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Countermeasures to Tax Fraud, Evasion and Avoidance: A Critical Review

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Ethics and Taxation

Abstract

After an overview of size and methods of tax evasion and avoidance, I provide an ethical evaluation of a number of controversial enforcement methods used to coerce compliance with tax laws: creating third-party liability for lost VAT; the abuse of law doctrine as developed by the Court of Justice of the European Union; blacklisting of tax havens; public shaming of tax avoiders; and imposing mandatory, third-party, cross-border reporting. The results of the evaluation are mixed but, generally, not positive. Third-party liability is reasonably applied in the EU when it comes to persons acting in good faith but the standards applied to those acting with some degree of mala fides are less satisfactory. Blacklisting is an ethically unacceptable effort to pressure low-tax countries, while violating their sovereignty, towards revising their policies and adhering to a higher rate of taxation and tax policy standards developed without their input or consent. Public shaming is an inefficient and misleading effort to coerce multinational companies to terminate tax planning strategies. FATCA has triggered a development into global information exchange which raises questions as to the protection of civil liberties. Although, the subject measures are not judged positively, this does not diminish the indispensable role of tax law enforcement as a constituent component of the equilibrium model. Policymakers are advised to ensure that tax law enforcement measures meet the equilibrium test, i.e., the required proportionality, because that would not only enhance voluntary compliance but encourage taxpayers to include ethical considerations when deciding on tax planning; and it may lead to a synergetic relationship between taxpayers and tax agencies.

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Notes

  1. 1.

    IRC v WT Ramsay Ltd [1982] AC 300.

  2. 2.

    This paragraph is taken from Brederode (2014) Sect. 2.2. For a recent and more complete overview of tax avoidance techniques, see Beer et al. (2018).

  3. 3.

    This paragraph is taken from Brederode (2014) Sect. 2.3. For a recent and more complete overview of tax avoidance techniques, see Beer et al. (2018).

  4. 4.

    Source: OECD, Revenue Statistics of OECD Member Countries.

  5. 5.

    There are many difficulties in determining the revenue gain. Some of this income might already be taxed under Subpart F, some might be absorbed by excess foreign tax credits, and the effective tax rate may be lower than the statutory rate. Sullivan concludes that an estimate of between $10 billion and $20 billion is appropriate.

  6. 6.

    “Among multinationals, the lowest average tax rate is faced by firms which belong to multinational groups with a tax haven linkage.”

  7. 7.

    The VAT Gap is the difference between the amount of VAT revenue actually collected and the theoretical amount that is expected to be collected, given the observed information on the country’s economy and the actual VAT legislation. The amount of VAT total theoretical liability, known as VTTL, is calculated using the so-called “top-down” approach: the national VAT rate structure is imposed on the national accounts expenditure and investment data at the most detailed level possible to derive expected liability.

  8. 8.

    HM Revenue and Customs: Measuring Indirect Tax Losses (2005).

  9. 9.

    CJEU, 12 January 2006, joint cases C-354/03, Optigen Ltd; C-355/ 03, Fulcrum Electronics Ltd; and C-484/03, Bond House Systems Ltd, [2006] ECR-483.

  10. 10.

    Supra, para 24.

  11. 11.

    Optigen, Fulcrum, Bond House, supra, note 10, para 52.

  12. 12.

    CJEU, 6 July 2006, Joint Cases C-439/04, Axel Kittel, and C-440/04, Recolta, [2006] ECR-6177.

  13. 13.

    Opinion AG Ruiz in joined cases C-439/04 and C-440/04, [2006] ECR I-6163, para 63.

  14. 14.

    Supra, note 13, para 59.

  15. 15.

    Supra, note 13, para 56.

  16. 16.

    Supra, note 13, para 57.

  17. 17.

    The Latin term Fraus Legis translates into Fraud in Law. The concept is applied in all areas of law. See, for a comparative study in the area of international private law: Heeder (1998); for the historical application in Dutch tax law, see Niessen (1985).

  18. 18.

