In April 2009, representatives of the leading industrialised and emerging countries stood together as one for the first time at a G20 summit in London. In the wake of the global financial crisis, they announced their intention to strengthen the international financial system and intensify cooperation in the area of taxation. Under the slogan «Strengthening financial supervision and regulation», they launched a series of tax policy measures that continue to this day and are constantly being expanded. What has happened since then? And what impact do these developments have on asset structures?
Base Erosion and Profit Shifting 1.0
At the beginning of 2013, the OECD Committee on Fiscal Affairs (CFA) launched the Base Erosion and Profit Shifting (BEPS) initiative on behalf of the G20. This was intended to gradually curb the tax planning options of international corporations, while at the same time undermining tax competition between business locations. In the long term, tax laws across countries should be increasingly harmonised.
To this end, the G20/OECD member states adopted a 15-point action plan in autumn 2013 (cf. www.oecd-ilibrary.org), which focuses on the reduction and shifting of profits of internationally active companies and aims to reach a common understanding on international taxation standards. In October 2015, the G20/OECD member states and other countries adopted recommendations for measures derived from this plan, which include amongst others the following:
- Avoidance of double non-taxation
- Limitation of the deductibility of interest payments
- Tightening the exchange of tax information
- Streamlining of tax benefits for patent boxes (IP boxes)
- Obligation to provide standardised documentation on transfer prices
- Exchange of information on the global distribution of sales, taxes paid, etc. (Country-by-Country-Reporting)
In order to monitor and further develop the implementation of these measures, the «Inclusive Framework on BEPS» was created at OECD level in 2016. This was a new body to which more than 140 countries and territories now belong. It reports to the G20/G7 and provides tax policy recommendations. Membership is essential in order to have a say. Liechtenstein is also a member.
Implementation at European level
The BEPS action points were subsequently transposed into European law. The Council of the European Union (EU) issued the first Anti-Tax Avoidance Directive (ATAD) in 2016, followed by the EU Directive DAC6 in 2018. This further developed the EU Administrative Assistance Directive adopted in 2011.
DAC6
The Directive on Administrative Cooperation (DAC6) is a cooperation of European administrative authorities. It obliges intermediaries and taxpayers to report information on crossborder tax planning to the tax authorities and to promote the automatic exchange of information between tax administrations of EU Member States.
ATAD
The ATAD directives aim to prevent tax avoidance and aggressive tax planning by multinational companies in the EU through various tools. For example, interest deductions are limited, hidden reserves or asset transfers in the context of a relocation are taxed, and hybrid structuring options that would lead to double non-taxation are prevented. This also includes the shifting of profits to low-tax countries (Controlled Foreign Corporation Rules, CFC) or the non-recognition of inappropriate tax arrangements (General Anti-Abuse Rules, GAAR).
The current ATAD3 variant (the EU Unshell Directive) relates to the substance requirements for companies. It focuses on companies that have their registered office in one country but carry out their effective business activities and management in another country. These companies are subject to an increased information and reporting obligation, whereby detailed information on economic activity and organisational structure is required in particular.
Base Erosion and Profit Shifting 2.0
As the digitalisation of the economy continues to progress, the G20/OECD member states agreed in 2021 to expand the BEPS initiative and, in future, to tax profits where economic activity and value creation actually take place. The «Inclusive Framework on BEPS» presented a two-pillar model in autumn 2021, consisting of «Pillar I» and «Pillar II», and recommended the creation of a law on the minimum taxation of large corporate groups (GloBE Act).
Pillar I
The purpose of Pillar I is to redefine the international taxation rights of multinational companies. It initially relates to large companies that generate a global turnover of at least 20 billion euros and have a return on sales of at least 10 per cent. Taxation rights between the country of residence and the market state shall be regulated more fairly and the determination of transfer prices shall be standardised. It is not yet clear when Pillar I will actually be implemented.
Pillar II
Pillar II includes a globally applicable minimum tax rate on profits, which is currently set at 15 per cent. This minimum tax rate is mandatory for companies that generate more than 750 million euros in revenue. In order to implement Pillar II the «Inclusive Framework on BEPS» adopted corresponding model provisions for the GloBE Act at the end of 2021.
GloBE Act
In Liechtenstein, the GloBE Act came into force on 1 January 2024. Depending on the applicable taxation, it will first apply to the 2024 or 2025 tax year. This affects large domestic and multinational corporate groups as well as legal entities (legal entities, trusts and partnerships), which in turn are part of a corporate group. What does this mean specifically?
If the ultimate parent company reports a consolidated annual turnover of at least 750 million euros in the consolidated financial statements for at least two of the previous four financial years, a top-up tax is levied in order to achieve the minimum tax level of 15 per cent. There are three variants of the top-up tax. The question then faced is which tax authority is authorised to levy the top-up tax:
- In Liechtenstein a Qualified Domestic Minimum Top-up Tax (QDMTT) is applied to all domestic business units of multinational corporate groups.
- The Income Inclusion Rule (IIR) means that a supplementary tax is levied at the level of a domestic parent company for foreign subsidiaries, provided they do not fulfil the minimum taxation requirements.
- The Undertaxed Payments Rule (UTPR) is levied on domestic business units if no IIR supplementary tax is applicable in the jurisdiction of the ultimate parent company.
How are asset structures affected?
Pillar II and the GloBE Act mean that all legal entities must be reviewed annually to determine the extent to which they are affected by the provisions. It must be determined whether a consolidated annual turnover exceeds the threshold of 750 million euros (it can be assumed that this threshold will be lowered in the coming years). If this is the case, a GloBE tax return must be prepared for the legal entities concerned, in addition to the regular tax return. If then the minimum tax of 15 per cent is not reached, the supplementary tax must be validated. This may also affect asset structures that qualify as private asset structures (PAS) under Liechtenstein tax law. In addition, it will be crucial to check the GloBE provisions against the other provisions of the ATAD or DAC6 guidelines, for example. This entire review mechanism takes time, increasing the documentation requirements and creating an administrative burden.
Conclusion and outlook
The BEPS initiative heralded a new era of tax regulation and tax transparency. Current discussions make it clear that this path is being maintained. The long-term goal of the G20/OECD member states is a centralised tax system that will level out at a high tax level. The EU Tax Observatory, a think tank based at the Paris School of Economics, stated even before the introduction of the Pillar II minimum tax rate that 15 per cent was insufficient and that increasing the minimum tax rate by a certain per cent would have a positive impact on tax revenues.
In addition, the increasing support for the introduction of a global wealth tax makes it clear that this tax mechanism will also determine international tax policy in the future. In the midst of all this tax pressure, the simple fact that governments could save more by reducing deficits than increasing taxes is being overlooked.
However, tax transparency and tax harmonisation are one thing, but asset protection and wealth preservation are another. Tax issues play a role in wealth structuring for various reasons, but they are not the main focus. The general opinion that asset structures are set up so that someone can save taxes is simply wrong. At the centre of any asset structuring is the question of what purpose an asset should fulfil in the long term and how the long-term fulfilment of this purpose can be guaranteed. Accordingly, it is important to have a business location that can fulfil this long-term purpose by guaranteeing legal certainty, international conformity and long-term stability.