Corporate Loss Utilisation through Aggressive Tax Planning

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Author(s):
OECD
Publication Date :
03 Aug 2011
Pages :
92
ISBN :
9789264119222 (PDF) ; 9789264119215 (print)
DOI :
10.1787/9789264119222-en

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Corporate losses raise compliance risks if aggressive tax planning is used as a means of increasing or accelerating tax relief in ways not intended by the legislator, or to generate artificial losses. This report describes the size of loss carry-forwards, the rules applicable in relation to losses, and identifies the following risk areas: corporate reorganisations, financial instruments and non-arm’s length transfer pricing. After having summarised aggressive tax planning schemes on losses, as well as country detection and response strategies, it offers a number of conclusions and recommendation for tax administration and tax policy officials.

  

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    Foreword
    Aggressive Tax Planning is a source of increasing concern for many countries. Numbers at stake are vast, often in the order of billions of dollars. Countries have developed various strategies to deal with aggressive tax planning and international co-operation features prominently among them. Working co-operatively countries can deter, detect and respond to aggressive tax planning in an effective way while at the same time ensuring certainty and predictability for compliant taxpayers.
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    Abbreviations
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    Executive Summary
    Due to the recent financial and economic crisis, the amount of global corporate losses is enormous. Over and above the immediate tax revenue impact of these losses as a result of the normal operation of countries’ loss relief rules, these losses also raise tax compliance risks, in particular if companies turn to aggressive tax planning as a means of increasing and/or accelerating tax relief on their losses. This report deals with corporate tax losses. The term "losses" has to be understood broadly for purposes of this report: although the report deals primarily with the tax treatment of taxpayers which have suffered overall losses, it also touches on issues which are relevant to deductions which may reduce a taxpayer’s profits without necessarily resulting in an overall loss. The report deals with both real and artificial losses, as well as with the issue of multiple deductions of the same (real or artificial) loss, typically through hybrid mismatch arrangements.
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    Introduction
    Due to the recent financial and economic crisis, the amount of global corporate losses is enormous. Over and above the immediate tax revenue impact of these losses as a result of the normal operation of countries’ loss relief rules, these losses also raise tax compliance risks, in particular if companies turn to aggressive tax planning as a means of increasing and/or accelerating tax relief on their losses.
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    Size of Corporate Tax Losses
    This chapter presents data on the size of corporate loss carry-forwards in 11 of the 17 countries that participated in this study. It discusses the potential impact on future government revenues.
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    Policy Issues in the Tax Treatment of Losses
    This chapter presents the different policy considerations related to the use of losses for tax purposes. It looks, in general terms, at the tax policy reasons behind various legislative choices.
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    Country Rules on Corporate Tax Losses
    This chapter summarises the main features of the rules governing corporate tax losses in the 17 countries that participated in this study. It gives an overview of relevant rules for assessing possible tax risks for revenue bodies.
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    Schemes Involving Tax Losses
    This chapter summarises schemes concerning tax losses that have been encountered in the 17 countries that participated in this study. It identifies key risk areas in relation to losses, including the use of financial instruments, corporate reorganisations and non-arm’s-length transfer pricing.
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    Strategies for Detecting Schemes Involving Tax Losses
    This chapter examines strategies employed to detect aggressive tax planning schemes involving tax losses. It offers a general overview of detection strategies and looks at those employed by the 17 countries that participated in this study.
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    Strategies for Responding to Schemes Involving Tax Losses
    This chapter presents response strategies to aggressive tax planning schemes. It looks at strategies that deny or limit the tax benefits of aggressive tax planning schemes, other strategies that influence taxpayer behaviour, and strategies that target promoters and other intermediaries.
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    Conclusions and Recommendations
    Countries’ strategies have to operate within the broader context of their tax system, administrative practice and culture. It is up to each country to decide how to approach the issues addressed in this report and what strategies would be the most appropriate in the context of, and the most consistent with, its rules and framework. It is against this background that this report reaches the following conclusions and recommendations.
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    References
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    Annex A - Size of loss carry-forwards compared to loss carry-forwards in percentage of gross domestic product
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