Taxpaying made easier

How do you spell it?

Prawo Jazdy was the most reckless driver Ireland had ever known, travelling at unlawfully high speed around the country, pausing only to park illegally. And yet despite getting caught innumerable times, he avoided prosecution simply by changing address. Then one day a particularly gifted member of the Garda began to wonder if it all might not be a hideous mistake and looked up the Polish bandit’s name, not in the Interpol database, but a dictionary. Imagine his surprise when, as the Irish Times relates, he learned that Prawo Jazdy means “driving license”. Case solved.

Here we’re talking about minor traffic offences committed by people who were actually cooperating with the police and not trying to avoid paying, and yet the basic information wasn’t getting across. A few studies published recently deal with the far more complicated and expensive business of international tax paying, or tax dodging, depending on how you look at it.

The Tax Justice Network estimates that individuals hold about $21 trillion of unreported wealth offshore, the equivalent of the combined GDP of the US and Japan. They think the figure may be even higher ($32 trillion) but even a previous, far lower estimate of $11 trillion still represents around $250 billion dollars in lost tax revenue each year – five times what the World Bank calculated was needed to address the UN Millennium Development Goal of halving world poverty by 2015. The usual term for these places offering low or zero taxes is tax haven, but TJN thinks that “secrecy jurisdiction” is a better description, since they provide facilities to get around the rules of other jurisdictions using secrecy as their prime tool.

The core of the problem is that taxes are a national affair while finance is international. The OECD has been working for years to help tax administrations cooperate across borders and the OECD Model Tax Convention serves as the basis for the negotiation, application, and interpretation of over 3000 bilateral tax treaties in force around the world, and its Commentaries have been cited by courts in virtually every OECD member country, as well as in many non-OECD countries. The Convention has just been updated to allow tax authorities to ask for information on a group of taxpayers without having to name them individually, as long as the request is not a “fishing expedition” launched in the hope of netting a few tax dodgers in a batch of honest citizens.

These are so-called targeted requests, but the OECD is also looking at how to make automatic exchange of information more efficient (some countries call this “routine” rather than “automatic” exchange). This is the systematic and periodic transmission of “bulk” taxpayer information collected by the source country to the country of residence concerning income from dividends, interest, royalties, salaries, pensions, and so on.  Denmark has the most relationships of this kind, sending information to 70 other countries.

According to a survey carried out for the OECD’s Centre for Tax Policy reported in Automatic Exchange of Information: What It Is, How It Works, Benefits, What Remains To Be Done the sums represented range from a few million to over 200 billion euros. Automatic exchange seems to work both to detect tax evasion and as a deterrent. EU experience with the Savings Directive suggests that without automatic exchange, over three-quarters of taxpayers may not have complied with their tax obligations in their country of residence. Denmark helped 440 of its absent-minded citizens to remember foreign income after the tax administration carried out 1000 audits and sent out 1100 letters announcing that it received automatic information from abroad.

Automatic Exchange contains plenty of practical advice on implementing agreements. For instance, as Prawo Jadzy shows, it’s essential to get the basics right by using a standard format to make sure each side of the exchange understands what it’s looking at in different languages, when multiple first names and family names may be involved or addresses may include both flat number and street number.

Information on taxes is sensitive, and Keeping it safe: the OECD guide on the protection of confidentiality of information exchanged for tax purposes sets out best practices related to confidentiality and provides practical guidance, including recommendations and a checklist, on how to meet an adequate level of protection.

I to by było na tyle. Jedź ostrożnie!

Useful links

OECD work on exchange of information for tax purposes

OECD Centre for Tax Policy and Administration

How to pay less tax

Aggressive isn’t enough, Al, you need planning too. Click to see how the tax inspectors caught Capone.

The simplest way to pay less tax is to earn less, but if you’re a multinational enterprise, there are other options, including double deductions – pay your tax in one country then deduct that sum in two or more other ones. You can also make your income disappear for tax purposes by getting a deduction in one country  that isn’t included in the calculation anywhere else. If you’re really smart you can even generate foreign tax credits for taxes you didn’t actually pay at all. The exception proves the rule, and while most OECD documents contain some warning about there being “no magic/silver bullets”, that doesn’t apply to international taxation.

