Nature, purpose and effect of controlled foreign corporation rules. Their compatibility with the principles of international tax law
Increase in globalization and foreign trade in the last century led to aggressive tax planning. Though these planning measures are legitimate, they are designed for shifting profits to low tax jurisdictions. There is a number of measured to deal with this tax abuse. In particular, some jurisdictions apply controlled foreign corporation (CFC) rules. Historically, the CFC concepts were created to help prevent tax evasion achieved by setting up offshore companies in tax havens, such as Bermuda and the Cayman Islands. Increasingly countries have developed CFC legislation to counter perceived overseas abuses enveloped in a low tax overseas entity. The aim of CFC rules is to prevent or obstruct the creation of structures used by companies, especially domestic multinationals, for pure avoidance of domestic tax liability. CFC rules are designed to prevent profit shifting without penalizing foreign subsidiaries engaged in legitimate business practices. A controlled foreign corporation is a corporate entity that is registered and conducts business in a different jurisdiction or country than the residency of the controlling owners. A company that qualifies as a CFC generally has its...
