A tax gamble of hide and seek in Monaco




Some say the better the gambler, the worse the man

I was in beautiful Monaco a few weeks ago. The state, roughly with the size comparable to Central Park in New York City, is surrounded by Member States of the EU such as France and Italy. Yet, it is not part of the union.

An interesting thing to know about Monaco is the state´s beneficial tax system. The state removed income taxes back in 1869, and are known for having exceptionally low taxrates for e.g companies. It is rumored that the famous Monte Carlo casino´s revenues makes it unnecessary to have higher tax rates. So – today´s article is a slightly different one about taxes. If you want your business to grow big, it is of importance to know some basics concerning the tax system to be able to save yourself from unnecessary expenses. This is relevant for businesses, either if you are operating in the sectors of fashion, entertainment or else.

Businesses have always been undertaking arrangements for tax planning. Certain forms are legal, but
during recent years it is reported that companies have been more reluctant to undertake forms of aggressive tax planning which the EU has been trying to counteract.

A form of aggressive (read: illegal) tax planning is when a company shifts taxable profits towards states with more advantageous tax regimes. For example: to be able to obtain double deductions for the same expenses in both states. In other words – exploitation of the fact that the states (earlier) did not cooperate with one another concerning if e.g a deduction already had been made for the same expense in another state where the company has a taxable juridical person.

Transfer pricing is another type of aggressive tax planning which means that a company shifts their taxable income towards a state where the income in question is tax- free. This results in an erosion of the taxable base in the other state where the income actually should have been reported.

Well, the important part is that this have been practicable for businesses to do within the EU with a lower risk of getting caught for tax evasion or fraud, until now.

The council of the EU have on the 18th of March this year (2015) replaced an earlier Directive (for interested: 77/799/EEC which also regards exchange of information) with the Directive 2011/16. This, among other things, results in a mandatory exchange of information between the Member States  concerning tax rulings. This means in practice that it will be harder for business to undertake aggressive tax planning. Because from now on, Member States will have the information needed about the other states tax rulings in order to react to profit shifting within the EU.

For example – the earlier black listed (concerning tax rates) EU Member Luxembourg, which also is the named country in the LuxLeaks scandal a couple of months ago, will probably not be marked as a tax paradise for businesses within the EU any longer. So if you are thinking about dealing with tax planning for your company, it might be a good idea to make sure you stay on the light side of the road.

Because after all, it seems like the notorious tax gamble of hide and seek

suddenly became a tougher game to play.