    See Chap. 1 of this book.

  19. 19.

    For the U.S. landmark case, see, U.S. Supreme Court, Gregory v. Helvering, 293 U.S. 465 (1935).

  20. 20.

    For a detailed discussion of the Court’s view of tax avoidance, see O’Shea (2012–2013), Brederode and Meussen (2017), para 6.05.

  21. 21.

    CJEU, 16 July 1998, Case C-264/96, Imperial Chemical Industries plc (ICI), [1998] ECR I-04695, para 26; later confirmed in, for instance, CJEU, 13 December 2005, Case C-446/03, Marks & Spencer, [2005] ECR I-10837; and CJEU, 21 January 2010, Case C-311/08, Société de Gestion Industrielle (SGI), [2010] ECR I-487.

  22. 22.

    CJEU, 21 February 2006, CaseC-255/02, Halifax Plc et al. v. Commissioners of Customs & Excise, [2006] ECR I-01609, para. 69.

  23. 23.

    Halifax, supra, para 73.

  24. 24.

    Halifax, supra note 23, para 74.

  25. 25.

    Halifax, supra note 23, para 75.

  26. 26.

    Halifax, supra note 23, para 80.

  27. 27.

    CJEU, 22 December 2010, Case C-277/09, The Commissioners for Her Majesty’s Revenue & Customs v. RBS Deutschland Holdings GmbH, [2010] ECR I-13805, para 51.

  28. 28.

    RBS Deutschland, supra, para 53.

  29. 29.

    CJEU, 12 September 2006, Case C-196/04, Cadbury Schweppes, [2006] ECR I-8031, Para 35.

  30. 30.

    Cadbury Schweppes, supra, para 36.

  31. 31.

    Cadbury Schweppes, supra note 30, para 37.

  32. 32.

    Cadbury Schweppes, supra note 30, para 50.

  33. 33.

    Cadbury Schweppes, supra note 30, para 51.

  34. 34.

    Cadbury Schweppes, supra note 30 para 55.

  35. 35.

    Cadbury Schweppes, supra note 30, para 64.

  36. 36.

    CJEU, 13 March 2007, Case C-524/04, Thin Cap GLO, [2007] ECR I-2107; CJEU, 21 January 2010, Case C-311/08, Société de Gestion Industrielle (SGI), [2010] ECR I-487; CJEU, 13 November 2014, Case C-112/14, Commission v. United Kingdom of Great Britain and Northern Ireland, ECLI:EU:C:2014:2369, para. 27 and CJEU, 3 October 2013, Case C-282/12, Itelcar—Automóveis de Aluguer Lda v. Fazenda Pública, ECLI:EU:C:2013:629.

  37. 37.

    Itelcar, supra note 37, para 37.

  38. 38.

    For example, CJEU, 18 December 2014, Joined Cases C-131/13, Italmoda, C-163/13, Turbo.com BV, and C-164/13, Turbo.com Mobile Phone’s BV, ECLI:EU:C:2014:2455; CJEU, 17 December 2015, Case C-419/14, WebMind-Licenses, ECLI:EU:C:2015:832; CJEU, 7 December 2010, Case C-285/09, Criminal Proceedings against R., [2010] ECR I-12605, ECLI:EU:C:2010:742.

  39. 39.

    CJEU, 22 November 2017, Case C-251/16, Edward Cussens et al., ECLI:EU:C:2017:881, para 43.

  40. 40.

    See art. 138 (1) in conjunction with art. 168 (a) of Directive 2006/112.

  41. 41.

    See art. 2 (1)(b) of Directive 2006/112.

  42. 42.

    See art. 168 (c) of Directive 2006/112.

  43. 43.

    If the exemption would need to be honored, no criminal charges would have been possible under German domestic law and the falsification of documents would amount to an administrative offense punishable by a fine of maximum EUR 5000.

  44. 44.

    Art. 28c(A)(a) of Directive 77/388/EEC of 17 May 1977, OJ L 145, 13.6.1977.

  45. 45.

