benefical ownership, beneficial ownership of information, country-by-country reporting, EU, European Investment Bank, European Parliament, Luxleaks, OECD, OECD Global Forum, Qalaa, recommon, Swissleaks, tax avoidance, tax dodging, tax evasion, tax haven, tranparency
(President of the EIB:Werner Hoyer)
In a new report published on Tuesday this week, transparency NGOs have called on the the Luxembourg-based European Investment Bank (EIB) to set up its own ‘Tax Unit’ to assess how much corporate tax its clients are paying, and produce its own analysis of tax havens rather than rely on the OECD’s ‘black and grey’ list of jurisdictions.
(Preident of the World Bank Group: Jim Yong Kim)
This would be in addition to existing criteria used by the World Bank Group to define tax havens loosely based on the work of the OECD Global Forum on Transparency and Exchange of Information. The practical effect of this criteria is that private investors seeking support financing through the Bank’s International Finance Corporation, would be ineligible if the investment has a connection to a country that is on the OECD ‘black’ or ‘grey’ list; or is a jurisdiction that has been found to be less than compliant under the OECD Phase 2 assessment criteria, which is based on the translation of transparency norms into legal and regulatory practice.
The NGO report titled ‘Towards a Responsible Taxation Policy for the EIB’ and published on April 21st this year, advocates that the the EIB, which is set to be the driving force behind the European Commission’s flagship €315 billion infrastructure investment fund, should define a ‘tax haven’ based on whether or not they have a means of identifying and sharing the beneficial ownership of a company.
The report by Re-Common and Counter Balance argues that this would allow the EIB to ascertain who ultimately owns, controls or benefits from a company or fund that receives its support. They also recommend that the EIB clients should also be required to produce country-by-country-reports.
This development should not come as a surprise because last year I flagged renewed efforts in the European Union to revisit the definition of tax havens along the lines suggested in the NGOs Report. As a result the EIB already has a policy commitment to preventing tax avoidance, money laundering and other damaging activities, including a general prohibition on investments linked to non-compliant jurisdictions (NCJ) or tax havens.Indeed this demand for all companies seeking EIB funds to publish country-by-country-reports (CBCR) also featured in a European Parliament report adopted in March 2014. At present, EU rules require CBCR only from banks and firms in the extractive and logging sectors.
According toAntonio Tricarico, the report’s author, ‘Recent revelations such as Luxleaks and Swissleaks prove that Europe is losing out billions of euros because of tax dodging, and in developing countries the situation is even worse.
Fueling this move by the NGOs is a report by the Illicit Finance Journalism Project last October which found that the EIB had lent money to a number of companies operating in tax havens. One example cited was Qalaa, an African investment fund with $9.5 billion on its books, which has received hundreds of millions of euros from the EIB, and is domiciled in the British Virgin Islands.
It is important to note that the EIB, Qalaa and the jurisdictions in which or through which this investment fund raised money have acted within the legal rules. More here.
Predictably, given the constituency of the EIB, in response to the report the Bank noted that most of the reforms proposed by the report would require legal changes to be agreed by MEPs and ministers.
(Senior Minister Josephine Teo. Image – Today Online)
In a recent commentary on the OECD Base Erosion and Profits Shifting (BEPS) project, while Singapore’s Senior Minister of State for Finance and Transport, Josephine Teo, did not discount the importance of BEPS, she has rightly advised caution in moving forward on this aggressive agenda in an unilateral and uncoordinated way.
In tackling harmful tax practices she has strongly maintained that it is important not to discard the structures and practices that have facilitated investment and development.
She noted too that, ‘Singapore has kept its tax rates competitive. Even as we expect spending to increase, we will endeavor to keep the tax burden low, and we do so for a very simple reason – we want to continue to encourage enterprise, savings, and investment, which in turn generate positive economic spinoffs.’
Speaking to the changing international tax landscape, particularly the developments related to the Organisation for Economic Cooperation and Development’s (OECD) Action Plan to counter base erosion and profit shifting (BEPS), Minister Teo identified the “increasingly more aggressive actions” being taken by some tax authorities when scrutinizing cross-border transactions and in dealing with transfer pricing issues.
These comments should resonate with the emerging economies of Africa many of who have joined the OECD Global Forum on Transparency and Exchange of Information. While the focus has been on facilitating transparency and increased capture and exchanges of taxpayer information it is useful to remember that for compliance to be sustainable economic growth must also be a priority.
Importantly Minister Teo also cautioned that while quick action is useful it should not be used as a guise for protectionism. In my own view, this is a critical point given the continued and regular use of ‘blacklists’ by OECD members to compel adherence. In this regard is perhaps useful to note that Mauritius and Guernsey have now been removed from Italy’s blacklist.
