Top

Published in:

2017 | OriginalPaper | Chapter

4. Tax Havens: The Crisis of Transparency

Authors : Mayya Konovalova, Penelope Tuck, Rodrigo Ormeño-Pérez

Published in: Taxation in Crisis

Publisher: Springer International Publishing

Activate our intelligent search to find suitable subject content or patents.

search-config

AI-assisted search

Off

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.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

über 102.000 Bücher
über 537 Zeitschriften

aus folgenden Fachgebieten:

Automobil + Motoren
Bauwesen + Immobilien
Business IT + Informatik
Elektrotechnik + Elektronik
Energie + Nachhaltigkeit
Finance + Banking
Management + Führung
Marketing + Vertrieb
Maschinenbau + Werkstoffe
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

über 67.000 Bücher
über 340 Zeitschriften

aus folgenden Fachgebieten:

Bauwesen + Immobilien
Business IT + Informatik
Finance + Banking
Management + Führung
Marketing + Vertrieb
Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

previous chapter Inequality in Landownership, Democracy, and Progressive Taxation: Evidence from Historical Data

next chapter Corporate Profits’ Tax Avoidance: How the “Double Irish” Impedes Global Social Progress and Removes the Prosperity Base Needed for Future Generations

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.

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?

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.

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).

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.

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).

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.

http://www.ft.com/cms/s/0/2ed5ef86-17e3-11de-8c9d-0000779fd2ac. html accessed 17-4-09.

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.

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).

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

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

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).

Such widely accepted international agreements include Vienna Convention on the Law of Treaties and the Treaty of Rome.

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).

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.

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.

See https://stats.oecd.org/glossary/detail.asp?ID=4474

ActionAid. (2015, March). Responsible Tax Practice By Companies: London: OECD.

Alexander, R. M. (2013). Tax Transparency. Business Horizons, 56(5), 543–549.CrossRef

Anderson, C. (2001). O’Neill: OECD Tax Haven Too Broad. Washington Post.

Avi-Yonah, R. S. (1999–2000). Commentary. Tax Law Review, 53, 167.

Avi-Yonah, R. S. (2000). Globalization, Tax Competition, and the Fiscal Crisis of the Welfare State. Harvard Law Review, 113, 1573–1676.CrossRef

Avi-Yonah, R. S. (2007). International Tax as International Law: An Analysis of the International Tax Regime. Cambridge: Cambridge University Press.CrossRef

Baker, P. (2002). Changing the Norm on Cross-border Enforcement of Tax Debts. Intertax, 30(6), 7.

Baker, A. (2009). Deliberative Equality and the Transgovernmental Politics of the Global Financial Architecture. Global Governance: A Review of Multilateralism and International Organizations, 15(2), 195–218.

Baker, P. (2013). Is There a Cure for BEPS? British Tax Review, 5, 605.

Blaufus, K., Hundsdoerfer, J., Jacob, M., et al. (2016). Does Legality Matter? The Case of Tax Avoidance and Evasion. Journal of Economic Behavior & Organization, 127, 182.CrossRef

Braithwaite, J. (2005). Markets in Vice, Markets in Virtue. Oxford University Press on Demand.

Brauner, Y. (2014). What the BEPS. Florida Tax Review, 16, 55.

Burns, M. J., & McConvill, J. (2011). An Unstoppable Force: The Offshore World in a Modern Global Economy. Hastings Bus. LJ, 7, 205.

Clarke, C. (2016). What Are Tax Havens and Why Are They Bad? A review of Gabriel Zucman’s The Hidden Wealth of Nations: The Scourge of Tax Havens. Texas Law Review, 95.

Corwin, M. S. (2014). Sense and Sensibility: The Policy and Politics of BEPS. Current and Quotable Tax Notes.

de Willebois, E. v. d. D., 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.

Desai, M. A., & Hines, J. R., Jr. (2003). Evaluating International Tax Reform. National Tax Journal, 56, 487–502.CrossRef

Dharmapala, D. (2008). What Problems and Opportunities Are Created By Tax Havens? Oxford Review of Economic Policy, 24(4), 661–679.CrossRef

Dharmapala, D. (2014). What Do We Know About Base Erosion and Profit Shifting? A Review of the Empirical Literature (CESifo Working Paper Series No. 4612).

Eccleston, R. (2012). The Dynamics of Global Economic Governance: The Financial Crisis, the OECD, and the Politics of International Tax Cooperation. Cheltenham: Edward Elgar.

Eccleston, R., Kellow, A., & Carroll, P. (2015). G20 Endorsement in Post Crisis Global Governance: More Than a Toothless Talking Shop? The British Journal of Politics and International Relations, 17(2), 298–317.CrossRef

Englisch, J., & Yevgenyeva, A. (2013). The “Upgraded” Strategy Against Harmful Tax Practices Under the BEPS Action Plan. British Tax Review, 5, 620–637.

FATF. (2014, October). FATF Guidance: Transparency and Beneficial Ownership: Paris: FATF/OECD.

Findley, M. G., Nielson, D. L., & Sharman, J. C. (2014). Global Shell Games: Experiments in Transnational Relations, Crime, and Terrorism (Vol. 128). Cambridge: Cambridge University Press.

Freedman, J. (2007). Interpreting Tax Statutes: Tax Avoidance and the Intention of Parliament. The Law Quarterly Review, 123, 52–90.

Fuest, C., & Riedel, N. (2009). Tax Evasion, Tax Avoidance and Tax Expenditures in Developing Countries: A Review of the Literature. Report Prepared for the UK Department for International Development (DFID) (pp. 1–69).

Geraats, P. M. (2002). Central Bank Transparency. The Economic Journal, 112(483).

Gordon, R. (1981). Tax Havens and Their Use By U.S. Taxpayers. Washington, DC: Internal Revenue Service.

Gravelle, J. G. (2015). Tax Havens: International Tax Avoidance and Evasion. Congressional Research Service.

Haberly, D., & Wójcik, D. (2015). Tax Havens and the Production of Offshore FDI: An Empirical Analysis. Journal of Economic Geography, 15(1), 75–101.CrossRef

Hampton, M. P. (1996). The Offshore Interface: Tax Havens in the Global Economy/Mark Hampton. Basingstoke: Macmillan.CrossRef

Hines, R. D. (1988). Financial Accounting: in Communicating Reality, We Construct Reality. Accounting, Organizations and Society, 13(3), 251–261.CrossRef

HM Revenue & Customs. (2016). Measuring Tax Gaps 2016 Edition. Tax Gap Estimates for 2014–15. London: HMRC.

Hood, C. (2006). Transparency in Historical Perspective. Oxford University Press.

Hood, C. (2007). What Happens When Transparency Meets Blame-Avoidance? Public Management Review, 9(2), 191–210.CrossRef

Hudson, A. (2014). Equity and Trusts (3rd ed.). London: Routledge-Cavendish.

Keen, M., & Konrad, K. A. (2014). The Theory of International Tax Competition and Coordination.

Kudrle, R. T. (2008). The OECD’s Harmful Tax Competition Initiative and the Tax Havens: From Bombshell to Damp Squib. Global Economy Journal, 8(1), 1–23.CrossRef

Leaders. (2016). The Lesson of the Panama Papers: Leak of the Century. London: Economist.

Moscovici, P. (2016). Tough Measures Needed to Reform Tax on Corporate Profits. EC Tax Review, 25(1), 2–3.

Neslund, K. (2009). Why Tax Information Exchange Agreements are “Toothless”. Tax Insider, 16.

O’Neill, O. (2006). Transparency and the Ethics of Communication. In C. Hood & D. Heald (Eds.), Transparency: The Key to Better Governance? (pp. 75–90). Oxford: Oxford University Press.

OECD. (1998). Harmful Tax Competition: An Emerging Global Issue. OECD.

OECD. (2013a). Action Plan on Base Erosion and Profit Shifting. OECD.

OECD. (2013b). Addressing Base Erosion and Profit Shifting. OECD.

OECD. (2015a, September). Improving Co-operation Between Tax and Anti-Money Laundering Authorities. Washington, DC: OECD.

OECD. (2015b). BEPS Action 11: Improving the Analysis of BEPS (Public Discussion Draft). OECD.

OECD. (2016, April). OECD Secretary-General Report to G20 Finance Ministers. Washington DC: OECD.CrossRef

Orlov, M. (2004). The Concept of Tax Haven: A Legal Analysis. Intertax, 32(96).

Palan, R. (2003). The Offshore World: Sovereign Markets, Virtual Places, and Nomad Millionaires. Cornell University Press.

Palan, R. (1957–2010). Tax Havens: How Globalization Really Works/Ronen Palan, Richard Murphy, and Christian Chavagneux. Ithaca, NY: Cornell University Press.

