Tackling Tax Havens and Offshore Finance

1
Tackling Tax Havens and Offshore Finance
Seminar onMoney Laundering, Tax Evasion and
Financial Regulation Transnational
InstituteAmsterdam12th-13th June 2007

• Prof. Sol Picciotto
• Lancaster University Law School

2
Recent Initiatives against Havens OFCs

• globalization is creating new challenges in the
  field of tax policy. Tax schemes aimed at
  attracting financial and other geographically
  mobile activities can create harmful tax
  competition between States, carrying risks of
  distorting trade and investment and could lead to
  the erosion of national tax bases. We strongly
  urge the OECD to vigorously pursue its work in
  this field, aimed at establishing a multilateral
  approach under which countries could operate
  individually and collectively to limit the extent
  of these practices.
• G7 Summit Meeting, Lyon June 1996

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Loose Coordination

• We remain concerned about offshore financial
  centers and tax havens which undermine
  international standards of financial regulation
  and which are shelters to avoid or evade payment
  of tax. We strongly support the work being done
  by the FSF and the OECD's Forum on Harmful Tax
  Practices, as well as the cooperative efforts of
  the OECD's Committee on Fiscal Affairs (CFA) and
  the FATF. We urge the OECD's CFA to bring a rapid
  conclusion to its work on bank secrecy.
• G7 Finance Ministers and Central Bank Governors
  Tokyo, January 2000

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Finance and Tax Organisations Networks

• TaxationLeague of Nations Fiscal Committee
  1928-1946UN Financial Fiscal Commission
  1948-54OECD Committee on Fiscal Affairs
  (OECD-CFA) 1956-UN Ad Hoc Group of Tax Experts
  1967-2004UN Committee of Tax Experts UN-CTE
  2004-OECD Global Forum on Taxation2001-Internat
  ional Tax Dialogue (IDB, IMF, OECD, UN, WB)
  2003-
• Financial Market SupervisionBank for
  International Settlements BIS 1930-Basel
  Committee on Banking Supervision BCBS
  1974-Offshore Group of Banking Supervisors OGBS
  1980-International Organisation of Securities
  Commissions IOSCO 1987-International
  Association of Insurance Supervisors IAISJoint
  Forum (BCBS-IOSCO-IAIS) 1996Financial Stability
  Forum FSF 1999-Financial Stability Institute
  (BIS BCBS) 1999-
• Money-LaunderingFinancial Action Task Force
  FATF 1989-Caribbean FATF 1992-Egmont Group
  1995-

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Reforming the International Financial
Architecture

• Financial Stability Forum (based at BIS)
  1999-national financial regulators in
  12significant international financial centres
  international financial institutions (IMF, WB,
  BIS, OECD) international sectoral regulators
  (BCBS, IASB, IAIS, IOSCO)committees of central
  bank experts (CPSS, CGFS) ECB
• Compendium of Standards12 key standards for
  sound financial systemsPolicy Transparency
  (data, fiscal system, monetary financial
  policy)Financial Sector Regulation
  (banking/insurance/securities, payments,
  AML)Market Integrity (corporate governance,
  accounting/audit, insolvency)
• IMF/WB Standards Codes Initiative
  1999-Financial Sector Assessment Programme
  FSAPOFC Assessments 2000-Reports on Standards
  Codes ROSCsdone by IMF, WB, FATF/FSRBs (for
  AML-CFT)voluntary, publication by agreement,
  4-5-year cycle

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From Stigma to Seal of Approval for OFCs

• Ensuring Safety SoundnessROSCs give bill of
  healthgreater security of OFCs facilitates use
  also for illicit purposes
• Standards Omit Tax Cooperationbank
  corporate/commercial secrecy unchallenged except
  for AML-CFTlittle information sharing yet
  between AML tax authoritiesmay be confined to
  tax-related crimes
• Secrecy Essential to Dirty Money flows
• No name shameIMF ends FATF blacklisting

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Havens for Tax Regulatory Avoidance

• Old-Style smuggling
• New-Style legal fictionse.g. shipping flags of
  convenience (Panama, Liberia)commercialisation
  of sovereignty
• taxing residents incomeincome is an abstract
  conceptincome from capital especially
  indeterminatemost effective by deduction at
  source (PAYE, interest, dividends)i.e. on
  employees, individual savers/pensionerslegal
  person can be located anywhere
• Avoidance (planning) strategies(i) altering
  timing of payments (ii) recharacterising nature
  of payments(iii) changing the recipient.