    Criminal Proceedings against R., supra note 39, para 48.

  46. 46.

    Criminal Proceedings against R., supra note 39, para 45.

  47. 47.

    Criminal Proceedings against R., supra note 39, para 54.

  48. 48.

    Halifax, supra note 23, para 94.

  49. 49.

    Opinion of AG Bobek of 7 September 2017, Case C-251/16, Edward Cussens et al., ECLI:EU:C:2017:648, para 36.

  50. 50.

    Criminal Proceedings against R., supra note 39, para 47.

  51. 51.

    Criminal Proceedings against R., supra note 39, para 52.

  52. 52.

    The policy changes provided, inter alia, that commitments by the tax havens would not come into force until all tax havens, including Luxembourg, Switzerland, Hong Kong and Singapore, would agree to the same conditions, which removed the core of any commitment by the tax havens.

  53. 53.

    See art. 5 of the OECD Convention.

  54. 54.

    The reciprocity theory holds that individuals will contribute voluntarily to collective goods so long as they believe that most others are willing to do the same. This in contrast to the rational choice theory of collective action, which assumes that individuals will only contribute to societal collective goods when incentives are created in the form of either subsidies or penalties (see, Kahan 2003; Fehr and Gächter 2000).

  55. 55.

    Most corporations seek to reduce their global effective tax rate. Reduced taxation may be triggered by purposefully created tax losses which reduce taxable income but do not affect financial earnings per share.

  56. 56.

    See, e.g., Syal and Wintour (2012), Treanor (2009).

  57. 57.

    The reason public outrage was so broadly held and not limited to hardcore activists is that it was reported at a time of economic recession, fiscal austerity and spending cuts that affected many. Statements that tax avoidance by corporations are the cause of reduced government services can easily direct public outrage.

  58. 58.

    Not all politicians supported the approach of Margaret Hodge and the Public Accounts Committee and have criticized her abrasive style and the effectiveness of the hearings, see Hall (2013).

  59. 59.

    Tax agencies in most countries can impose fines on tax payers but these can be challenged in court before they go into effect. In contrast, public shaming takes immediate effect and cannot be reversed.

  60. 60.

    House of Commons, Session 2012–13, Early Day Motion 852, 13 December 2012, primary sponsor: John Mann. http://www.parliament.uk/edm/print/2012-13/852.

  61. 61.

    Such as reduced sales due to a consumer boycott triggered by the shaming, loss of stock value by shareholders.

  62. 62.

    Hiring Incentives to Restore Employment Act, Pub. L. No. 111-147, 124 Stat 71 (2010) (adding Internal Revenue Code (IRC) §§ 1471–1474; 6038D).

  63. 63.

    Treas. Reg. § 1.6038D-2T(a). An unmarried taxpayer living in the U.S. must file a Form 8938 if the total value of the taxpayer’s specified foreign financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year. This threshold is doubled in the case of specified individuals who are married filing jointly. A qualifying unmarried taxpayer living abroad must file a Form 8938 if the total value of the taxpayer’s specified foreign financial assets is more than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year. This threshold is doubled as well in the case of qualified individuals living abroad who are married filing jointly.

  64. 64.

    IRC § 1471(c)(1). Foreign financial institutions must collect and report the names, addresses and tax identification numbers of customers who are U.S. persons, as well as their account balances and annual receipts and withdrawals.

  65. 65.

    IRC § 6662(j)(3). In addition, non-disclosure of foreign assets via Form 8938 may lead to a non-disclosure penalty of USD 10K plus additional penalties up to USD 50K, if such nondisclosure continues after notification from the IRS, IRC §§ 6038D(d)(1) and (d)(2). The two penalties contemplated by IRC § 6038D(d) can potentially aggregate to $60,000. These penalties are subject to abatement under IRC § 6038D(g) if the failure to file is “shown to be due to reasonable cause and not due to willful neglect.” This determination will be made on a case-by-case basis taking into account all pertinent facts and circumstances. See Treas. Reg. § 1.6038D-8T(e).

