Размышления женщины о геополитике

In the mid-1960s, the United Nations renewed its interest in the problem of double taxation as part of its action to promote flows of foreign investment to developing countries. The UN stated that «The growth of investment flows from developed to developing countries depends to a large extent on what has been referred to as the international investment climate. The prevention or elimination of international double taxation – i.e. the imposition of similar taxes in two or more States on the same taxpayer in respect of the same base – whose effects are harmful to the exchange of goods and services and to the movement of capital and persons, constitutes a significant component of such a climate»[50 - United Nations (2001) Model Double Taxation Convention between Developed and Developing Countries, New York: United Nations, p.vi.].

In 1980, the United Nations published the UN Model Double Taxation Convention between Developed and Developing Countries, which was preceded by the Manual for the Negotiation of Bilateral Tax Treaties between Developed and Developing Countries (1979). Like all model conventions, the UN Model Convention is not enforceable, i.e. its provisions are not legally binding. The UN Model Convention reproduces many Articles of the OECD Model Convention.

Ironically enough, the UN and OECD Conventions not only boosted flows of foreign direct investments but also had created a legal basis for massive tax avoidance. Multinational corporations took advantage of legal loopholes and skillfully used aggressive tax planning in order to hide their assets and profits in offshores. That became possible due to concluding bilateral tax treaties on avoiding double taxation. Shortly after successfully creating a worldwide network of more than 3,000 bilateral tax treaties, the OECD committed itself to developing an anti-offshore legislation.

The Convention on Mutual Administrative Assistance in Tax Matters represents a kind of transitional law from protecting MNEs against double taxation to preventing double non-taxation by the same MNEs. The Convention was developed jointly by the OECD and the Council of Europe in 1988 and was amended by the Protocol in 2010. The Convention provides for administrative co-operation between states in the field of assessment and collection of taxes, in particular, with a view to combat tax avoidance and evasion. This co-operation ranges from exchange of information, including automatic exchanges, to recovery of foreign tax claims[51 - OECD (1988) Convention on Mutual Administrative Assistance in Tax Matters URL: http://www.oecd.org/ctp/exchange-of-tax-information/convention-on-mutual-administrative-assistance-in-tax- matters.htm.]. 106 jurisdictions currently participate in the Convention, including 15 jurisdictions covered by territorial extension. This represents a wide range of countries including all G20 countries, all OECD countries, all BRICS, major financial centres and an increasing number of developing countries.

However, it was not until the late 1990s that world powers had begun their first coordinated attack on offshore shell games.

Notably, first measures to prevent harmful tax competition from the part of low tax jurisdictions were undertaken by the European authorities. On 1 December 1997, the EU Council of Economics and Finance Ministers (ECOFIN) adopted the Code of Conduct for business taxation. The Code is the EU’s main tool for ensuring fair tax competition in the area of business taxation. It sets out clear criteria for assessing whether or not a tax regime can be considered harmful. All Member States have committed to adhering to the principles of the Code. The Code of Conduct requires Member States to refrain from introducing any new harmful tax measures («standstill») and amend any laws or practices that are deemed to be harmful in respect of the principles of the Code («rollback»). The Code covers tax measures (legislative, regulatory and administrative) which have, or may have, a significant impact on location of business in the EU.

The criteria for identifying potentially harmful measures include:

– an effective level of taxation which is significantly lower than the general level of taxation in the country concerned;

– tax benefits reserved for non-residents;

– tax incentives for activities which are isolated from the domestic economy and therefore have no impact on the national tax base;

– granting of tax advantages even in the absence of any real economic activity;

– the basis of profit determination for companies in a multinational group departs from internationally accepted rules, in particular those approved by the OECD;

– lack of transparency[52 - European Commission (2014) Harmful tax competition. URL: http://ec.europa.eu/taxation_customs/business/company-tax/harmful-tax-competition_en.].

In 1998, the OECD published the report «Harmful Tax Competition: An Emerging Global Issue». The report distinguishes between preferential tax regimes and harmful tax competition. Preferential regimes «generally provide a favourable location for holding passive investments or for booking paper profits. In many cases, the regime may have been designed specifically to act as a conduit for routing capital flows across borders. These regimes may be found in the general tax code or in administrative practices, or they may have been established by special tax and non-tax legislation outside the framework of the general tax system». Further on, the OECD defines «four key factors assist in identifying harmful preferential tax regimes:

(a) the regime imposes a low or zero effective tax rate on the relevant income;

(b) the regime is «ring-fenced»;

(c) the operation of the regime is nontransparent;

(d) the jurisdiction operating the regime does not effectively exchange information with other countries»[53 - OECD (1998) Op. cit., p.25.].

The Report contains guidelines for dealing with harmful preferential tax regimes in member countries, similar to those of EU’s Code of Conduct, including:

1. To refrain from adopting new measures, or extending the scope of, or strengthening existing measures, in the form of legislative provisions or administrative practices related to taxation, that constitute harmful tax practices;

2. To review their existing measures for the purpose of identifying those measures, in the form of legislative provisions or administrative practices related to taxation, that constitute harmful tax practices;

3. To remove, before the end of 5 years starting from the date on which the Guidelines are approved by the OECD Council, the harmful features of their preferential tax regimes etc.[54 - Ibid, p.72.].

The turning point occurred in the middle of 2000, when two international organizations – the Financial Action Task Force on Money Laundering (FATF) and the OECD – almost simultaneously published reports about offshore jurisdictions. The FATF published its Review to Identify Non-Cooperative Countries (June 22, 2000) based upon 25 Criteria promulgated by the FATF’s Report on Non-cooperative Countries and Territories (February, 2000). The OECD published the Report on Progress in Identifying and Eliminating Harmful Tax Practices (June 26, 2000) prepared by the Forum on Harmful Tax Practices. From June 2000, the FATF and the OECD had started issuing «black» and «gray» lists of «non-cooperative» jurisdictions.

The OECD acknowledged as a huge problem the practice of double non-taxation, as well as cases of no or low taxation resulting in multinational enterprises paying global corporate tax rates of just 1 or 2% due to sophisticated tax schemes including offshores. The OECD presumes that, «when reporting their global earnings, too many multinational companies can artificially (and legally) move their profits around in search of the lowest tax rates, often undermining the tax bases of the jurisdictions where the real economic activities take place and where value is created»[55 - Saint-Amans, P. Global tax and transparency: We have the tools, now we must make them work. URL: http://www.oecd.org/tax/global-tax-transparency-we-have-the-tools.htm.]. The OECD estimated that in 2013 global corporate income tax revenue losses could be between 4% to 10% of global revenues[56 - Ibid.], i.e. almost a quarter of a trillion dollars annually[57 - OECD (2015) Secretary-General Report to G20 Leaders. Antalya, Turkey November 2015, Paris: OECD Publishing, p.9.]. The main reasons behind cross-border tax evasion were aggressive tax planning by some multinational enterprises, interaction of domestic tax rules, lack of transparency and coordination between tax administrations, limited country enforcement resources and harmful tax practices. The affiliates of MNEs in low tax countries report almost twice the profit rate (relative to assets) of their global group, showing how BEPS can cause economic distortions[58 - Saint-Amans, P. Op. cit.].

Two pillars of international anti-offshore legislation

Current international tax agenda relies on two building blocks: tackling tax avoidance via the OECD/G20 Base Erosion and Profit Shifting (BEPS) project; and promoting transparency and exchange of information among jurisdictions for tax purposes.

Addressing base erosion and profit shifting

The OECD coined the term «base erosion and profit shifting» (BEPS) and focused its efforts on creating legal framework to deal with this problem. The OECD report «Addressing Base Erosion and Profit Shifting» states, «Base erosion constitutes a serious risk to tax revenues, tax sovereignty and tax fairness for OECD member countries and non-members alike. While there are many ways in which domestic tax bases can be eroded, a significant source of base erosion is profit shifting»[59 - OECD (2013) Addressing Base Erosion and Profit Shifting, Paris: OECD Publishing, p.6.]. The report analyzes the main causes of BEPS and identifies «six key pressure areas: 1) hybrids and mismatches which generate arbitrage opportunities; 2) the residence-source tax balance, in the context in particular of the digital economy; 3) intragroup financing, with companies in high-tax countries being loaded with debt; 4) transfer pricing issues, such as the treatment of group synergies, location savings; 5) the effectiveness of anti-avoidance rules, which are often watered down because of heavy lobbying and competitive pressure and 6) the existence of preferential regimes»[60 - Ibid, p.9.].

The BEPS package developed by the OECD upon the request of G20 leaders covers three unifying tasks:

– to align rules on taxation with the location of economic activity and value creation;

– to improve coherence between domestic tax systems and international rules;

– to promote transparency.

The BEPS package was introduced in Kyoto, Japan, in June 2016. The BEPS Project delivers solutions for governments to close the gaps in existing international rules that allow corporate profits to «disappear» or be artificially shifted to low or no tax environments, where companies have little or no economic activity[61 - OECD (2016) First meeting of the new inclusive framework to tackle Base Erosion and Profit Shifting marks a new era in international tax co-operation. URL: http://www.oecd.org/tax/first-meeting-of-the-new-inclusive-framework- to-tackle-base-erosion-and-profit-shifting-marks-a-new-era-in-international-tax-co-operation.htm.].

In line with the OECD BEPS package, the European Commission adopted the Action Plan (2015) for fair and efficient corporate taxation in the EU, which also deals with issues related to harmful tax practices. On 28 January 2016, the European Commission presented the Anti-Tax Avoidance Package and the Council adopted the Anti-Tax Avoidance Directive on 12 July 2016. The Directive proposes six legally binding anti-abuse measures to counteract some of the most common types of aggressive tax planning, which all Member States should apply against common forms of aggressive tax planning.

