Measures Against Tax Havens Agreement
Tax havens are criticized because they often result in the accumulation of idle cash, which is expensive and inefficient for companies to repatriate the shelter benefits resulting in a tax incidence disadvantaging the poor. Many tax havens are thought to have connections to fraud, money laundering and terrorism. While investigations into illegal tax haven abuse on, there have been few convictions. Lobbying pertaining to tax havens and associated transfer pricing has also been criticized.
This concern over the possible implications of international tax competition has prompted many governments to consider international cooperative efforts designed to preserve their abilities to tax mobile business income. Despite enthusiasm expressed by some participating nations, differences of viewpoint and interest make international tax agreements involving more than two countries quite difficult to conclude.
The most ambitious and effective multilateral tax agreement to date is an effort of the Organization for Economic Cooperation and Development (OECD).OECD in 1998 introduced what was then known as its Harmful Tax Competition initiative, and what is now known as its Harmful Tax Practices initiative.
The purpose of the initiative was to discourageOECD member countries and certain tax havens outside the OECD from pursuing policies that were thought to harm other countries by unfairly eroding tax bases. In particular, the OECD criticized the use of preferential tax regimes that included very low tax rates, the absence of effective information exchange with other countries, and ringfencing, which means that foreign investors were entitled to Income Tax that domestic residents were denied. An important part of the proposal was to place the burden of proof in court on the taxpayer. To avoid tax competition, many high tax jurisdictions have enacted legislation to counter the tax sheltering potential of tax havens.
Generally, such legislation tends to operate in one of five ways:
- Attributing the income and gains of the company or trust in the tax haven to a taxpayer in the high-tax jurisdiction on arising basis. Corporation legislation is an example of this.
- Transfer pricing rules, standardization of which has been greatly helped by the promulgation of OECD guidelines.
- Restrictions on deductibility or imposition of a withholding tax when payments are made to offshore recipients.
- Taxation of receipts from the entity in the tax haven, sometimes enhanced by notional interest to reflect the element of deferred payment. The European Union (EU) withholding tax is probably the best example of this.
- Exit charges, or taxing of unrealized capital gains when an individual, trust or company emigrates.
Tax avoidance by the use of trusts including family trusts is widespread, especially among wealthy people and other legal entities and must be urgently curbed. The move to exchange information on individuals and companies is welcome, but the level of tax evasion remains very high. The beneficial ownership of all companies and trusts must be registered publically. What is needed is public disclosure of the country-by-country tax reporting by the MNCs and action on the taxation of shadow banking and private pools of capital.
A key mechanism in countering tax evasion and avoidance is a periodic assessment of all citizen’s net assets, including those held abroad. It would also contribute to improving informed policy-making and taxation policy. The fight against tax evasion and avoidance requires more transparency at the enterprise level, including greaterdemocratizationat work, limitation of provisions regarding trade secrets and public disclosure of beneficial ownership.