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What legislative and regulatory initiatives has the government taken to combat tax avoidance in your jurisdiction?
Combatting tax avoidance is a constantly evolving process in the United States. Recent regulatory actions include the Section 385 regulations (Treasury Regulation Section 1-385-2), which were issued in final and temporary form. These regulations are designed to curb inversion transactions in which US multinationals acquire a foreign company and then enter into a series of transactions to have the newly acquired foreign company become the parent of the multinational group, with the tax of the US group being reduced through deductible interest payments. The Section 385 regulations are intended to reduce the tax advantages of inversion transactions. In July 2017 the US Treasury announced that the effective date of these regulations will be delayed until 2019.
To what extent does your jurisdiction follow the OECD Action Plan on Base Erosion and Profit Shifting?
A majority of the Organisation for Economic Cooperation and Development Base Erosion Profit Shifting Action Plan action items have been part of US law, regulations or Internal Revenue Service administrative practice for many years.
For example, the government adopted controlled foreign corporation anti-avoidance provisions (Action Item 3) in the early 1960s, and these provisions have been revised through both legislative and regulatory changes over the years. Similarly, Internal Revenue Code Section 163(j) has been in force for many years to limit deductible interest payments made by US subsidiaries to foreign affiliates (Action Item 4). In addition, the government enacted extensive transfer pricing penalty and documentation rules in the early 1990s. These rules were updated in 2016 to require the filing of country-by-country reports (Treasury Regulation Section 1.6038-4).
As a matter of tax policy, since the late 1980s the government has included the limitation of benefits provisions (Action Item 6) as part of the US Model Income Tax Convention used to negotiate income tax treaties. Recent US tax treaties have also included provisions for mandatory arbitration of unresolved mutual agreement procedure and advance pricing agreement cases (Action Item 14).
Is there a legal distinction between aggressive tax planning and tax avoidance?
There is no distinction between aggressive tax planning and tax avoidance. However, different penalties apply to taxpayers and tax advisers depending on whether:
- disclosure and reporting requirements have been complied with; and
- a tax position is based on substantial authority and reasonable cause.
What penalties are imposed for non-compliance with anti-avoidance provisions?
Civil and criminal penalties can apply for non-compliance with anti-avoidance provisions, depending on the nature of the non-compliance. Internal Revenue Code Section 6662 imposes 20% and 40% penalties for certain transfer pricing-related adjustments, while Section 6662A imposes 20% and 30% accuracy penalties on defined classes of abusive listed transaction tax avoidance transactions.
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