Even when limited to just one country, systems of taxation are complicated and difficult to navigate. When multiple countries and the spread of misinformation are factored in, it can be truly overwhelming. It is hardly surprising, therefore, that businesses and individuals often turn to professional tax advisors to make sense of the complex systems they are faced with.
Given that tax is defined as a compulsory contribution without consideration, it is understandable that taxpayers try to reduce this financial burden
The media’s reaction to the release of the Paradise Papers in November 2017 demonstrated that taxation is clearly an emotive issue, but not one that is always properly understood. There are, for example, various methods of reducing tax bills that are completely legal, whether they concern offshore businesses or not.
Tax optimisation is not something that should be condemned; it is simply one aspect of prudent fiscal management, no different from an individual making the most of their tax-deductible expenses when completing a personal tax return. Unfortunately, some governments appear committed to destroying tax competition, despite the fact that it is not to their advantage. This is a disturbing trend that is becoming particularly apparent in the EU, where the power of member states threatens to undermine our civil liberties.
Of course, staying on the right side of the law is essential, which is why choosing the right tax advisor or legal representative is so important. Afschrift Law Firm has been providing valuable advice to its clients for more than 20 years.
EU member states are in constant need of capital and, as a result, they are trying to collect the maximum amount of tax revenue. One of the methods that EU member states are using, under the pressure of more powerful members such as Germany and France, is to limit tax competition. As a consequence, measures are being collectively implemented to restrict tax optimisation.
This said, tax competition will never really disappear, and has even started to develop on regional or federal levels in countries such as Spain or Belgium. Even if governments attempt to prevent tax optimisation, opportunities will always exist. With states continually introducing new tax niches, which can create ways for companies to reduce their tax burden, it could be argued that tax optimisation is even encouraged by the state itself, albeit within a specific context. In any case, the more they are subject to heavy taxation, the more companies and individuals will resort to tax optimisation. The role of lawyers is to help them achieve their optimisation targets within the limits of the law.
Given that tax is defined as a compulsory contribution without consideration, it is understandable that taxpayers try to reduce this financial burden. Government efforts to prevent tax optimisation only result in the creation of new rules and greater complexity. In order to deal with the application of these rules, companies and individuals will be in even greater need of tax lawyers so as to avoid suffering the consequences of the state’s tax policy.
Letter of the law
Directives have been implemented to limit certain types of tax optimisation, such as the deduction of interest or royalties related to intellectual property rights. The implementation of these directives is the result of the joint and concerted action of several large EU members to make it less advantageous for companies to establish themselves in smaller EU countries, many of which use tax incentive policies to attract foreign investment. It is characteristic of the European Commission to use this tactic against its smaller members, including Luxembourg, the Netherlands, Belgium and Ireland.
Because these countries are so small, they need to attract foreign companies by adopting tax-friendly policies; without these advantageous tax policies, large companies would always base their operations in bigger countries. Having said this, it’s important that national tax incentive schemes are carefully chosen so they aren’t classified as selective state aids, which are prohibited in the EU.
Under another directive issued by the EU, tax advisors are obligated to disclose any tax optimisation programmes they set up for their clients. However, these rules are not applicable to lawyers because of attorney-client privilege, which is absolutely essential, especially given the complexity of tax laws. For clients, trusting their tax specialist is hugely important. A client cannot entrust their lawyer with the intricate details of their finances if they aren’t certain these details will remain confidential. This trust is the only way to make sure that clients disclose all information, which is vital if lawyers are to provide their clients with judicious advice and remain respectful of the law. Any measure that would limit attorney-client privilege could result in a violation of the law. The job of the lawyer is never to suggest a violation of the law, but rather to adapt to the law. At all times, the absolute protection of the client-attorney privilege should be upheld.
Optimisation for all
If one wishes to avoid the creation of a virtual cartel of EU states, fiscal competition between states, and even between territorial subdivisions and federal regions, is necessary. Such a cartel will always act against the interests of the taxpayer as its actions will necessarily result in an increase in taxation. While the role of individual states has increased in recent years, unfortunately their efficiency has not increased proportionally. Without fiscal competition, nothing would compel states to reduce tax, nor prevent them from increasing it.
Politicians will always be tempted to increase their power and present their roles as essential. Meanwhile, voters prefer to see personal gain than see taxes reduced for everybody. As a result, it is always more advantageous for politicians to propose plans that benefit their supporters, rather than reduce taxation in a uniform manner. Fiscal competition is therefore necessary in order to restrain the current trend that is seeing our societies become more and more state controlled. By their nature, taxes are set up by those in power. Without competition, this power may become arbitrary. Everybody must have the right to vote with their feet by establishing elsewhere if tax pressure becomes too much.
Nevertheless, fiscal competition does not seem to entirely disappear, even when faced with the pressure from the EU and the Organisation for Economic Cooperation and Development, which generally act in the interests of the most powerful states. Furthermore, even if unification could be achieved, this would not prevent the development of fiscal competition based on tax rates, the harmonisation of which is currently not being discussed.
It’s also worth keeping in mind that tax optimisation is not solely the preserve of large multinational companies: individuals and small companies can stand to benefit as well. First, there are procedures implemented by the tax administration, provided by law or by administrative practice. Moreover, the utilisation of the advance tax ruling procedure, through which a taxpayer may receive prior approval from the tax administration on any given future operation, is not reserved for big companies – smaller companies and individuals may also benefit from this.
Finally, tax optimisation does not always require an individual or organisation to have influence or capital. Lawyers and other advisors are perfectly positioned to recommend tax optimisation methods to smaller companies, specifically developed for them and adapted to their needs, taking into consideration their distinct legal or accounting situation.