Abstract
In the midst of the 2016 Panama Papers scandal, Pascal Saint-Amans, Director of the Centre of Tax Policy and Administration, pointed out that transparency was one of the three main pillars of the international tax agenda. Indeed, the opaque nature of corporate vehicles, habitually associated with tax havens, has been heralded as the major contributor to the increase in tax avoidance. Anonymous legal structures are often enabled using the so-called shell companies, or “legal fictions”. By adding extra layers of complexity to the ownership structure, these companies can serve the devious purpose of obscuring transactions trails, which is handy for taxpayers wishing to minimise their tax burden. Although often associated with tax havens in the public imagination, evidence suggests that anonymous legal entities are provided on a much larger scale in some of the OECD countries. The world’s leading governments have been recently promoting transparency as the new way forward to address tax avoidance and evasion by multinational companies, with the OECD holding the leading position among transnational tax regulators. While the initiatives aiming to look through corporate vehicles are abundant, the implementation and effects thereof seemed to escape the interest of policymakers. Clearly, there is a need to step back and try to understand the effects of the existing regulations. In this chapter, we provide an outline of the transnational regulatory initiatives targeting the opaqueness of corporate vehicles, and discuss the potential effectiveness of the current transnational initiatives aiming to increase transparency of beneficial ownership and enforce better regulations on tax havens. The most active and internationally recognised transnational tax regulator is the OECD; hence, in this chapter, we concentrate on the OECD initiatives in tax matters, in particular, on the Base Erosion and Profit Shifting (BEPS) project, and its role within the transparency of beneficial ownership agenda. In the discussion section, we conclude that categorisation of the countries into tax havens might not be helpful for the overall regulatory goals of the OECD, which, in turn, undermines the neutrality of the organisation as a transnational regulator, and that the apparent lack of belief in the international initiative from the OECD member countries is not helpful in furthering the OECD objectives.
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Notes
- 1.
Tax avoidance is sometimes used to refer to a legal reduction in taxes, while evasion refers to tax reductions that are illegal. In general, both tax avoidance and tax evasion are alternative methods of reducing taxes that differ in their lawfulness (Blaufus et al. 2016). For a general distinction see Gravelle, J.G., 2009. Tax havens: International tax avoidance and evasion. National Tax Journal, pp. 727–753.
- 2.
For instance, in order to arrive at the total amount of missing wealth, Zucman subtracts global liabilities from global assets. This ignores a number of factors, such as that national accounts do not use the same methods for measuring assets and liabilities, nor do they have an obligation to report these data accurately. Another example is that Zucman includes stocks and bonds, without assets like yachts, art, and other luxuries. For a more detailed review see Clarke, C., 2016. What Are Tax Havens and Why Are They Bad?
- 3.
For more details see Notice of Exemption, Proposal No. 7 on Tax Policy Principles by Domini Social Equity Fund: Washington DC: U.S. Securities and Exchange Commission available at https://www.sec.gov/Archives/edgar/data/851680/000119312514178926/d718969dpx14a6g.htm last accessed March 2017.
- 4.
The distinction between acceptable and unacceptable tax practices is not drawn hard and fast. Generally, tax evasion is considered illegal, while tax avoidance is more of a grey area. It has been argued that HMRC tends to decide whether tax avoidance is acceptable simply on grounds of cost. Self (2008) provides an authoritative opinion on the matter, suggesting that acceptable tax avoidance must necessarily relate to a business transaction and have a commercial aspect, although the latter component of a tax-planning scheme can be difficult to define (Self 2008). For a more detailed academic discussion, see the article by Judith Freedman (2007), who suggests introducing a general anti-avoidance principle, distinct from GAAP (Freedman 2007).
- 5.
Tax expenditures can be defined as deviations from a benchmark tax system , which deliberately reduce the tax burden on certain economic activities or taxpayers, giving rise to national tax revenue losses.
- 6.
For instance, HMRC estimated that the tax gap for 2014–2015 stood at £36 billion, or 6.5 per cent of theoretical tax liabilities (HM Revenue & Customs 2016).
- 7.
Richard Gordon, Special Counsel for International Taxation Enclosure, was tasked by the Commissioner of Internal revenue to prepare a report on tax havens and their use by US taxpayers. This was the first official report on the topic, which has ever since been referred to as the Gordon Report, 1981. Tax Havens and Their Use by United States Taxpayers—An Overview. U.S. Treasury .
- 8.
http://www.ft.com/cms/s/0/2ed5ef86-17e3-11de-8c9d-0000779fd2ac. html accessed 17-4-09.
- 9.
During the time of Crusades in the twelfth century, trusts were in use by warriors who often left their properties behind while being away from England. The person left in charge of the property needed to have the powers of legal ownership in order to tend the land in the absence of the real owner. The idea of split ownership emerged as a mechanism to ensure that, upon return, the crusaders could recover their rights of ownership. For more detailed discussion see Alastair Hudson, Equity and Trusts, 3rd ed. (Routledge-Cavendish 2014), p. 31–32.
- 10.
For a good illustration of the complexity of legitimate corporate structures see de Willebois, Emile van der Does Sharman, J. Harrison, R. et al. (2011) The Puppet Masters: How The Corrupt Use Legal Structures To Hide Stolen Assets and What To Do About It, World Bank Publications (p. 56) and Vermeulen, E. (2013), Beneficial Ownership and Control: A Comparative Study - Disclosure, Information and Enforcement, OECD Corporate Governance Working Papers No. 7, OECD Publishing (p. 12).
- 11.
See Financial Action Task Force on Money Laundering, “FATF 40 Recommendations,” p. 15, available online at http://www.fatf-gafi.org/dataoecd/7/40/34849567.pdf
- 12.
See Exchange of Information on Request: Handbook for Peer Reviews 2016–2020, OECD 2016, available at http://www.oecd.org/tax/transparency/global-forum-handbook-2016.pdf
- 13.
The approximate annual incorporation rate of shell companies in the leading “tax havens”, the British Virgin Islands and Panama, is 40,000 and 70,000, respectively, while the corresponding annual statistics in the UK is 300,000, and in the USA it is around two million (de Willebois, Emile van der Does et al. 2011).
- 14.
Such widely accepted international agreements include Vienna Convention on the Law of Treaties and the Treaty of Rome.
- 15.
It has been argued that the “revenue principle” has arisen due to the general perception of tax collection to be an act of sovereignty, resulting in the reluctance of states to allow exercising foreign sovereignty on their territory (Baker 2002).
- 16.
The Global Forum standard on exchange of information is broken down into ten essential elements, divided into three parts: A, availability of information; B, access to information; and C, exchange of information. The standard stipulates that each jurisdiction should have appropriate international instruments in place with all relevant partners for the effective exchange of information, and it is important to ensure that the information sought is available and accessible.
- 17.
The binary of source-residency implies an international tax system where only one state will necessarily win the right to the revenue—either the country of source of profit or the country of residency.
- 18.
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Konovalova, M., Tuck, P., Ormeño-Pérez, R. (2017). Tax Havens: The Crisis of Transparency. In: Thomakos, D., Nikolopoulos, K. (eds) Taxation in Crisis. Palgrave Macmillan Studies in Banking and Financial Institutions. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-65310-5_4
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