From flight to quality by world companies to tax audits, life will be very different
By STEVE TOWERS 04 December 2009
What happens in Vaduz stays in Vaduz - or so they thought.
Early in 2008, news broke of European tax evasion on a grand scale. Senior executives and directors of many of Germany’s top public listed companies were accused of storing millions of euros in secret Liechtenstein bank accounts - and not declaring the income in their German tax returns.
Germany was aghast. Chancellor Angela Merkel led the public condemnation of the tax ethics of these executives and directors, and publicly vilified the banks that had permitted - or perhaps encouraged - such action.
From this incident, political will solidified behind a 10-year-old OECD initiative which had appeared, by early last year to have run out of steam. The German government demanded greater financial transparency - and a full implementation of the OECD’s ‘exchange of information’ proposals.
The UK and France publicly supported Germany, and it soon became an EU demand. The global financial crisis allowed the banks to be easily portrayed in the public’s mind as the bad guys. Then news broke of tens of thousands of Swiss bank accounts of high net worth US citizens and the lack of information exchange from many of the world’s offshore financial centres became a leading topic at G-20 meetings, no less. Life would never be the same again.
Now that the OECD/G-20 ‘name and shame’ initiative is largely behind us, and most of the world’s offshore financial centres make their way (as quickly as possible!) from the grey list to the white list, it is time to take stock and ask: ‘What will be different in the future?’
Life will be very different for those individuals whose tax planning in the past has been based on non-declaration of income - they will now have to pay tax!
But what about the Fortune 1000 public companies: how will they be impacted?
Let’s be clear: The OECD/G-20 initiative is all about disclosure of information, in order to reduce the incidence of tax evasion (that is, deliberately not declaring income in tax returns). This has no direct application to the world’s large public companies, which do not evade taxes (a criminal offence in most countries).
However, this does not mean that the world’s large public companies will be unaffected by the initiative. I can identify at least three areas in which there could be a significant impact.
The first is in regard to the tainting of certain jurisdictions. By ‘naming and shaming’ specific jurisdictions, the world’s large public companies will be encouraged to not do business with, and not to have investments in, such jurisdictions. Such jurisdictions will not be ‘politically correct’.
In my opinion, there will be a flight to quality by these companies. They will withdraw from tainted jurisdictions, and they will position their investments in ‘acceptable’ or untainted jurisdictions. They will not want to be in tomorrow’s newspaper headline: XYZ Inc uses Cayman Islands to book profits.
What is the difference between tainted and untainted jurisdictions? Perception. For tainted jurisdictions, there is the perception that investments are placed in the jurisdiction for tax reasons and not for substantive business reasons. In contrast, untainted jurisdictions are those where the prima facie perception is not ‘tax planning’; these jurisdictions are those where substantive business operations are routinely carried on. Let’s call it the ‘smirk test’: if the name of the jurisdiction can be mentioned without a smirk appearing on the countenance of the listener, it’s probably untainted.
In Asia-Pacific, countries such as Singapore and Hong Kong should be perceived to be untainted jurisdictions and should therefore benefit from the flight to quality. Potentially tainted jurisdictions include Labuan and (although not part of Asia-Pacific, but frequently used in Asia-Pacific tax planning) Mauritius.
Most, if not all, Caribbean tax havens would be tainted.
The second significant impact will be in regard to tax audits. Although tax evasion is not practised by the Fortune 1000, tax avoidance (that is, planning to, legally, avoid taxes) certainly is. The extensive increase in ‘exchange of information’ agreements throughout the world, a direct result of the OECD/G-20 initiative, will make international tax audits much easier for tax authorities in high tax countries to conduct.
Verifying information
Such tax authorities will now be able to verify the information which has been disclosed about foreign companies within the group - what activities they truly perform, the number of employees they truly have, their true economic substance. This will strengthen the hand of those tax authorities, particularly in regard to transfer pricing audits.
The third potentially significant impact takes us back to Germany and Liechtenstein. The revelations concerning the secret bank accounts of the senior executives and directors of the top German companies damaged the public standing of the German companies. This raises the question of whether large public companies in the future will feel compelled to enquire into the private tax affairs of their senior executives and directors, as a condition of employment.
