Hedging through the tax charge: a threat to tax revenue
17 March 2013
Posted by: SAIT Technical
By Organisation for Economic Co-operation and Development (OECD)
Risk management and hedging are key issues in corporate management. In
certain cases, taxpayers may see an opportunity or a need to factor
taxation into their hedging transactions to be fully hedged on an
Aggressive tax planning (ATP) schemes based on
after-tax hedging pose a threat to countries’ revenue base. Empirical
evidence suggests that hundreds of millions of USD are at stake, with a
number of multi-billion transactions identified by countries. This
type of ATP schemes originated in the banking sector, but experience
shows that they are also used in other industries and, in some
instances, also by medium-sized enterprises, thus generating an even
bigger threat to tax revenue. Any country that taxes the results of a
hedging instrument differently from the results of the hedged
transaction/risk is potentially exposed to such schemes.
Following on from the OECD’s report Corporate Loss Utilisation through Aggressive Tax Planning (2011), Aggressive Tax Planning Based on After-Tax Hedging
describes the features of ATP schemes based on after-tax hedging as
well as the strategies used to detect and respond to those schemes. The
report, which draws from schemes submitted to the OECD Directory on
Aggressive Tax Planning, also highlights a number of challenges from a
compliance and policy perspective.
The report recognises that
not all after-tax hedging arrangements are aggressive and that after-tax
hedging in and of itself is not an issue, thus recommending countries
to adopt a balanced approach in their response to after-tax hedging. In
recent years, however, a number of countries have encountered ATP
schemes in which taxpayers use after-tax hedging to make higher returns,
without actually bearing the associated risk which is in effect passed
on to the government. In all of these schemes, there is generally no
pre-existing exposure to hedge against but rather the exposure is
created as part of the relevant scheme.
The report is
another example of what enhanced international co-operation in tax
matters can bring about. Countries shared information and other
intelligence on ATP schemes based on after-tax hedging, allowing them to
detect such schemes and respond to them in a timely manner.
For further information, please contact Achim Pross (Achim.Pross@oecd.org) at + 33 1 45 24 98 92 or Raffaele Russo (Raffaele.Russo@oecd.org) + 33 1 45 24 19 06 in the OECD’s Centre for Tax Policy and Administration.