Key features of the Anti-Tax Avoidance Package include:

– legally-binding measures to block the most common methods used by companies to avoid paying tax;

– a recommendation to Member States on how to prevent tax treaty abuse;

– a proposal for Member States to share tax-related information on multinationals operating in the EU;

– actions to promote tax good governance internationally;

– a new EU process for listing third countries that refuse to play fair[62 - European Commission (2016) Fair Taxation: Commission presents new measures against corporate tax Avoidance URL: http://europa.eu/rapid/press-release_IP-16-159_en.htm.].

Political agreement on the Anti-Tax Avoidance Directive (ATAD) was reached by the EU Member States at the meeting of Economic and Financial Affairs (ECOFIN) Council on 17 June 2016. The agreement requires all Member States to enact laws that largely implement G20/OECD base erosion and profit shifting (BEPS) outcomes on interest limitation rules, hybrid mismatches and controlled foreign companies (CFCs) as well as additional measures on exit taxation and a general anti-abuse rule (GAAR). Member States were generally required to adopt these ATAD measures in their domestic law by 31 December 2018.

Promoting transparency

Transparency is crucial to identifying aggressive tax planning practices by large companies and to ensuring fair tax competition. Measures to combat BEPS would be inefficient without resolving the problem of high offshore secrecy. «The veil of secrecy can too easily be used to hide the beneficial owners of legal arrangements from tax administrations and other law enforcement agencies»[63 - OECD (2016) OECD Secretary-General Report to G20 Finance Ministers.Update on Tax Transparency, Washington D.C., United States, April 2016, Paris: OECD Publishing, p.10.]. The latest standard for identifying beneficial owners was developed by the Financial Action Task Force in 2012. The FATF published the new Guidance on Transparency and Beneficial Ownership in 2014.

The FATF gives the following definition: «Beneficial owner refers to the natural person (s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement». Further on, the Guidance gives a more detailed interpretation: «an essential element of the FATF definition of beneficial owner is that it extends beyond legal ownership and control to consider the notion of ultimate (actual) ownership and control. In other words, the FATF definition focuses on the natural (not legal) persons who actually own and take advantage of capital or assets of the legal person; as well as on those who really exert effective control over it (whether or not they occupy formal positions within that legal person), rather than just the (natural or legal) persons who are legally (on paper) entitled to do so»[64 - FATF (2014) FATF Guidance. Transparency and Beneficial Ownership, Paris: FATF/OECD, p.8.].

The FATF explains that «legal and beneficial ownership information can assist law enforcement and other competent authorities by identifying those natural persons who may be responsible for the underlying activity of concern, or who may have relevant information to further an investigation. This allows the authorities to „follow the money“ in financial investigations involving suspect accounts/assets held by corporate vehicles. In particular, beneficial ownership information can also help locate a given person’s assets within a jurisdiction»[65 - Ibid, p.3.].

The FATF Recommendations provide measures to address the transparency and beneficial ownership of legal persons (Recommendation 24) and legal arrangements (Recommendations 25). Countries should take measures to prevent the misuse of legal persons and arrangements from being misused for criminal purposes, including by:

– Assessing the risks associated with legal persons and legal arrangements;

– Making legal persons and legal arrangements sufficiently transparent, and

– Ensuring that accurate and up-to-date basic and beneficial ownership information is available to competent authorities in a timely fashion[66 - Ibid, p.46.].

Recently, the UNCTAD carried out a comprehensive study of beneficial ownership dedicating its annual World Investment Report 2016 to the problem of investor nationality and policy challenges. The Report states, «More than 40 per cent of foreign affiliates worldwide have multiple «passports». These affiliates are part of complex ownership chains with multiple cross-border links involving on average three jurisdictions. The nationality of investors and owners of foreign affiliates is becoming increasingly blurred». According to the UNCTAD, «Multiple passport affiliates» are the result of indirect foreign ownership, transit investment through third countries, and round-tripping. About 30 per cent of foreign affiliates are indirectly foreign owned through a domestic entity; more than 10 per cent are owned through an intermediate entity in a third country; about 1 per cent are ultimately owned by a domestic entity. These types of affiliates are much more common in the largest MNEs: 60 per cent of their foreign affiliates have multiple cross-border ownership links to the parent company. The larger the MNEs, the greater is the complexity of their internal ownership structures. The top 100 MNEs in UNCTAD’s Transnationality Index have on average more than 500 affiliates each, across more than 50 countries. They have 7 hierarchical levels in their ownership structure (i.e. ownership links to affiliates could potentially cross 6 borders), they have about 20 holding companies owning affiliates across multiple jurisdictions, and they have almost 70 entities in offshore investment hubs»[67 - UNCTAD (2016) World Investment Report 2016. Investor Nationality: Policy Challenges, Geneva: UNCTAD, pp. xii, xiii.].