The bullets are “hybrid mismatch arrangements”, hybrids for short, and although they cost the rest of us billions of dollars a year, they’re perfectly legal, for the time being anyway. The OECD’s Centre for Tax Policy and Administration and the Canada Revenue Agency have just organised a meeting with senior tax officials from OECD countries to discuss the issues raised, following the publication of an OECD study Hybrid Mismatch Arrangements: Tax Policy and Compliance Issues.

Hybrids exploit the fact that although the economy is increasingly globalised and integrated, corporate tax systems are still running on principles established around a hundred years ago for firms operating mainly in one country, with little need to consider how different systems affected each other. International tax expert Professor Reuven S. Avi-Yonah put it like this when testifying to the US Congress Ways and Means Committee: “corporate residence is not a particularly meaningful concept, it makes little sense to base the entire US international tax regime on it.” Multinationals certainly don’t base their tax strategies on it and take advantage of mismatches between national legislations via aggressive tax planning.

The basic idea behind hybrids is to have the same money or transaction treated differently by different countries to avoid paying tax. One common feature of hybrids is dual residence, companies that are residents of two countries for tax purposes. Speaking during the debate on the UK budget earlier this year, Conservative MP Charlie Elphicke denounced the “magic roundabout” that allowed companies like Google to avoid tax, pointing out that the company “took about £2.15 billion in revenue from the UK in 2010, making an estimated £700 million profit, yet it did not pay any tax. In fact, it declared a loss of £22 million”.

Amazon is another case in point. If you look at their accounts, you’ll find that they may not actually trade in a country they do business in, since they only have a delivery company there. In Europe, the main business is based in Luxembourg, and the billions of euros in sales income generated elsewhere is not taxed in those countries.

Apart from dual residence, the other most common elements that hybrids exploit are entities, instruments and transfers. The details are complex and vary from place to place, but one firm offering to help companies avoid tax through hybrid entities, in this case limited liability companies, sums up the approach in the clearest of terms: “The [entity] allows for a real presence [in the host country], with all the normal benefits of [that country’s] legal structure and bank accounts… but reap the profits – tax free!”

A typical hybrid instrument would allow a company to treat something as debt in one country and equity in another, while hybrid transfers are arrangements that are treated as transfer of ownership or an asset in one country but only as a loan with collateral in another.

By playing off one country’s tax system against another, the most successful hybrids achieve double non-taxation – the company doesn’t pay tax anywhere, an unintended consequence if ever there was one of the tax laws of the countries concerned. It’s worth repeating that none of this is illegal. Replying to criticisms of its low tax bill, a spokesperson for Google said: “We have an obligation to our shareholders to set up a tax efficient structure, and our present structure is compliant with the tax rules in all the countries where we operate.”

That may be true, but it raises a number of issues. Obviously companies act like this to reduce the revenue tax authorities receive. The total sum isn’t known and a few jurisdictions may benefit at the expense of the rest, but some figures are available. In 2009 New Zealand settled cases involving four banks for a combined sum exceeding NZ$2.2 billion (€1.3 billion); Italy has settled a dozen cases involving hybrids for around €1.5 billion;  while in the US the amount of tax at stake in 11 foreign tax credit generator transactions has been estimated at $3.5 billion.

Then there’s the issue of fairness and trust in the tax system. A new OECD study, Taxing Wages shows that the tax burden on earnings is continuing to rise in OECD countries. Governments trying to convince workers that they have to pay for austerity measures would have a better chance of convincing them if capital income was seen to be taxed fairly. Local businesses that don’t have the multinationals’ means to use hybrids and other means of paying less tax may feel they’re being treated unfairly too, and they are at a competitive disadvantage.

What can be done? A number of countries have introduced rules which specifically deny benefits arising from hybrids by linking the domestic tax treatment of an entity, instrument or transfer involving a foreign country with the tax treatment in that foreign country. The OECD recommends such initiatives, along with two others: sharing intelligence and experience on tackling hybrid; and consider introducing or revising disclosure initiatives targeted at certain hybrids.

