Transcript Slide 1

Optimisation,
Avoidance, Tax
Evasion
Jean-François Brun
Gérard Chambas
CERDI
Module 8
Introduction
Tax avoidance: unintentional failure to comply with tax
obligations (failure to make declarations, etc.) Penalties
with interest for late payment (administrative procedure)
Tax evasion: intentional failure to comply with tax rules to
reduce the amount of taxes to be paid. Penalties and
prosecution
Definition specific to each country
Distinction not always clear between avoidance and evasion
Fiscal optimization of multinationals: avoidance or evasion?
In both cases: loss of revenue
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Outline
I - WHO? People involved in tax evasion
II - WHY? The causes of tax evasion: shortcomings in the
collection and gathering of information, controls and
sanctions
III - WHAT? Fiscal Optimization: high demand for exemptions
and ad hoc measures
IV - HOW? Operational guidelines to reduce tax evasion
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I People involved in avoidance and
tax evasion
• Large enterprises (manipulation of the result with transfer
price, cost increases such as provisions, optimization)
• Medium-sized companies (often hidden in presumptive
regimes, simple evasion methods such as false invoices)
• Liberal professions: declaration of lower amounts and failure
to declare
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I forms of avoidance and tax evasion
 Other forms of tax evasion (e.g. VAT)
•
Absence of declarations
•
Submission of implausible declarations to avoid
penalties and exploit the lack of reactivity
•
Major falsifications (increase of VAT credits, sales
without invoices)
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I forms of avoidance and tax evasion
• Multinationals: fraud and optimization difficult to reduce
• Transfer prices
• Location of remuneration abroad (control of exchange)
• Lack of clarity in the mining sector
• Strategic behaviour as regards controls
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What’s happening now with MNCs?
•
Source: http://www.tackletaxhavens.com/the-solutions/unitary-tax/
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II The causes of evasion: shortcomings in the
gathering of information, controls and sanctions
• Shortcomings in collection and gathering information:
connection between customs and tax administrations not
operational
• Control programs biased with protected files, lack of
transparency, risk analysis methods not implemented
• Incapacity to deal with transfer prices, lack of capacity
• Complexity of mechanisms at play (MNCs)
• Weak and/or non-implemented sanctions
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II A specific factor of tax and customs evasion:
corruption
Corruption frequently endemic, favorable to evasion
Evasion feeds corruption
Tangible progress in modern administrations (audits,
computerization, automation of procedures, incentives,
sanctions, control)
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III Fiscal Optimisation: Challenges
• Exemptions easy to obtain (example, WAEMU has no
common investment code)
• Possibility for large businesses to obtain adaptations to tax
rules: specific regimes via conventions
• Use of complex mechanisms by MNCs, e.g. Ghana,
SABMiller (Brewer) paid zero tax on profits for the period
2008-2010
• Google, average tax rate: 2.4% (double Irish Dutch
sandwich, etc.)
• Developing countries defenceless
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IV Operational guidelines for the
reduction of evasion
• Use of legislation in tax code and procedures with automaticity and
transparency
• Incentives must be in common law
• Ethics and transparency
• Computerization
• Simplified tax
• Modern administrative organization
• Civic education and communication
• Global fight against corruption
• Country by country reporting (CBCR)
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IV Operational guidelines for the reduction of
evasion
Transfer prices - definition
• “The price at which an enterprise transfers physical assets,
intangible assets or provides services to affiliated enterprises”
according to the OECD - import-export within the same group
• World trade: 1/3 is intra-company trade
• Provision of services concerned (administration costs,
headquarters costs, royalties on patents or brands, etc.)
• Arm’s length principle
• Fixing transfer price affects the tax base of the countries
concerned
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IV Operational guidelines for the reduction of
evasion
Transfer prices - the disadvantages
• System very favorable for MNCs
• Favors complex tax evasion or avoidance mechanisms and
procedures (Google, etc.)
• Separate entities favorable to tax evasion and tax avoidance
(Amazon UK, etc.)
• Major loss of revenue for states
• Difficult to eliminate. Comparability of data is a problem
• Need for dialogue between the tax administrations of different
countries and capacity building in developing countries' revenue
administrations
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IV Operational guidelines for the reduction of
evasion
The Need for Coordinated Global Action on Resource
Transparency
• Crucial to ensure a level playing field for all companies in the
industry
• Enhancing transparency on taxation, one of the key priorities during
Britain's term as presidency of G8 group
• Important that also resource-rich developing countries are involved
to implement disclosure requirements and support transparency in
their national extractive industries.
• The Dodd Frank Act of 2009 in the US, requires large US and foreign
oil, gas and mining companies listed on the US stock exchange to
report payments on a project-by-project and country-by-country
level.
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IV Operational guidelines for the reduction of
evasion
EU efforts to fight against tax evasion
• The 2012 Communication on “An Action Plan to strengthen the
fight against tax fraud and tax evasion” with an action plan for
2013 & 2014
• The EU agreed on 9 April 2013 on a Country-by-Country
Reporting (CBCR) for oil, gas and mining and forestry sectors
• The EU proposal goes further than the US legislation in that it also
targets large non-listed companies, as well as loggers of primary
forests.
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IV Operational guidelines for reducing
evasion: unit tax
Unit tax - the principle
• The profit generated by the company considered as a whole
(global profit)
• Does not seek to identify what amount of profit comes from which
entity
• Global profit is apportioned according to a formula that takes
account of the actual activity in different locations
• Taxation must be paid to the places where the profit is generated
• Formula based on actual indicators (employees, installed capital,
etc.)
• Simplification
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IV Operational guidelines for reducing
evasion: unit tax
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IV Operational guidelines for the
reduction of evasion
Unit tax - the advantages
• No
•
•
•
need:
to closely examine the internal accounts in detail, prices used
to negotiate adjustments based on the ALP
to examine “diversion” of profits, in particular, complex
techniques to place them into tax heavens.
• to define rules of residence and source of profit
• Simplification for tax administration and entities subject to tax
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Initiatives for transparency concerning
revenue derived from natural resources (1)
The Extracting Industries Transparency Initiative (EITI)
• Based on the willingness of countries to report (oil, gas, mines)
but participation becomes mandatory (private - public) if the
country adopts the initiative.
• Data per enterprise, per category of taxes (see below)
• Willingness to give a global vision of countries participating
(summary report)
• 23 countries applying the EITI, and 16 candidate countries in
2013, still few resource-rich countries
• Natural Resources Charter (NRC) establishes principles for better
management – Revenue Watch Institute (RWI)
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Initiatives for transparency concerning
revenue derived from natural resources (2)
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Initiatives for transparency concerning
revenue derived from natural resources (3)
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• Thank you for your
attention
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