Reactions to Avoidance and Aggressive Tax Planning Lilian V. Faulhaber Associate Professor Georgetown University Law Center

Overview Interaction between BEPS and SAARs and GAARs Initial interaction Growing acceptance of TAARs Lessons from BEPS about SAARs, TAARs, and GAARs Lessons from BEPS about the role of anti-avoidance rules in the future How do trends discussed by panelists reflect the lessons from the BEPS outputs?

Definitions GAARs TAARs SAARs Can apply to all transactions Focused on purpose, substance, artificiality, or avoidance Apply only to specific transactions Focused on purpose, substance, artificiality, or avoidance Apply only to specific transactions Sets out objective rules to define avoidance

The BEPS Project The most significant international reaction to avoidance and aggressive tax planning in recent history Instruments used by BEPS Project provide new insights into: Options for the fight against avoidance Design options for different instruments Reasons to choose certain instruments over others Effectiveness of various instruments

BEPS and GAARs Not a focus of the BEPS Project Why not? Country-by-country divergence and discretion Agreement may be easier than implementation Need to identify the causes of BEPS Disliked by countries because gave too much flexibility to other countries Disliked by taxpayers because created uncertainty

BEPS and SAARs BEPS Action Items focused on provisions that some countries consider SAARs: Action 2 (hybrid mismatch arrangements) Action 3 (CFCs) Action 4 (interest deductibility) Action 6 (treaty abuse) Action 7 (artificial avoidance of PE status) Action 12 (mandatory disclosure rules)

BEPS outputs: a growing acceptance of TAARs? Action 3 as an example: “An anti-avoidance requirement is therefore not considered further in this report, but this is not intended to imply that an anti-avoidance requirement can never play a role in CFC rules that tackle base erosion and profit shifting.” (¶ 60) Substance analyses to be considered as part of CFC rules: Substantial contribution analysis based on facts and circumstances Significant people functions analysis Necessary business premises and establishment analysis Substantial activities analysis (¶¶ 81-86)

Lessons from BEPS Greater acceptance of TAARs and GAARs than predicted by the BEPS Action Plan Anti-hybrid rules triggered by lack of substance (change to Parent-Subsidiary Directive resulting from Action 2) CFC rules with substance analyses (Action 3) Principal purpose test (Action 6)

Lessons from BEPS (cont.) Recommended SAARs: Anti-hybrid rules (Action 2) Linking rules CFC rules without substance analyses (Action 3) Categorical analysis – focus on source of income Excess profits approach – focus on seemingly objective ratio Interest deductibility rules (Action 4) Choice between fixed percentage of EBITDA or group ratio rule Special rules for certain types of income/industries Guidance on definition of PE threshold (Action 7) Focus on defining specific activities and parties Mandatory disclosure rules (Action 12) Focus on specific hallmarks

Role of GAARs, TAARs, and SAARs in the future GAARs and TAARs play different roles than SAARs: Easier to agree, so suggest lack of agreement on problem or solution May also represent willingness to go further if implemented alongside SAARs Design of SAARs: Linking rules Focus on specific identifiers (hallmarks, activities, parties, source of income, industry) Ratios (group ratios, excess profits)