(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.