(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.
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Today in London at the Open Government Partnership Summit, Prime Minister Cameron announced his government’s plans to make public, national registers of the ‘true’ , ‘shell’, ‘real’ or ‘beneficial’ owners of companies.
In the company of the Presidents of Tanzania and Liberia, Cameron said that “a list of the owners of “shell” companies where firms keep money offshore to avoid tax will be published to discourage tax evasion.”
He went on to say that, “the cloak of secrecy surrounding company ownership had lead to questionable practice and downright illegality”; and that “illegality that is bad for the developing world – as corrupt regimes stash their money abroad under different identities…is bad for Britain’s economy too – as people evade their taxes through untraceable trails of paperwork.”
No Tax Base – No Low Tax Case
Using this new mantra – also unveiled today – in making the case for the adoption of similar legislation by his G20 colleagues, Cameron has seemingly positioned publicly accessible registers as the solution to all that ails the developing world by commenting that “the UK is helping deprive corrupt politicians and criminals of the use of anonymous companies to hide their real identities. This will go a long way in curbing corruption, money laundering, drug trafficking, tax evasion and financial crime responsible for the continued loss of much needed wealth from the world’s poorest countries.”
G8UK Transparency Agenda
Cameron has been talking about public registers of beneficial owners even before he hosted this year’s G8 Summit in Northern Ireland. His 3T agenda, based on tax, trade and transparency was the forerunner to this year’s endorsement by the G20 of automatic exchange of tax information as the new global standard which the OECD Global Forum has been charged with implementing; thereby supplanting the existing rule that advocates treaty-based bilateral exchanges ‘on request’.
Cameron also registered some success under the second ‘T’ – trade – with the recent launch of EU-US Free Trade talks, even as concerns about the usual French ‘sensitivities in the areas of culture and farming subsidies were raised.
Now with his announcement that, not only is the UK going to establish a public register of the ultimate or ‘true’ owners of companies, but these registers to be available for public scrutiny, Cameron is trying to gain traction in the third part of his ambitious G8UK agenda.
It turns out that there is cause for Cameron to speak so boldly about the accessibility of public registers as this British initiative comes as the EU considers amending its anti-money laundering directive to tighten loopholes and demand that natural beneficial owners of corporations be named in a public registry.
It has also been reported that France is considering similar measures.
Even the Obama administration has promised to take action on beneficial ownership as part of its commitment under the transparency initiative called Open Government Partnership. Congress is considering legislation to create private corporate registries at state level.
Of course no word yet from other G8 members most notably Russia and Canada whose response to Cameron transparency agenda was lukewarm at best.
Who’s the ‘real’ owner anyway?
In circumstances when the UK still permits the holding of ‘bearer shares’ facilitating the opacity of company ownership, Cameron’s talk of transparency and public access was perhaps understandably greeted with horror by the ‘suits’ in London.
It is true however that the Cameron has also announced his government’s intention to abandon this lucrative plank Britain’s business brand, more than fifteen years after legitimate offshore financial centres outlawed the practice.
Unfortunately, banning proof of company ownership by the mere possession of an anonymous share certificates isn’t much help in exposing the true beneficiaries of company ownership.
In fact, while in the afterglow of the Northern Ireland Summit, UK’s overseas dependencies and the US published national action plans to give effect to the creation of registers to log the real owners of corporate vehicles, these plans do little to clarify the metrics required to determined how such a determination would be arrived at, given the several degrees of separation which can remove the company from its true owners.
But how would it work?
Nobody’s sure yet but possibilities include cross-referencing with other databases such as those held by the Passport Office and the electoral register. Alternatively, or perhaps additionally, companies could be asked to provide identification information for beneficial owners such as a national insurance number and date of birth.
What is clear however is that firms registered in Britain will come under a legal obligation to obtain and hold adequate, accurate and current information on the ultimate owner who benefits from the company – and be required to place the information on a central register that would be maintained by Companies House.
