Scandalous revelations on tax avoidance by multinational companies and the role that a number of European countries have played in facilitating this, has made the headlines. While some of the scandals concern tax evasion – which is a type that entails illegal activities – a number of the revelations concern tax avoidance. The latter describes an act that is not a deliberate violation of tax laws, but rather acts against the spirit of the law through aggressive tax planning, which in most cases is fully legal. This reminds me of the famous quote by Jean-Baptiste Colbert on the art of taxation which he said “consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing”.
One cannot help but mention the Swiss leaks scandal, when the International Consortium of Investigative Journalists (ICIJ) had exposed 60,000 leaked files with details of more than 100,000 clients of the HSBC Bank in Switzerland. The material was originally leaked by Hervé Falciani, a former computer engineer at the bank. Among other things, the data showed that HSBC was helping clients set up secret bank accounts to hide fortunes from tax authorities around the world, and assisting individuals engaged in arms trafficking and money laundering to hide their illicitly acquired assets.
Back home, Opposition shadow minister of finance MP Kristy Debono told a conference organised by the Malta Association of Credit Management that the Prime Minister’s failure to fire the two holders of offshore companies (a minister and a chief of staff) risks dismantling the country’s financial services industry. She was not perturbed that the international press noted the fact, disclosed in Panama Papers, concerning circa 700 cases when licensed intermediaries aided and abetted local clients in opening and maintaining secret accounts in tax havens. On a positive aspect, she said that the Opposition will stand four-square behind the government’s fight against tax harmonisation, but warned that the country must brace itself for all options.
Naturally, the hacking of 11.5 million documents of Mossack Fonseca, a law firm based in Panama (represented locally by Nexia BT), has fanned the fire against secret dealings by various international business owners. All this has strengthened the resolve of the G20 and the OECD, as well as protestations from the European Parliament, several member states, businesses and civil society, and certain international partners to implement a stronger and more coherent approach against corporate tax abuse. Yet such practices have been going on unhindered for decades, and there is a lucrative legal consultancy industry which advises clients in tax avoidance – they are constantly on the lookout for loopholes.
No one expects offshore havens to disappear anytime soon. The industry is massive, starting with Swiss banks, which, Gabriel Zucman, an economics professor at the University of California at Berkeley, said hold about $1.9 trillion in assets not reported by account holders in their home countries. One unusual location which provides secrecy is Reno in the state of Nevada in the United States of America. It may come as a surprise to readers that the US is one of the few places left where advisers actively promote accounts that will remain secret from overseas authorities.
One reads how a wealthy Turkish family is using Rothschild’s trust company in Reno to move assets from the Bahamas to the US, while a family from Asia is moving assets from Bermuda to Nevada. The argument goes that there is nothing illegal about banks like Rothschild to lure foreigners to place money in the US with promises of confidentiality as long as they are not intentionally helping to evade taxes abroad. The Rothschild trust company sales pitch adds that it caters to customers attracted to the “stable, regulated environment” of the US.
That may not be legitimate if any bank is found to be helping its clients evade tax as happened in 2007, when UBS Group AG banker Bradley Birkenfeld in Switzerland, blew the whistle on his firm helping US clients evade taxes with undeclared accounts offshore. Swiss bank Rothschild Bank AG, as a result entered into a non-prosecution agreement with the US Department of Justice. The bank admitted helping US clients hide income offshore from the Internal Revenue Service and agreed to pay an $11.5 million penalty and shut down nearly 300 accounts belonging to US taxpayers, totalling $794 million in assets. In 2010, the Foreign Account Tax Compliance Act (FATCA) became law. This requires financial firms to disclose foreign accounts held by US citizens and report them to the IRS or face steep penalties.
In other parts of the world there is no rush from tax havens to give up their secrets and scare away the goose that lays the golden egg. Even in biblical times we read in the New Testament how wealthy Jews were always careful in their wealth declaration in order to save paying high tributes to Caesar in Rome. In modern times, the classic approach is for taxpayers to reduce their tax bill by moving their tax residence and/or assets to a low-tax jurisdiction. The mandarins in Brussels object to this claiming that such practices distort the market because they erode the tax base of the State of departure and shift future profits to be subject to tax in the low-tax jurisdiction of destination.
Naturally, given the lack of corporate tax harmonisation in the Union one cannot blame tax consultants for studying ways where rich clients move their tax residence out of a high tax member state. But the noose is tightening for tax evaders. A recent EU directive calls for tighter controls. This Directive, (the Anti-Tax Avoidance Directive), lays down rules against tax avoidance practices that directly affect the functioning of the internal market. It is one of the constituent parts of the Commission's Anti-Tax Avoidance Package, which addresses a number of important new developments and political priorities in corporate taxation. The concept includes mandatory use of country by country tax reporting (CBCR). This initiative requires disclosure of CBCR information to tax authorities only with the aim to ensure further compliance of multinational enterprises (MNE) with national tax laws.
This reporting will be mandatory for all EU and non-EU MNEs with activities in the EU having a consolidated turnover above EUR750 million. The type of information to be disclosed would include income tax paid and accrued as well as other contextual information: the nature of the activities, turnover, number of employees, and profit before tax.
The next step will be an Action Plan on corporate taxation, which will be presented later on this year and will include the launch of a debate on the Common Consolidated Corporate Tax Base (CCCTB) and ideas for integrating new OECD/G20 BEPS actions at EU level.
In conclusion, PKF Malta is of the opinion that the entire reform process is nothing but a Trojan horse in the Commission’s plans that could shortly pave the way for a common corporate tax, last put in mothballs in 2008 at the start of the recession. A pan-European one-size-fits-all corporate tax is a straightjacket that stifles growth since member states do not enjoy homogeneous economies. The hissing continues despite Jean-Baptiste's good intentions.
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Mr Mangion is a senior partner at PKF, an audit and consultancy firm, and has over 25 years’ experience in accounting, taxation, financial and consultancy services.