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.
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.
(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:
- What are the impacts of international tax planning by multinational enterprises on other participants in the Canadian economy?
- Which of the international corporate income tax and sales tax issues identified in the BEPS Action Plan should be considered the highest priorities for examination and potential action by the government?
- Are there other corporate income tax or sales tax issues related to improving international tax integrity that should be of concern to the government?
- What considerations should guide the government in determining the appropriate approach to take in responding to the issues identified – either in general or with respect to particular issues?
- Would concerns about maintaining Canada’s competitive tax system be alleviated by coordinated multilateral implementation of base protection measures?
- What actions should the government take to ensure the effective collection of sales tax on e-commerce sales to residents of Canada by foreign-based vendors?
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 person carries on an active business in the state with which Canada has concluded the tax treaty and, where the relevant treaty income is derived from a related person in Canada, the active business is substantial compared to the activity carried on in Canada giving rise to the relevant treaty income;
- The person is not controlled, directly or indirectly in any manner whatever, by 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; or
- The person is a corporation or a trust the shares or units of which are regularly traded on a recognized stock exchange.
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:
- sub-licensing of royalty income through a favourable treaty jurisdiction,
- payment of dividends through a holding company located in a favourable treaty jurisdiction; and
- the continuation of a company into a more favourable treaty jurisdiction prior to the realization of a capital gain.
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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British Virgin Islands’ Minister of Finance believes that competition and the dictates of the global tax transparency agenda continue to have a negative impact on the territory’s principal money earner – financial services.
The significance of this activity cannot be overstated as its contribution to government earnings is estimated at 93.7%.
Finance Minister Orlando Smith is right to be concerned because the close of 2013 saw the BVI blacklisted by France amid a storm of controversy about that territory’s ability to effectively fulfil its treaty obligations to France under their 2010 Tax Information Exchange Agreement. More here.
BVI’s competitiors for business – Jersey and Bermuda – were also blacklisted by France but received a much welcomed ‘gift’ as they were removed from the list days before Christmas.
Despite assurances by Finance Minister Smith that France is satisfied with the process it has in place to deal with information requests under the treaty, so far no such indication has been given by France.
As a result, investors with assets in the BVI remain exposed to the application by France of a 75 percent withholding tax.
It is little wonder then that in his January 14, 2014 Budget Speech Minister Smith referred to the territory’s International Tax Authority, which he said has “made significant inroads in the management and fulfilment of the BVI’s international tax obligations.” He went on to say that he expects the unit to produce a “paradigm shift in the manner in which the BVI deals with its international tax obligations.” More here.