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International Tax Avoidance

• payments deductible as costs by operating
  company, paid to Conduit in treaty-haven

Host
Home
income source e.g. Fee 100
A- Resident
Treaty - no withholding tax
Base-haven
Treaty-haven
asset
99
Conduit
stepping-stones
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Globalization Tax Competition

• Emergence of tax havens 1920s family wealth
  business, e.g. Vesteys
• Postwar direct capital flows emergence of
  OFCsexploitation of tax deferral on retained
  earnings by TNCscurrent account convertibility
  1958-offshore banking international capital
  marketsdeposits in havens 11b 1968, 368b 1978
• Liberalization of investment flows capital
  flight complete convertibility 1979-1984 US
  UK end WT on interest to non-resident portfolio
  investors1988 German WT on interest abandoned
• Competition for investment 103 states offer
  investment incentives by 1988

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Types of Haven

• Base-Havenno/low (income/profits) tax,
  ORexemption for non-residents, e.g.
  International Business Company
• Treaty-Haven
• Tax treaty limiting Source state withholding
  allowing Conduit(no effective denial-of-benefits
  provisions)
• Secrecy
• Bank records no disclosure to (foreign) fisc
• fiduciary accounts - beneficial owner concealed
• company ownership - bearer shares, owners not
  registered
• company accounts limited filings, not enforced
• professional-client confidentiality
• Any state may be a haven for anothers taxes
• Some states offer specialist services

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Should Offshore be Targeted?

• Offshore is systemic, not few rogue statese.g.
  UK/US since 1984 allow Eurobond interest to be
  paid gross to recipients certified as
  non-resident by paying agent fears of portfolio
  capital outflow if reporting introduced.Netherlan
  ds as tax haven due to Dutch mixer and treaties
• Dual Approach needed
• Stronger Positive Coordinationon definition of
  business tax base e.g. interest
  non-deductibilityUnitary taxation of TNCs e.g.
  EUs CCTB
• Limits of Negative view of harmful tax

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Harmful Tax Practices

• OECD 1998 Report Haven criteriaNo/nominal
  taxation (low effective tax rate)
• tax holidays exemption of foreign source
  income?
• Lack of transparency
• secret rulings, negotiated tax privileges
• Lack of (effective) exchange of information
• only information already obtained for its own
  enforcement?
• No Substantial Activities / Ring-Fencing
• dropped 2001
• Are financial services in OFCs substantial?Rule
  s on Controlled Foreign Corporations increasingly
  complexUnitary approach would allocate tax by
  real criteria (employees, sales, assets)
• Effective Information Exchange
• within OECD (Switzerland, US, etc), others
  (Singapore, Dubai)?
• Global Forum, Towards a Level Playing FieldUS
  shell companies AML reporting of dealings
  with shells in OFCs?

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Tax and Crime Kept Separate?

• G7 Finance Ministers CBGsMoney laundering
  authorities should be permitted to the greatest
  extent possible to pass information to their tax
  authorities to support the investigation of tax
  related crimes. (Birmingham 1999)
• Defining Tax Financial Crimeguilty knowledge
  needs proof of knowledge that activity clearly
  illegal
• Grey Areasbribery political donations,
  government complicityinsider dealing privileged
  informationtax avoidance/evasion/fraud

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How to Define Offshore?

• Main criteriaoffering services aimed at
  non-residentsfavourable regulation, especially
  secrecylow/zero effective tax rates
• IMF proposed definitiona country or
  jurisdiction that provides financial services to
  nonresidents on a scale that is incommensurate
  with the size and the financing of its domestic
  economy (Zoromé 2007).
• Quantifiability?Gaps in balance of payments
  statistics Information Framework
  InitiativeProxy capital accounts portfolio
  investments dataratio of financial services
  exports /GDPbanding by country income level? (to
  include Barbados, Costa Rica, Lebanon, Macao,
  Malaysia, Uruguay)what level of deviation from
  mean? (single deviation includes UK)

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A Financial Transparency Index?

• Ranked Listing of OFCsbased on objective data
• Transparency Weightingobjective evaluations of
  compliance with global standards
• Information Availabilityon register/supplied
  automatically/on request/court orderpersons with
  power to direct use of assetspersons deriving
  benefits from entityofficers, executives
  professional advisers of entitypersons for whom
  nominees are actingaccounts payments to
  non-residents
• Effective Information Exchangedomestically,
  including between AML tax authoritiesinternatio
  nally, no requirement of domestic interest or
  dual criminality