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Global impact of tax haven crackdowns
From flight to quality by world companies to tax audits, life will be very different
By STEVE TOWERS
04 December 2009
What happens in Vaduz stays in Vaduz - or so they thought.
Early in 2008, news broke of European tax evasion on a grand scale. Senior executives and directors of many of Germany’s top public listed companies were accused of storing millions of euros in secret Liechtenstein bank accounts - and not declaring the income in their German tax returns.
Germany was aghast. Chancellor Angela Merkel led the public condemnation of the tax ethics of these executives and directors, and publicly vilified the banks that had permitted - or perhaps encouraged - such action.
From this incident, political will solidified behind a 10-year-old OECD initiative which had appeared, by early last year to have run out of steam. The German government demanded greater financial transparency - and a full implementation of the OECD’s ‘exchange of information’ proposals.
The UK and France publicly supported Germany, and it soon became an EU demand. The global financial crisis allowed the banks to be easily portrayed in the public’s mind as the bad guys. Then news broke of tens of thousands of Swiss bank accounts of high net worth US citizens and the lack of information exchange from many of the world’s offshore financial centres became a leading topic at G-20 meetings, no less. Life would never be the same again.
Now that the OECD/G-20 ‘name and shame’ initiative is largely behind us, and most of the world’s offshore financial centres make their way (as quickly as possible!) from the grey list to the white list, it is time to take stock and ask: ‘What will be different in the future?’
Life will be very different for those individuals whose tax planning in the past has been based on non-declaration of income - they will now have to pay tax!
But what about the Fortune 1000 public companies: how will they be impacted?
Let’s be clear: The OECD/G-20 initiative is all about disclosure of information, in order to reduce the incidence of tax evasion (that is, deliberately not declaring income in tax returns). This has no direct application to the world’s large public companies, which do not evade taxes (a criminal offence in most countries).
However, this does not mean that the world’s large public companies will be unaffected by the initiative. I can identify at least three areas in which there could be a significant impact.
Politically correct
The first is in regard to the tainting of certain jurisdictions. By ‘naming and shaming’ specific jurisdictions, the world’s large public companies will be encouraged to not do business with, and not to have investments in, such jurisdictions. Such jurisdictions will not be ‘politically correct’.
In my opinion, there will be a flight to quality by these companies. They will withdraw from tainted jurisdictions, and they will position their investments in ‘acceptable’ or untainted jurisdictions. They will not want to be in tomorrow’s newspaper headline: XYZ Inc uses Cayman Islands to book profits.
What is the difference between tainted and untainted jurisdictions? Perception. For tainted jurisdictions, there is the perception that investments are placed in the jurisdiction for tax reasons and not for substantive business reasons. In contrast, untainted jurisdictions are those where the prima facie perception is not ‘tax planning’; these jurisdictions are those where substantive business operations are routinely carried on. Let’s call it the ‘smirk test’: if the name of the jurisdiction can be mentioned without a smirk appearing on the countenance of the listener, it’s probably untainted.
In Asia-Pacific, countries such as Singapore and Hong Kong should be perceived to be untainted jurisdictions and should therefore benefit from the flight to quality. Potentially tainted jurisdictions include Labuan and (although not part of Asia-Pacific, but frequently used in Asia-Pacific tax planning) Mauritius.
Most, if not all, Caribbean tax havens would be tainted.
The second significant impact will be in regard to tax audits. Although tax evasion is not practised by the Fortune 1000, tax avoidance (that is, planning to, legally, avoid taxes) certainly is. The extensive increase in ‘exchange of information’ agreements throughout the world, a direct result of the OECD/G-20 initiative, will make international tax audits much easier for tax authorities in high tax countries to conduct.
Verifying information
Such tax authorities will now be able to verify the information which has been disclosed about foreign companies within the group - what activities they truly perform, the number of employees they truly have, their true economic substance. This will strengthen the hand of those tax authorities, particularly in regard to transfer pricing audits.
The third potentially significant impact takes us back to Germany and Liechtenstein. The revelations concerning the secret bank accounts of the senior executives and directors of the top German companies damaged the public standing of the German companies. This raises the question of whether large public companies in the future will feel compelled to enquire into the private tax affairs of their senior executives and directors, as a condition of employment.
Now that will be interesting.
The writer is a tax partner at Deloitte Singapore
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