(Director Pascal Saint-Amans. Image: zimbio)
Speaking about the ‘substance’ of flows between Australia and Singapore following his testimony to the Australian Senate hearing on corporate tax avoidance and minimization, Director of the OECD Centre for Tax Policy and Administration noted that as far as he was aware Singapore required evidence of ‘real activity’ while other very small economies you only have ‘sham’ entities.
To provide a balanced perspective on the issue of ‘sham’ companies, their location and use, it is worthwhile to note the well documented study titled, ‘Global Shell Games: Testing Money Launderers’ and Terrorist Financiers’ Access to Shell Companies’ conducted by Michael Findley, University of Texas at Austin, Daniel Nielson, Brigham Young University and Professor Jason Sharman of Australia’s Center for Governance and Public Policy, a recognised expert in this area, Sharman attempted to set up ‘shell’ companies in twenty-two states. These states included some often classified as tax havens and others generally regarded as responsible, internationally compliant members of the OECD and G20.
(Professor Jason Sharman Imaged: Griffiths University)
The first step in Professor Sharman’s exercise was to conduct an online search of ‘offers’ to set up this type of company. He attracted bids from forty-five service providers. In seventeen cases, the requested ‘shell’ company was set up without applying the customary KYC (Know Your Customer) protocols to determine the actual identity of the client. Moreover, the set-up price was not prohibitive, as the service cost ranged between USD 800 and USD 3000. Interestingly, only four of these providers were located in tax havens, while thirteen were located in OECD countries claiming to observe the rules of verification: seven in Great Britain, four in the United States, one in Spain, and one in Canada.
To ensure that the BEPS project is not dismissed as another attempt to undermine the competitiveness of non-OECD countries it will be important that when discussing and describing the location of ‘sham’ companies that reference is not made only to small economies but also to those developed ones who continue to escape proper characterization.
This attention to detail will guard against the unilateral and uncoordinated action about which Singapore has raised concerns.
'fair share of taxes', automatic exchange of tax information, benefical ownership, blacklisting, blacklists, Convention on mutual administrative assistance in tax matters, Diplomacy, Double taxation, European Union, G20, G8, harmful tax compeition, OECD, shell company, tax avoidance, tax evasion, tax havens, tax treaties, TIEA, WTO
Australia, beneficial owner, beneficial ownership of information, brissbane, FATF, foundations, G20, g20 final communique, g20brisbane, koala, koala bears, Obama, OECD Global Forum, Trusts, ultimate ownership and control, Vladimir Putin
(Aussie PM Tom Abbott and US President Obama)
Don’t expect much by way of surprises because the October 22-24 Financial Action Task Force (FATF) meeting and the OECD Global Forum on Transparency and Exchange of Tax Information Berlin plenary, also held this past October, provided some useful sign-posts to what G20Brisbane would be minded to agree to.
Importantly, now that one of its members, the United Kingdom, has finally gotten rid of ‘bearer shares’- almost twenty years after the OECD called on tax havens to do so – the G20 High Level Principles on Beneficial Ownership Transparency inludes the expected ‘beefed up’ language in this regard.
A conspicuous though not unexpected absence is agreement on public registries of beneficial ownership with consensus reached only on such registries being made accessible to law enforcement, tax authourities, finanical intelligence units and their international counterparts.
The requirement to provide ultimate beneficial owner information has also been extended, if somewhat more tentatively, to trusts and foundations. See my earlier predictions on this here.
Here now are the ten (10) principles G20Brisbane have agreed:
- Countries should have a definition of ‘beneficial owner’ that captures the natural person(s) who ultimately owns or controls the legal person or legal arrangement.
- Countries should assess the existing and emerging risks associated with different types of legal persons and arrangements, which should be addressed from a domestic and international perspective.Appropriate information on the results of the risk assessments should be shared with competent authorities financial institutions and designated non financial businesses and professions (DNFBPs) and, as appropriate,other jurisdictions. Effective and proportionate measures should be taken to mitigate the risks identified.
- Countries should identify high risk sectors and enhanced due diligence could be appropriately considered for such sectors. Countries should ensure that legal persons maintain beneficial ownership information onshore and that information is adequate, accurate, and current.
- Countries should ensure that competent authorities (including law enforcement and prosecutorial authorities, supervisory authorities, tax authorities and financial intelligence units) have timely access to adequate, accurate and current information regarding the beneficial ownership of legal persons. Countries could implement this, for example, through central registries of beneficial ownership of legal persons or other appropriate mechanisms.
- Countries should ensure that trustees of express trusts maintainadequate, accurate and current beneficial ownership information, including information of settlors, the protector (if any) trustees and beneficiaries. These measures should also apply to other legal arrangements with a structure or function similar to express trusts.
- Countries should ensure that competent authorities (including law enforcement and prosecutorial authorities, supervisory authorities, tax authorities and financial intelligence units) have timely access to adequate, accurate and current information regarding the beneficial ownership of legal arrangements.
