Limits to Tax Planning

S. 219 1. Introduction

There is a growing perception that governments lose substantial tax revenues because of tax planning aimed at eroding the taxable base and/or shifting profits to locations where they are subject to a more favorable tax treatment. Tax planning strategies may aim at moving profits to where they are taxed at lower rates and at moving expenses to where they are relieved at higher rates. These strategies typically make use of deferral by using a foreign corporation located in a low-tax country, which results in a no current taxation of the low taxed profits at the level of the ultimate parent company.

While tax planning may be technically legal and therefore is a widely accepted way of improving the company’s cash position, the overall effect of this type of planning is to erode the corporate tax base in a manner that is not intended by domestic policy. Still, the fight against tax evasion and avoidance is a legitimate objective in international tax law, which leaves States free to apply their domestic tax law in order to prevent and remedy tax evasion and avoidance. Tax evasion and avoidance are also a European Community law concern. They not only have adverse effects ...