With tax avoidance under an unprecedented level of international scrutiny, the world's major holding company locations are facing turbulent times.
After a year of intense media and public pressure over the planning structures, which many tax outsiders perceive to be too aggressive, of a number of big multinational companies, the OECD released its action plan on base erosion and profit shifting (BEPS) this month.
Globalisation and the digital economy have allowed companies to be increasingly mobile.
The action plan states: "These developments have been exacerbated by the increasing sophistication of tax planners in identifying and exploiting the legal arbitrage opportunities and the boundaries of acceptable tax planning, thus providing MNEs with more confidence in taking aggressive tax positions."
Over the next 12 to 24 months, the OECD will work with governments to improve the overall tax take and crack down on tax arbitrage by addressing flaws in international rules.
The action plan will address problems arising from the digital economy, hybrid mismatches, transfer pricing and transparency. It spells, according to Pascal Saint-Amans, director of the OECD's Centre for Tax Policy and Administration, the end of "the golden age of "we don't pay taxes anywhere"."
Despite the increased pressure, advisers writing from a number of the traditional holding company locations believe their respective jurisdictions will remain attractive for business.
Stefan Kuhn and Sébastien Maury of KPMG argue that Switzerland has a competitive real economy not only based on financial services, but on life sciences, power and automation technologies, mechanical engineering, and precision instruments. They believe that with its export oriented economy, it is crucial Switzerland has a good network of free trade agreements and a vast investment protection and double tax treaty network, in turn making it an attractive holding company location.
André Zarb and John Ellul Sullivan of KPMG make the case that Malta is an ideal holding company location because English is an official language, the country has a corporate law system modelled on UK principles, a flexible participation exemption system and tax-free and efficient repatriation of profits to shareholders. What is more, they argue, it was largely unharmed by the financial crisis and has adopted International Financial Reporting Standards (IFRS) in common with the EU.
Cyprus has not proved quite as stable since this year's banking crisis. Even so, Michalis Zambartas of Eurofast Taxand believes it remains an attractive holding company location because it has more than 48 double tax treaties, it has a low corporate tax rate and it is a member of the EU and complies with OECD standards.
Peter Vale and Sarah Meredith of Grant Thornton point to Ireland as a flourishing holding company location, noting its tax regime has prompted a number of well-known groups to move regional or global headquarters to Ireland including Shire, LinkedIn and Facebook, as well as attracting investments from Apple, PayPal, EA and Fidelity last year.
Of course, some of these companies have been attracting negative headlines over the amount of tax they pay. Even if traditional holding company locations remain attractive despite international pressure, companies should think carefully about their reputation before choosing what may be seen as an aggressive structure to avoid tax. At the end of the day it is not location, location, location anymore. It is substance, substance, substance.
Salman Shaheen
Editor
International Tax Review