- Countries should require financial institutions and DNFBPs, including trust and company service providers, to identify and take reasonable measures, including taking into account country risks, to verify the beneficial ownership of their customers. Countries should consider facilitating access to beneficial ownership information by financial institutions and DNFBPs. Countries should ensure effective supervision of these obligations, including the establishment and enforcement of effective, proportionate and dissuasive sanctions for non-compliance.
- Countries should ensure that their national authorities cooperate effectively domestically and internationally. Countries should also ensure that their competent authorities participate in information exchange on beneficial ownership with international counterparts in a timely and effective manner.
- Countries should support G20 efforts to combat tax evasion by ensuring that beneficial ownership information is accessible to their tax authorities and can be exchanged with relevant international counterparts in a timely and effective manner.
- Countries should address the misuse of legal persons and legal arrangements which may obstruct transparency, including: a.prohibiting the ongoing use of bearer shares and the creation of new bearer shares, or taking other effective measures to ensure that bearer shares and bearer share warrants are not misused; and b.taking effective measures to ensure that legal persons which allow nominee shareholders or nominee directors are not misused.
The OECD Common Reporting Standard (CRS) which is designed to give effect to the new Automatic Exchange of Information (AEIO) standard is the latest addition to global co-ordination efforts to counter tax evasion; and builds on other information sharing mechanisms found in tax treaties, Tax Information Exchange Agreements (TIEAs), the OECD Multilateral Convention on Mutual Assistance in Tax Matters, FATCA and the EU Savings Directive.
It applies not only to income earned by corporate monoliths but also to individuals.
Since it is meant to implement the OECD AEIO standard it is broader in scope than information exchanges contemplated under FATCA.
Planned or existing FATCA compliance machinery in the private and public sector will not be sufficient to satisfy the CRS. What will be needed is a flexible approach which will meet the dictates of the existence compliance models while being capable of quickly and cost-effectively incorporating the expected changes, additions and modifications to global information sharing which will occur in the short to medium term.
Mauritius has just joined a list of 46 countries including the UK Overseas Territories and Crown Dependencies who have indicated that they will adopt the CRS by the 31st of December 2015. The list does not include the United States.
Banks are not the only entities who must comply with the CRS but the term financial institutions includes some entities that are excluded from FATCA Model 1 IGAs such as financial institutions with a local client base, local banks, certain retirement funds, financial institutions with a low-value accounts, sponsored investment vehicles, some investment advisors and investment managers and specified investment funds.
New ‘on-boarding’ procedures adopted by financial institutions will see some clients being dropped; and others will find it increasingly difficult to find a bank that will want to take them on as clients.
Not all financial institutions will survive the implementation of the CRS. The cost of compliance and the risks associated with non-compliance will be too high for some.
In like manner not all International Financial Centres will survive the global drive towards integrated mechanisms for information sharing.
No-one can be assured of confidentiality of the information transmitted. Already some some reports suggest that countries like the US will reserve the right not to exchange information if the confidentiality of their citizens cannot be adequately safeguarded by the state requesting the information.
What will happen to the mountain of information identified, collated, collected, verified, assimilated, transmitted and stored has to be determined at the firm level and the country level.
The IRS has announced that ‘FTCA-phishing’ has already stated; it will only be a matter of time before similar problems are faced under the the CRS.
The CRS has the potential to accelerate the purging of financial and quasi-financial institutions. For many OFCs –sooner rather than later- a decision about whether or not to continue to be involved in the competitive provision of financial services will have to be made as the cost of CRS implementation, compliance and monitoring; coupled with the emerging elements of the BEPS project; and pre-existing obligations under the transparency and information exchange protocols fast develop into a complex web of rights, roles, and responsibilities, the beginning the ending of which cannot, at this stage be determined with any certitude.
(Swiss Finance Minister: Image courtesy Reuters)
Proposed modifications to recommendations by the Financial Action Task Force (FATF) by Swiss law-makers have fuelled fears of Switzerland’s re-branding as ‘uncooperative’ by the OECD.
The plan that has raised the ire of the Swiss Finance Minister would see an adjustment in the threshold which would trigger the characterisation of a serious tax offence as ‘tax evasion’.
To be fair, recent experience shows that Minister Eveline Wider-Schlumpf is right to be concerned.
Though referred to as ‘Recommendations’ the 40 +9 rules FATF are recognised as the international standard for
- combating money laundering;
- financing of terrorism; and
- the proliferation of weapons of mass destruction.
Importantly too, according to the FATF “they form the basis for a global response to these threats to the integrity of the financial system and help ensure a level playing field.”
As many international and offshore financial centres already know, such co-ordinated activity includes the ‘blacklisting’ of a country as ‘uncooperative‘ for failure to apply the standard to the letter and in the prescribed time-frame.
As part of the obligations of the FATF’s thirty-four (34) member jurisdictions Switzerland must provide biennial up-dates on its progress in applying the Recommendations.
Switzerland’s next scheduled onsite visit by an FATF delegation is in June or July next year.