Academic journal article Multinational Business Review

Asset Protection in Multinational Enterprises - Where to Now?: Implications for Asset Protection Planning in Multinational Enterprises from the OECD's Work on BEPS

Academic journal article Multinational Business Review

Asset Protection in Multinational Enterprises - Where to Now?: Implications for Asset Protection Planning in Multinational Enterprises from the OECD's Work on BEPS

Article excerpt

Introduction

Multinational enterprises (MNEs) are rapidly becoming a significant presence in the world. With a number of large MNEs having turnover greater than many states, they are powerful enough to set their own rules (Muchlinski, 2007). With the advent of the digital economy, many MNEs have been able to structure themselves in ways to obtain significant tax benefits. The rise of the digital economy has meant that many transactions that previously relied on a physical proximity to a market can now be undertaken more or less anywhere. MNEs have responded to this changing environment by adopting new business models. Instead of using a model that would once have seen MNEs having fixed jurisdictions, MNEs are now able to adopt global value chains, with business functions located wherever they can be undertaken most efficiently (OECD, 2013a). This has raised questions for states as to whether the current rules underpinning the international tax framework, such as source, permanent establishment, and residency, have kept pace with these changes (OECD, 2013b).

As it becomes increasingly difficult for states to identify an MNE's true location, MNEs have greater opportunities to reap the benefits of mismatches in the international tax system. Of particular concern is the perceived ability of MNEs to shift profits across borders to take advantage of low tax rates. This is called base erosion and profit shifting (BEPS). The issue with BEPS has not arisen as a result of anything that MNEs have concocted of their own accord. Rather, it has arisen as a result of rules that states have created, largely with the aim of protecting their own domestic tax bases. The interrelation of widely divergent domestic tax rules has created opportunities for MNEs to obtain significant tax benefits and states are becoming increasingly concerned of the threat these opportunities pose to domestic tax revenues (OECD, 2013a). The Organisation for Economic Co-Operation and Development (OECD) has responded to these concerns by publishing a report (the BEPS Report) promising to develop a comprehensive action plan for the future prevention of BEPS. On 19 July 2013, the OECD delivered on its promise and released a 40-page action plan (BEPS AP). In its broadest context, the BEPS AP proposes a fundamental rewrite of the international tax system. It advocates for greater international taxing powers to be given to states to generate more tax revenues from MNEs and to combat the abuse of BEPS by MNEs. This may be seen as part of a broader international push to shift the tax enforcement emphasis away from a strict focus on each state protecting its own domestic tax base towards a new international model under which domestic tax authorities work together to combat tax avoidance. If successful, the work on BEPS has the potential to drastically affect MNEs. There is no doubt that the BEPS AP has the potential to significantly impact fundamental rules governing the taxation of cross-border transactions, including tax treaties, transfer pricing and anti-avoidance provisions. However, there is also potential for significant impacts to asset protection planning in MNEs as the international community pushes closer to greater transparency and automatic information exchange (AIE).

Why is asset protection important to MNEs?

As with any commercial enterprise, it is fair to assume that one of the primary goals for an MNE, if not the only goal, is to maximise profits. This carries with it the inevitable drive to reduce tax. However, tax is only part of the profit maximisation story. Also vital is effective asset protection. A sensible starting point for a discussion on asset protection is to understand what asset protection is. In general terms, asset protection may be described as the legal planning utilized by an enterprise or an individual to shield assets against unanticipated risks. A competent asset protection strategy assumes that, at some point in the future, the enterprise or individual may be in jeopardy, thus, opening assets controlled by that enterprise or individual to risk. …

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