Useful links

OECD work on aggressive tax planning

OECD work on Exchange of Information for Tax Purposes

Tax Inspectors Without Borders/Inspecteurs des impôts sans frontières The OECD’s Task Force on Tax and Development has launched an initiative to help developing countries bolster their domestic revenues by making their tax systems fairer and more effective. The OECD will  establish an independent foundation, to be up and running by the end of 2013, that will provide international auditing expertise and advice to help developing countries better address tax base erosion, including tax evasion and avoidance.

Are tax havens disappearing?

Countries the Financial Stability Board declared posed problems in 2011

Today’s first post is from Christian Chavagneux, Deputy Editor of Alternatives Economiques, Editor of Economie politique and author with Ronen Palan of Les paradis fiscaux, (Tax Havens) whose 3rd edition is forthcoming in 2012. Below, you will find a reply from OECD’s Pascal Saint-Amans

The fight against tax havens was one of the priorities of the 2009 G20 summit in London. Three years later, the results are mixed. To combat fraud and tax evasion by the wealthy, the G20 decided to push for the signature of treaties covering the mutual exchange of information in order to develop information exchange on demand. What can we expect from this?

According to a study by Niels Johannesen and Gabriel Zucman, the announcement of the treaties had little effect on bank deposits in tax havens. Their claim is backed up by data from French budget minister Valérie Pécresse: France made 230 requests for information to 18 countries in the first 8 months of 2011. The reply rate was only 30% and the quality of the information supplied wasn’t always of the highest quality, adding weight to the demand of international NGOs to move to a system of automatic exchange of information.

The super rich are not the only ones to take advantage of tax havens, multinationals use them too. Analysis of the geographical distribution of FDI by US firms at the end of 2010 for example shows that the Netherlands, Luxemburg, Bermuda or Ireland come out well ahead of Germany, France or China. 

The Banque de France recalculated FDI flows into and out of France eliminating fictitious flows transiting via tax havens. The result? France’s outward FDI flows dropped by 41% and flows into France by 81%! Adjusting data for several years this way shows a widening gap between traditional and corrected figures, a sign that use of tax havens is growing.

The G20 has done nothing to fight against such shady dealings which, according to Bloomberg allow Google for example to be taxed at 2.4%. To combat this, NGOs are asking for country by country reporting. In other words, multinationals would have to provide their turnover, number of employees, payroll, profits and taxes for each country they operate in. This would show the disparity between the place where an economic transaction was carried out and where it is taxed.

The G20 has abandoned the fight against tax havens as territories that facilitate financial instability. In November 2011, after months of work, the Financial Stability Board declared that only two countries posed problems: Venezuela and Libya. However, a 2008 report by the US Government Accountability Office showed that a part of the American shadow banking system that developed the toxic assets of the subprime crisis was operating out of the Cayman Isles.

The Northern Rock fiasco in the UK resulted from excess short-term debt hidden in its Granite subsidiary, registered in Jersey. Bear Stearns took hits on speculative funds partly based in the Caymans, and likewise the German firm Hypo Real Estate was destroyed by losing bets placed by its irish subsidiaries, and so on. 

Tax havens have played a leading role in all the key epsiodes of the financial crisis. As well as that, when you realise that they are the main holders of American public debt and that according to Patrick Artus of Natixis bank, “The three main holders of French debt are Luxemburg, the Cayman Isles and the UK”, it’s easy to see that these territories are involved in speculation on public debt.

Tax havens, in the service of the richest and most powerful individuals and companies, promote global inequalities. Their offer of opaque services and risk taking contribute to speculative finance and the serious consequences in terms of loss of business and jobs. Unfortunately, the G20 is still far from having done everything to control these parasitical states. 

Useful links

The article (in French) in Alternatives économiques that started this debate is here 

The Tax Justice Network’s Financial Secrecy Index

Are tax havens disappearing? Yes, but this is only the beginning

Members of the Global Forum on Transparency and Exchange of Information for Tax Purposes

Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, replies to Christian Chavagneux’s article.