  66. 66.

    IRC § 1471(a); § 1473(1).

  67. 67.

    Statement by Senator Levin, 111 Cong. Rec. S1635-36: “Right now, thousands of U.S. tax dodgers conceal billions of dollars in assets within secrecy-shrouded foreign banks, dodging taxes and penalizing those of us who pay the taxes we owe. The Permanent Subcommittee on Investigations (…) estimated that these tax-dodging schemes cost the Federal Treasury $100 billion a year.” http://www.gpo.gov/fdsys/pkg/CREC-2010-03-17/pdf/CREC-2010-03-17-pt1-PgS1633-8.pdf#page=4.

  68. 68.

    Congressional Joint Committee on Taxation, JCX-5-10, JCT Estimates Budget Effect of HIRE Act (Feb. 23, 2010).

  69. 69.

    The U.S. federal budget averages about 3.9 trillion from 2012 through 2019.

  70. 70.

    IRC § 1474(a).

  71. 71.

    Unless they live in a no-tax or low-tax country.

  72. 72.

    26 U.S. Code § 911. The exclusion is adjusted each year for inflation. For tax year 2018 the amount is USD 103,900. Any tax on the remaining foreign income is calculated as if it were still in the bracket it would have been in before the exclusion, i.e., the lower rates of the progressive tax system are lost.

  73. 73.

    ‘European banks shut Americans out over U.S. tax rules’, USA Today, 27 September 2012. http://usatoday30.usatoday.com/money/business/story/2012/09/27/european-banks-oust-americans/57849014/; ‘Banks lock out Americans over new tax law’, CNN, 15 September 2013. http://money.cnn.com/2013/09/15/news/banks-americans-lockout/index.html?hpt=hp_t3.

  74. 74.

    See art. 7 of the Universal Declaration of Human Rights (UDHR). (http://www.un.org/en/documents/udhr/); and Protocol 12 of the European Convention for the Protection of Human Rights and Fundamental Freedoms (http://conventions.coe.int/Treaty/Commun/QueVoulezVous.asp?NT=005&CL=ENG) which extends the non-discrimination provision of art. 14 of the Convention to all legal rights provided for in national law (not just the rights protected under the Convention). Not all countries have signed this protocol, however, including Switzerland and the UK.

  75. 75.

    Art. 15 (1) of the Charter of Rights and Freedom.

  76. 76.

    Supreme Court of Canada, Andrews v. Law Society of BC (1989) 1 S.C.R. 143.

  77. 77.

    Articles 7 and 8 of the Charter of Rights and Freedom.

  78. 78.

    The Charter of Rights and Freedom is part of the Constitution of Canada, Constitution Act 1982.

  79. 79.

    Florida Bankers Association v. Department of Treasury, No. 1:13-cv-00529 (D.D.C. 2014) (slip op.).

  80. 80.

    U.S.C. section 706(2)(A).

  81. 81.

    U.S.C. sections 601 to 612.

  82. 82.

    The annual automatic exchange between governments includes balances, interest, dividends, and sales proceeds from financial assets, reported to governments by financial institutions and covering accounts held by individuals and entities, see OECD 2014.

  83. 83.

    89 IGAs are in force, 11 are signed and 13 have the status of Agreement in Substance, source U.S. Department of the Treasury, available at https://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA.aspx (accessed September 22, 2018).

  84. 84.

    As citizens can sort themselves across jurisdictions, tax competition leads to an efficient outcome where different preferences of citizens regarding public expenditure are translated into distinct tax rates. Tax competition in this framework has therefore a desirable normative connotation. See, e.g., Tiebout (1956).

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  1. BrederodeTax, Lancaster, PA, USA

    Robert F. van Brederode

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    Robert F. van Brederode

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van Brederode, R.F. (2020). Countermeasures to Tax Fraud, Evasion and Avoidance: A Critical Review. In: van Brederode, R. (eds) Ethics and Taxation. Springer, Singapore. https://doi.org/10.1007/978-981-15-0089-3_13

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