What about trusts?
…to be continued.
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1. Keep Calm and Don’t Rush
OFCs should not be in a rush to embrace or reject the 15 point OECD Action Plan to reform the international tax system to counter base erosion and profits shifting by MNCs (BEPS).
Instead, as a group non-OECD/G20 OFCs should become active participants in the debate occasioned by the G20’s recent endorsement of the OECD BEPS Action Plan focussing on ‘big picture’ issues like the true size and complexity of the reform undertaking given that it would be the first major overhaul of the rules in 75 years; and the imperative of multilateral solutions to multilateral issues.
Moreover, as a group with more than 20 years experience with the OECD methodologies in global tax policy OFCs are best placed to discuss the track record of the OECD in these matters and raise pertinent questions like the appropriateness or otherwise of the OECD as the principal driver of international tax reform given that it remains a ‘special interest’ group.
2. Keep Calm and Do Not Panic
OFCs should be careful at this stage not to frame their interventions as a defence to perceived threats to their livelihood, sovereignty, free trade and fair competition; which though valid are hackneyed and will be met with equally well-worn, well- rehearsed rebuttals.
Instead the clear message should emphasize OFC concerns about the lukewarm response by the U.S to proposed BEPS solutions, despite G20 endorsement; suggestions to renegotiate almost 2,000 tax treaties to address the double non-taxation of digital companies; the EU’s parallel anti-tax avoidance agenda; and the demonstrable apathy by both the US Congress and the UK government to new international measures that might undermine the profitability of their MNCs.
In this regard FATCA presents a relevant and topical.
The OECD has two years to perfect their BEPS Action Plan; but 24 months is a long time in national, regional and international politics. It is also a long time to maintain public interest and momentum in the parallel issues like development, poverty, corruption, bribery and other pulse points that together have provided the sound track to the OECD’s ambitious anti-tax avoidance plans.
Moreover,if the increasing ‘green-shoots’ of economic recovery become more ‘hardy’ enthusiasm for the arduous task of tax reform, domestic or international may wane.
3. Keep Calm and Be Mindful
That said, OFCs should be mindful that the OECD will have to demonstrate some early dividends long before the end of 2015; and history has shown that this comes at the expense of OFCs. Indeed this modus is currently on display as after five years, having failed to dislodge secrecy from Switzerland’s competitive profile, the OECD has instead focussed on applying wrong-sized solutions to OFCs who have never resorted to secrecy as a means of attracting investment.
This has no doubt left OFCs committed to transparency and information exchange ‘on request’ wondering what all the fuss about in the first place because nothing has changed.
Added to that, this past week, the OFC members of the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes who have been working to bring the legal and regulatory regimes in line with the ‘on request’ bench-mark were informed by G20 communiqué that the standard had been replaced by automatic information exchange through the adoption of the OECD Convention on Mutual Administrative Assistance in Tax Matters.
OFCs should know by now that there are no ‘brownie points‘ to be earned by enthusiastic application of the first draft’ of any OECD rules.
4. Keep Calm and Wait Your Turn
Already the business community has made some telling comments about the OECD Action Plan. That coupled with very public criticism by the tax justice lobby makes it likely that accelerated action on BEPS may well end up on the back -burner.
Strategically therefore, OFCs should allow the G20’s multinationals, who have been identified as the main target of new anti-tax avoidance rules, to be the first to make the case against the OECD BEPS Action Plan.