Christian Chavagneux is right to criticise tax havens and argues that more needs to be done to combat their negative consequences for developed and developing countries alike. But it’s wrong to imply that the G20’s actions have been ineffective since it pledged to tackle the issue in 2009.

The study he quotes by Johansen and Zucman on whether bank secrecy has ended actually answers another question, namely the effect of the G20 push for tax information exchange on the location of bank deposits. The location of the deposits themselves is not the issue – funds do not need to be repatriated to a country in order to be taxed by that country. What is important, and what the G20 initiative focuses on, is making the existence and ownership of those deposits more transparent to tax authorities.

The information exchange agreements signed since 2009 are only now beginning to enter into force, and the expansion of each country’s network of agreements is continuing. Even so, an OECD survey of 20 rich and poor countries showed that early measures to deter tax evasion have already resulted in 100,000 individuals paying a total of $14bn in unpaid tax on assets worth between $120-150bn.

We now have commitments by all the major international financial centres to eliminate bank secrecy for tax purposes. In most cases, including Switzerland, Singapore and Austria and Liechtenstein, those commitments have already been implemented. 

Nor are governments abandoning the fight on tax havens as Christian Chavagneux suggests, including on automatic exchange of information. In 2011, the updated multilateral Convention on Mutual Administrative in Tax Matters entered into force and now has 33 signatories including Costa Rica, France, Georgia, Germany, Indonesia, Norway, Russia, the UK and the USA. The Convention looks beyond mere information exchange on request, allowing parties to engage in automatic exchange as well as international assistance for tax collection. In November 2011, we saw the G20 support automatic exchange of information as appropriate.

In February 2012, the Financial Action Task Force refined its criteria for assessing anti-money laundering frameworks, with more targeted requirements that will improve transparency. That same month, the US proposal to implement the Foreign Accounts Tax Compliance Act led to the UK, France, Italy, Spain and Germany agreeing to explore a common approach to improved reporting of bank transactions. These changes will lead to stronger domestic frameworks to ensure all relevant information is available, and tax authorities relying on broader networks of information exchange agreements can expect to benefit from these developments.

The Global Forum on Transparency and Exchange of Information for Tax Purposes already has 107 members and continues to expand its membership to cover emerging financial centres. By the next G20 Summit in Mexico in June, the Forum will have published more than 70 Phase 1 country reviews, while the Phase 2 reviews commenced in 2012 provide for an in-depth investigation into the procedures and resources available, to make sure that each jurisdiction can meet their commitments to the international standard.

The role of governments is primordial of course, but we also recognise the efforts of civil society in continuing to draw attention to the issue of tax transparency. That is why OECD initiatives like the Taskforce on Tax and Development are bringing together tax authorities, business and civil society to share proposals to move towards our common goal of fairer taxation. 

Tax havens have been around since the late 19th or early 20th centuries, depending on how you define them. They are defended by powerful vested interests and the fight against them will not be won quickly or easily. However, combined with new OECD projects to strengthen inter-agency cooperation to tackle tax crimes and other financial crimes, there is good reason to be optimistic that we will continue to build on the substantial progress made since 2009.

Useful links

OECD Centre for Tax Policy and Administration

The outcomes of the 59 country reviews published so far by the Global Forum are available on the Exchange of tax Information (EOI) portal along with an interactive map showing the network of agreements to exchange tax information:

The government inspectors

You'll pay sooner or later

Around a third of global assets are held offshore beyond the reach of effective taxation according to the Tax Justice Network. The TJN also estimates that private individuals hide $11.5 trillion in tax havens, depriving the rest of us of $250 billion a year in tax revenues.

You could do a lot with an extra quarter of a trillion a year – finance the UN’s Millennium Development goals or transform the world’s energy system to combat climate change for instance. But in the meantime, the response to the crisis and sovereign debt is increased taxes and reduced public services.