Perrow, C. (2010). The Meltdown Was Not an Accident. In Markets on Trial: The Economic Sociology of the US Financial Crisis: Part A (pp. 309–330). Emerald Group Publishing Limited.

Picciotto, S. (2013). Can the OECD Mend the International Tax System? Tax Notes International, 71, 1105–1115.

Qureshi, A. H., & Qureshi, A. H. (1994). The Public International Law of Taxation: Text, Cases and Materials. London: Graham & Trotman.

Raz, J. (2009). The Authority of Law: Essays on Law and Morality. Oxford University Press on Demand.

Rixen, T. (2008). The Political Economy of International Tax Governance. Springer.

Roberts, J. (2009). No One Is Perfect: The Limits of Transparency and an Ethic for ‘Intelligent’ Accountability. Accounting, Organizations and Society, 34(8), 957–970.CrossRef

Roin, J. (2001). Competition and Evasion: Another Perspective on International Tax Competition. Georgetown Law Journal, 89, 543. at 557–61.

Rosenbloom, H. D. (2000). International Tax Arbitrage and the “International Tax System”. Tax LR, 53, 137.

Saint-Amans, P., & Russo, R. (2013). What the BEPS Are We Talking About? OECD.

Scholes, M. S. (2015). Taxes and Business Strategy. Boston: Prentice Hall.

Self, H. (2008). Acceptable Tax Avoidance. Beyond Boundaries: Developing Approaches to Tax Avoidance and Tax Risk Management. Oxford: Oxford University Centre for Business Taxation.

Sharman, J. (2006). Havens in a Storm: The Struggle for Global Tax Regulation. Ithaca: Cornell University Press.

Sharman, J. C. (2012a). Chinese Capital Flows and Offshore Financial Centers. The Pacific Review, 25(3), 317–337.CrossRef

Sharman, J. C. (2012b). Seeing Like the OECD on Tax. New Political Economy, 17(1), 17–33.CrossRef

Shaxson, N. (2012). Treasure Islands: Tax Havens and the Men Who Stole the World/Nicholas Shaxson (New ed.). London: Vintage.

Sheppard, L. A. (2009). Dear Former Tax Evasion Services Customer. Tax Notes International, 56(2), 91–95.

Shevlin, T. (2016). The Hidden Wealth of Nations: The Scourge of Tax Havens. Accounting Review, 91(6), 1807–1812.CrossRef

Sikka, P., & Willmott, H. (2013). The Tax Avoidance Industry: Accountancy Firms on the Make. Critical Perspectives on International Business, 9(4), 415–443.CrossRef

Slemrod, J., & Wilson, J. D. (2009). Tax Competition with Parasitic Tax Havens. Journal of Public Economics, 93(11), 1261–1270.CrossRef

Spencer, D. (2010). International Tax Cooperation: Centrifugal vs. Centripetal Forces: Part 1. Journal of International Taxation, 21(5), 46–60.

Stewart, M. (2015). Abuse and Economic Substance in a Digital BEPS World. Bulletin for International Taxation, 69(6/7).

Strathern, M. (2004). Abstraction and Decontextualization: An Anthropological Comment. In S. Woolgar (Ed.), Virtual Society? Technology, Cyberbole, Reality. Oxford: Oxford University Press.

Sullivan, M. (2004). Data Show Dramatic Shift of Profits to Tax Havens. Tax Notes, 13, 1190–1200.

The Scottish Law Commission. (2001). Limited Partnerships Act 1907 (A Joint Consultation Paper).

Tsoukas, H. (1997). The Tyranny of Light: The Temptations and the Paradoxes of the Information Society. Futures, 29(9), 827–843.CrossRef

Vermeulen, E. P. (2013). Beneficial Ownership and Control: A Comparative Study-Disclosure, Information and Enforcement. OECD Corporate Governance Working Papers, 7, 1.

Whewell, T. (2015). Scam Sparks Scots Fraud Haven Fears. BBC News.

Zucman, G. (2015). The Hidden Wealth of Nations: The Scourge of Tax Havens. University of Chicago Press.

Title: Tax Havens: The Crisis of Transparency
Authors: Mayya Konovalova
Penelope Tuck
Rodrigo Ormeño-Pérez
Publisher: Springer International Publishing
Book: Taxation in Crisis
Print ISBN: 978-3-319-65309-9

Electronic ISBN: 978-3-319-65310-5

Copyright Year: 2017
DOI: https://doi.org/10.1007/978-3-319-65310-5_4