According to Martin A. Sullivan, Blogger for Tax Analyst (subscription Service) some key elements of the business case against the OECD BEPS Plan include the following:
- The current international tax rules work well in most cases. So all that is needed are some targeted anti-abuse rules to thwart the most aggressive varieties of tax planning;
- The problem of base erosion and profits shifting is overstated and not well understood by the public. In particular, when it is observed that a large proportion of multinational profits are in tax havens, this is not necessarily an indication of inappropriate profit shifting because subsidiaries in tax havens have paid for valuable intangible assets that are generating those profits. Nobody can tell whether a multinational has inappropriately shifted profits without an exhaustive facts and circumstances study of each case;
- Contracts between related parties within a corporation should be respected for tax purposes. Therefore, multinationals by writing contracts should be able to shift intangible assets and risks to affiliates in tax havens with a relatively small number of employees. This type of “restructuring” serves important business purposes;and
- If a low-tax subsidiary of a multinational pays its share of costs of developing an intangible asset, it is entitled to its share of the profits—regardless of the level of real business activity undertaken by that subsidiary. If business activity is required to book profits in tax havens, the rules should require only a minimal physical presence. In particular, the rules should allow outsourcing of functions so requirements can be met by employees assigned to the subsidiary but not physically present at the location.
5. Keep Calm and Stay Focussed
In light of the above, in the short term OFCs should express agreement in broad outline with coordinated action to reform international tax policy; emphasizing the wisdom of applying of right-sized solutions to the clear examples of abuse.
Finally, as I have advocated before, OFCs should get on with the business of remaining competitive and innovative in attracting legitimate investment; and making their collective voice heard in the design and application of international tax rules.
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Any mature OFC worth its salt should already have a strategy on how it will provide world-class, competitive but compliant international business and financial services, to fuel its development agenda.
If the vision or mission of the OFC is forgotten or unclear to those whose job it is to implement the strategy it should not automatically trigger a wholesale revision of the OFC’s strategic plan.
Indeed, all that might be required in such a circumstance is a ‘memo’ from the ‘leadership’ restating the key elements of the strategy in clear, precise and authoritative terms; rallying the ‘troops’ towards the common goals of the jurisdiction.
A restatement does not of course obviate the need for ‘refreshing’ a strategic plan from time to time.
Indeed strategic planning is by nature a process that should give rise to a ‘plan’ every 5 or 7 years. That said however a strategic plan by an established OFC should always refer to certain ‘constants’ that need not be ‘rehashed’ and that repetition regarded as an exercise in strategic planning.
For a serious OFC strategic planning should be a three-way conversation involving the public sector, its customers (present and potential) and the interest groups in its society without whom the OFC could not exploit its strengths; address its weaknesses; exploit opportunities; and guard against threats.
This high level ‘big picture’ activity evaluates the past; tries to understand the present; and attempts to predict the future. It focusses on the core of ‘who’ the country is as an OFC; what it wishes to achieve; how it will be done; and in what timeframe.
However,in a protracted and unpredictable recession, characterised by:
- a likely reconfigured Eurozone;
- aggressive, multi-dimensional attacks on the business model of OFCs by countries with strong ‘onshore’ and ‘offshore’ features but desperate to plug largely self-inflicted ‘tax’ holes;
- and against the background of a shift in wealth-generation away from markets long serviced by OFCs,
This is not the time to second guess the future because it is already here.
Instead OFCs convinced of their right to market share and importance to an efficient global financial system need to focus their energies less on ‘strategic’ planning and more on ‘tactical’ planning.
Tactical planning takes the world as it is not what it ought to be or how the OFC would like it to be. It is a reality check, based on the premise that the ‘future’ is something to be implemented now not later.
A tactical plan is necessarily grounded in an existing strategic plan but the plan is micro-oriented and fixed on short term goals with an implementation timeframe of months (1-18) not years. It is geared towards supporting the operational management of the OFC and is about the ‘how’ of getting things done such as:
- quickly exploiting new market opportunities using existing or complementary products and services;
- improving customer experience in specific areas;
- or partnering with like-minded OFCs in brand management.
It assumes more effort spent on identifying ‘who’ will do ‘what’ and ‘when’ to best accomplish the OFC’s mission.
Tactical planning though not as grand an activity as ‘strategic’ planning is nonetheless the essential ‘back office’ work that underpins the successful implementation of an OFC’s strategic plan especially in uncertain times.