President of the EU Commission Jose Manuel Barros
You really cannot make this stuff up!
So the EU Commission publishes its long awaited tax haven blacklist of uncooperative countries.
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(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.
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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
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.
IMF Managing Director, Christine Lagarde
If you’re more than a bit surprised to read about the IMF’s new found interest in the global debate on tax evasion, aggressive tax planning, fair taxation and excessive profits shifting, that probably means you haven’t read this.
This month’s new public consultation launched by the IMF on March 3, seeks the public’s opinion on:
At the launch, Michael Keen, Deputy Director in the IMF’s Fiscal Affairs Department (FAD) observed that “…it is widely recognized that the current international tax architecture, designed for a very different world of a century or so ago, is under considerable strain,” and “…with that in mind, the IMF work will consider both the operation of the current architecture and more fundamental reforms that have been proposed by academics, civil society, and others.”
Angel Gurria, Secretary-General, OECD
Having last year confirmed that the OECD remains well placed to do the technical work in this area, and defined the Fund’s own comparative expertise in international tax issues based on “its unparalleled technical assistance experience on these issues, recognized expertise in their economic analysis, and the near-universal Fund membership; many will be keen to the will read what conclusions the FAD draws from its analysis of the input from governments, academic researchers, think tanks, and the private sector.
(IMF Chief Christine Lagarde)
Speaking at the end of the G20’s first meeting of 2014, Christine Lagarde, former French Finance Minister and now IMF chief backed OECD plans which would allow countries to ignore inter-company contracts aimed at channelling profits into tax havens.
She acknowledged that “governments have to invent new concepts just as quickly and as well as those companies are inventing their optimization schemes.”
(OECD Secretary-General, Angel Gurria)
According to OECD Secretary-General Angel Guerria, the proposed sweeping international tax reforms are not targeting multinationals but insisted that though they have a legitimate expectation of not being exposed to double taxation in the countries where they operate, “they have to contribute; their fair share has to be put on the table.”
(Australian PM Tony Abbott)
Also clear from the post-meeting briefings is that Aussie PM, Tony Abbott, is staking his country’s credibility on the successful implementation of an aggressive plan of international tax reform.
This should not come as a surprise since Australia is one of the most heavily reliant countries in the OECD on corporate tax receipts.
So fixed on the tax reform agenda is Australia, that,in response to a further comment from Lagarde that climate change should also be a G20 priority, PM Abbott warned against pursuing a ‘cluttered’ agenda.
Finance Minister Flaherty’s Federal budget predicts the current deficit in finances to continue until 2016 when he expects a surplus of 6.4 billion.
Like his counterparts around the world his February 11th budgetary statement focused on job creation, innovation and infrastructure.
As a member of the G8, G20 and the OECD, Flaherty also addressed international tax reform in the areas of tax transparency and the prevention of tax base erosion and profits shifting (BEPS).
It is for this reason that Canada’s 2014 budget merits more than a passing interest by treaty-based offshore financial centres (OFCs).
In this regard, Flaherty has called for comments from stakeholders on a series of questions designed to inform a national action plan to combat tax avoidance, including:
Following submissions on treaty shopping consultation paper,the budget confirmed that the government now believes that a treaty-based approach would not be as effective as a domestic law rule.
As a result the budget invites comment on what the general outline of such a domestic rule should look like.
Main Purpose Test
Minister Flaherty also confirmed that Canada has opted to use a “main purpose” approach to its treaty shopping rule, rather than the specific “limitation on benefits” approach favoured by the U.S in its treaties.
Under such a provision, a benefit would not be provided under a tax treaty to a person in respect of an amount of income, profit or gain if it is reasonable to conclude that one of the main purposes for undertaking a transaction – or a transaction that is part of a series of transactions or events – that results in the benefit, was for the person to obtain the benefit.
Presumption of ‘Conduit’
Furthermore, in the absence of proof to the contrary, it will be presumed, that one of the main purposes for undertaking a transaction was to obtain a benefit under a tax treaty if the relevant treaty income is primarily used to pay, distribute or otherwise transfer an amount to another person that would not have been entitled to an equivalent, or more favourable benefit, had the other person received the relevant treaty income directly.
Safe Harbour Presumption
Under a safe harbour presumption, and subject to the conduit presumption, it would be presumed, in the absence of proof to the contrary, that none of the main purposes for undertaking a transaction was for a person to obtain a benefit under a tax treaty in respect of relevant treaty income if one of the following conditions is met:
The proposed treaty shopping rules would apply to all of Canada’s tax treaties through inclusion in Canada’s Income Tax Convention Interpretation Act.
It is interesting to note that the new anti-treaty-shopping measures announced in this year’s budget are illustrated using the following examples well-known to onshore and offshore financial centres:
To the extent that Canada has rejected a treaty-based approach to treaty-shopping in favour of a domestic route, its OFC tax treaty-partners will want to monitor the continuing national dialogue on how transitional relief and coming-into-force measures could apply.
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Your summary of the biggest tax, trade and investment headlines affecting International Business and Financial Services.
France Attacks US Tech Firms.
U.S and Listed Multinationals in Mexico Tax Avoidance Probe.
Obama Rhetoric on Offshore Profits Criticised.
Ethical Fund Manager Pulls Amazon Investment.
New Pay-Up First Tax Avoidance Plan Criticised.
EU Parliament Urged to Ban Shell Companies
HMRC Gives Cayman Islands Account Holders 30 Days to Disclose Affairs.
Merkel’s Party Treasurer Quits Over Bahamas Trust.
Cayman Islands Gearing Up for OECD BEPS Programme.
OECD Releases New Draft on Transfer-Pricing Documentation.
Americans Renouncing Citizenship up 221%.
Ghana Suspends Windfall Tax; Some Aren’t Happy.
US – New Zealand FATCA Talks Underway.
Delaware LLC Bill Does Nothing for Transparency.
Dubai International Financial Centre Records 14% Growth in Company Formations.
Foreign Affairs Minister Insists Luxembourg Not a Tax Haven.
Luxembourg Won’t Block Expansion of EU Savings Directive
Portugal’s Receipt-Lottery to Fight Tax Evasion.
Anti-Money-Laundering, Beneficial ownership, bEPS, Digital Companies, Digital Economy, FATCA, international tax reform, Internet Companies, Kenyan Athletes, OECD, tax avoidance, tax evasion, tax havens, TIEA, US Republican Party
Your summary of the biggest tax, trade and investment headlines affecting International Business and Financial Services.
US Republican Party to Vote for FATCA Repeal.
French Politicians Unhappy with Removal of Bermuda and Jersey from Blacklist.
International Tax Overhaul On Schedule Says OECD.
Relatives of Chinese Leaders Accused of Using Tax Havens.
Russia Mulling Over 30% Tax for Online Retailers.
McDonald’s France Denies Charges of Tax Evasion.
Will Credit Suisse Settle US Suit for $800 Million?
Global Tax Avoidance Rules to be Aimed at Digital Economy.
10 Biggest Tax Havens in the World.
Kenyan Athletes Threaten Boycott Over Tax.
Cayman Islands Discusses Beneficial Ownership.
Special Tax Rules for Internet Companies Not Viable.
TIEA Solution to Colombia’s Blacklisting of the Bahamas.
EU Votes on Anti-Money-Laundering Directive.
Eighty-five of the World’s Wealthiest as Rich as the World’s Poorest.
More CEOs Have Greater Confidence in the Global Economy.
What the BEPS are We Talking About?
OECD Webcast on Base Erosion and Profits Shifting.
Internet Sales Tax Hurt Business.
Oxfam Urges Crackdown on Tax Avoidance
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