So how can we get the tax cheats to pay up? In Buenos Aires this week, tax commissioners from 45 countries plus representatives of big business and other organisations met to discuss “compliance” at the OECD Forum on Tax Administration. The Forum, created in 2002, brings together the people responsible for taxes at national level to “identify, discuss and influence relevant global trends and develop new ideas to enhance tax administration around the world”.

What have they done so far? Data from 20 countries that publish such information show that an extra $14 billion in taxes has been collected in the past two years. It’s a good start, but obviously a lot more has to be done. They’re dealing with highly mobile money that can be switched from place to place as havens become less safe and at the same time, tax administrations themselves are facing the same resource constraints as other parts of government, constraints the people they’re targeting don’t have to worry about.

The solution according to the FTA is to “work smarter” to optimise international cooperation, administration, compliance, legislation and service delivery. For an outsider like me, one of the most intriguing aspects of this is to be found in a list of publications with titles like “Guidance on Test Procedures for Tax Audit Assurance” and “Tax Reference Model – Application Software Solutions to Support Revenue Administration”. I discovered that the FTA is studying the use of social media by tax authorities.

In the US for example, the IRS has launched IRS2Go, a mobile app that lets users track the status of a refund, subscribe to e-mail updates, follow them on Twitter, and click to call a help line. Apart from providing services to the individual taxpayer, social media could also become important in another main aspect of FTA work – publicizing successes in getting tax avoiders to pay up or tax havens to close down so that those who once felt safe hiding their money feel more and more exposed to public scrutiny and public anger.

And imagine the kudos of having the tax inspector as your friend on Facebook.

Useful links

OECD Centre for Tax Policy and Administration

Tweeting on your taxes The OECD Observer looks at the social media aspect

OECD work on restoring public finances

If I were a rich man

Help the gentleman pay for his iPad, sweetie

When asked what he’d done with all the money he’d earned, former Manchester United star George Best replied that he’d spent a fortune on women, booze and fast cars. “The rest,” he said, “I just wasted.”

No such prodigality from the three dozen billionaires who’ve agreed with Bill Gates and Warren Buffet to give away at least half of their fortunes and get by on what’s left. The initiative is expected to bring in $600 billion eventually, about twice what Americans gave to charity last year.

Some of it would have been given anyway according to an interview with Buffet in the New York Times. He says the real value of the pledge is in the example it sets and the sentiments expressed in the letters posted on the Giving Pledge web site.

If you think that charity is a good thing but would like a more convincing example than somebody who explains in his letter to the Pledge that he only has three luxury homes, try imitating the poor. According to the OECD study Growing Unequal? Income Distribution and Poverty in OECD Countriesthe economic expansion that allowed the billionaires to make so much money hasn’t benefitted everybody. In fact, “the change has been equivalent to taking $880 from each of the poorest half of the population, and giving it to the richest half”.

What are they going to do with their philanthropy money? Education and health care top the list of intended beneficiaries. You might object that such basics should be a right, and not have to depend on charity and the whims of the rich.

Various sets of data suggest where other sources of funding could be found, even in poor countries. OECD Secretary-General Angel Gurría has pointed out that developing countries lose to tax havens almost three times what they get from developed countries in aid. 

Christian Aid estimates that the sums being lost to tax evasion could save the lives of 350,000 children each year if made available to programmes fighting poverty and disease.

OECD countries suffer from tax dodgers too. According to a 2009 report from the US Internal Revenue Service, the tax gap – the difference between tax owed and tax paid – was  around $345 billion in 2005, the most recent estimate. After subtracting revenue obtained through enforcement actions and other late payments, the IRS estimated the net tax gap at approximately $290 billion. The OECD says that tax evasion deprives other member governments of billions of euros a year too.

Charities do vital work that wouldn’t be done otherwise. But in a stronger, cleaner, fairer economy, they wouldn’t have to do it   

Useful links

OECD work on harmful tax practices

OECD work on fighting tax evasion

Outcomes of the first meeting of the Informal Task Force on Tax and Development

OECD report on Abuse of Charities for Money-Laundering and Tax Evasion