Remarkable international progress in fight against tax evasion and corporate avoidance

There has been remarkable progress in the fight against tax evasion and corporate avoidance in the past eighteen months.

This month it was announced that 47 countries had agreed to an Organisation for Economic Co-operation and Development (OECD) framework that commits them to “swiftly” pass new domestic laws that will allow them to collect information on all bank accounts and automatically exchange it with other participating countries.

The signatories include the significant financial centres of Singapore and Switzerland (and besides Switzerland, the other 33 members of the OECD).

The Swiss government said on May 06 that the sharing agreement underscored its commitment to tackling tax fraud and evasion. It said: “Switzerland supports the OECD ministers’ declaration concerning the development of a new automatic exchange of information (AEOI) standard in tax matters.”

The Swiss Bankers Association said: “The banks in Switzerland are willing to adopt the automatic exchange of information along with other financial centres, provided that the exchanged information is only applied for tax purposes.”

Swiss law differentiates between tax fraud, which is a criminal offence and tax evasion, which is treated as a misdemeanor.

Switzerland has long prospered on crimes committed beyond its borders. However, in recent decades, it has been forced to agree to disclosures on the proceeds of plundering by various dictators and the reputation of Swiss banking was tarnished by revelations that the banks had looted the unclaimed wealth of Nazi Holocaust victims.

Geneva, the Calvinist city that centuries ago had attracted wealthy French families fleeing the revolution, a decade ago had about 140 private banks, accounting for almost one in five of jobs in a city of 180,000 people.

Bruno Gurtner, chair of the global board, of the Swiss Tax Justice Network, in a letter to the Financial Times in March 2009, disputed the claim that Swiss secrecy laws “date back to 1934, when they were enacted partly to protect German Jews and trade unionists from the Nazis.”

Gurtner said: “This is a big myth. The argument about it being set up to protect Jewish money first appeared in the November 1966 Bulletin of the Schweizerische Kreditanstalt (today Credit Suisse). The main reason bank secrecy was strengthened in 1934 was a scandal two years earlier, when the Basler Handelsbank was caught ‘in flagrante’ facilitating tax evasion by members of French high society, among them two bishops, several generals, and the owners of Le Figaro and Le Matin newspapers. Before that, there was professional secrecy (such as exists between doctors and their patients), and violation was a civil offence, not a criminal one as it is today. Swiss bank secrecy has always been an effective way to attract foreign money.”

In 2008 and 2009 the credibility of Switzerland’s largest bank, UBS, the country’s fabled banking secrecy and the Swiss wealth management industry fell like dominoes under attack from a concerted US campaign against tax evasion.

UBS was fined $780m (CHF693m) and the Swiss authorities handed over thousands of client names to the US Internal Revenue Service.

The US Foreign Account Tax Compliance Act (FATCA), which was signed into US law in early 2010 as part of the Hiring Incentives to Restore Employment Act, requires foreign financial institutions to report information regarding US persons maintaining accounts, and by directing that US taxpayers report certain specified foreign financial assets with their tax filings.

The OECD information exchange framework will have some teething problems and Austria is seeking to delay implementation to 2017 while Christian Aid has said that under the current terms of the agreement, the world’s poorest countries will gain little or nothing, because they are not yet in a position to provide reciprocal information while some countries, including Switzerland, have also suggested that developing countries cannot be trusted to keep information on their own taxpayers confidential, and so will be excluded from the deal.

Nevertheless, progress has been impressive.

From January 2015, VAT on e-commerce within the Union will be levied at the rate at destination not at origin – for example Amazon moved its headquarters to Luxembourg because the VAT rate was 15% compared with for example 23% in Ireland.

Corporate tax avoidance

In 2009, Barack Obama, the new US president, proposed anti-tax avoidance measures. However, in the gridlocked US capital, the president’s measures got nowhere.

Then in late 2010 following big public spending cuts in the UK, protesters against tax avoidance, mainly women, from a group called UK Uncut, began occupying the high profile retail stores of the Arcadia group such as Topshop, BHS, Burton, Miss Selfridge and Dorothy Perkins, controlled by Sir Philip Green, one of Britain’s richest men.

David Cameron, British prime minister, had selected Green to review efficiency in Whitheall and according to the Guardian, his report published in October 2010 reported “shocking” wastage in the government’s procurement strategy. However, his suitability as a government adviser was questioned because of his alleged tax avoidance. The newspaper said the businessman banked the biggest pay cheque in corporate history in 2005 when his Arcadia fashion business, paid a £1.2bn dividend. The record-breaking payment went to his wife, Tina, who lived in Monaco and was the direct owner of Arcadia. Because of this arrangement no UK income tax was due on the gain.

Stories of big US consumer giants such as Apple, Amazon and Google paying no or very low taxes in the UK prompted a commitment from the UK government together with France and Germany to tackle tax avoidance which culminated in commitments in in 2013 by the Group of 8 leading developed countries and Russia, and the Group of 20 leading developed and emerging economies, to work with the Organisation for Economic Co-operation and Development (OECD) to produce new rules on disclosure and base erosion by 2015.

We reported this week that having spent the past eighteen months claiming that Ireland does not facilitate international corporate tax avoidance despite overwhelming evidence to the contrary, the Irish Government has done a U-turn and has signalled that it is ready to prepare for the reality of reform.

Today in The Irish Times, Feargal O’Rourke, the head of tax at PwC Ireland, a unit of the Big 4 accounting firm, who has gained a lot of business from selling ‘Double Irish Dutch Sandwich’ schemes to US multinationals writes in respect of the OECD’s BEPS (base erosion and profit shifting) international tax rules reform project::

 Reading between the lines, it is clear our corporate residency rules have been identified as the issue that needs to be addressed from a reputational perspective. If we accept this principle, the only issue we are debating is timing. Does Ireland benefit from addressing the issue before it is forced upon it? I believe the balance of advantages lies in Ireland dealing with it on a proactive basis.”

O’Rourke is suggesting that Ireland end its offshore company facility that are effectively tax avoidance vehicles.

This is a major change and one which Finfacts  recommended to the OECD in a submission last month: