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Organisation for Economic Co-operation and Development
Auditing Multinational
Enterprises
3 Taxation of Multinational
Enterprises
Centre for Tax Policy and Administration
Tax planning using havens or preferential
regimes
 Advantages of havens for tax planners
• Low or no tax for international companies (deferral)
• No transparency
• No exchange of information
 Characteristics of preferential regimes
• low tax by sector
(financial/distribution/communication)
• low structural costs - premises, staff etc.
• special incentives
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International Tax Planning
MNEs may seek to move income from
normal/high tax countries to low tax or tax
sheltered countries.
How?
 What types of income may be easily moved
between jurisdictions?
 What income-producing assets can easily be
relocated?
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Internationally mobile income
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Interest
Royalty or similar income from the ownership of
intellectual property
Income from investments
Income from capital assets
Income from treasury operations
The return to some risks
Discussion Point
Give an example (from your own or your country
experience if possible) of an MNE moving income to a
low tax or tax-sheltered jurisdiction.
Key tools of international taxation
Country Taxing Rights
 Countries may tax on a residence basis or a
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source basis
Residence = tax all income of a resident
wherever earned
Source = tax all income sourced in the country
(interest, rent, dividends etc) irrespective of
residence of owner of income
Many countries tax on both bases
Tax Treaties exist to ensure that the same
income is not taxed twice
Taxing income recognised in accounts
of a company registered in another
country
Parent registered
In Country A
Subsidiary registered
In Country B
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How could:
a) parent seek to tax
income that has been
recognised in the
accounts of the
subsidiary, or
b) subsidiary seek to tax
income recognised in the
accounts of the parent?
Key tools
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Residence rules - discuss now
Permanent establishment rules – discuss now
Controlled foreign companies rules - discuss now
Transfer pricing –discuss briefly now, but look at in more
depth later
Company residence
 Countries normally determine where a company
is resident according to:
- formal criteria e.g. place of incorporation,
registration etc
- factual criteria e.g. place of effective
management, principal business location
 If a company is potentially resident in more than
one country, then, if a treaty is in place, it may
specify residence to be the “place of effective
management”
Permanent Establishments
Introduction
Two key issues:
- Is there a permanent establishment of a resident of one
country in another? (Article 5 of MTC)
- If there is a such a permanent establishment, how much profit
should be attributed to it and thus be subject to host-country
taxation? (Article 7 of MTC)
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Types of Permanent establishment
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Fixed place of business PE
Construction PE
Dependent agent PE
1. Fixed place of business PE
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Does the non-resident have a place of place of business
in the host country?
Is it fixed, in both geographical and time senses?
Does the non-resident carry out its business through the
fixed place?
Fixed place of business PE
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A company, A Co, resident in Country A, carries out
maintenance work in apartments in a city in Country B
 It has carried on this business over a period of over 5
years
 It spends about three weeks on each job in each
apartment
 The work is carried out in different apartments in the
same city
 A Co has an office in one apartment block where it
stores records, tools and marketing materials and holds
sales meetings with potential customers.
Do you think there may be a fixed place of business PE of
Construction PE
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A building site, construction or installation project
constitutes a PE only if it lasts for more than 12 months
2. Dependent agent PE
A resident of Country A will have a permanent
establishment in country B where :
 … a person in country B
 … acts on behalf of the enterprise
 …and has, and habitually exercises, authority to
conclude contracts in the name of the enterprise
 .. and is not an independent agent
Dependent agent permanent establishment
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Insurco (A), a company resident in country A, issues
and underwrites motor insurance policies to individuals
Insurco (B), a subsidiary of Insurco A and a resident of
Country B, sells and markets those policies to
individuals in Country B
Insurco (B) organises advertising, it meets with potential
customers and sells insurance policies to customers on
behalf of Insurco (A)
The insurance contracts are between Insurco (A) and
individuals residing in Country B
Insurco (B) does not sell insurance policies on behalf of
any other insurance providers
Attribution of profit to a permanent
establishment
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Follows the arm’s length principle
But special consideration needs to be given to:
- attribution of capital to the PE
- attribution of risk to the PE
- attribution of assets to the PE
Controlled foreign companies
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Country CFC rules seek to attribute some or all of the
profit of a company to its shareholders
The effect is that CFC rules allow countries to tax the
profit of a subsidiary in a parent company
Anti – avoidance rules, normally restricted to
subsidiaries in a tax haven and to geographically mobile
passive income
Transfer Pricing
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Transfer pricing concerns the pricing (and other terms)
that companies use when carrying out transactions with
members of the same group.
This pricing will influence where profit or loss will be
recognised.
Tax authorities have introduced legislation to regulate
transfer pricing for taxation purposes.
Anti- avoidance rules
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Many states have general anti-avoidance rules that
allow them to disregard or recharacterise transactions
that are primarily tax motivated
Approaches vary between countries
Thin capitalisation
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Many countries have “thin capitalisation” rules that
typically restrict the interest payable by a company on
loans from, or guaranteed by, a shareholders.
They are normally based on “debt to equity” or similar
financial ratios.
Approaches vary between countries.