How do tax havens actually work?
Tax evasion and tax havens –
The debate about offshore leaks and the very low tax payments of large multinational corporations have drawn public interest to the problem of “tax havens”. When corporations take advantage of differences in tax rates between different countries, tax structuring can be entirely legal. However, if the taxable income of private individuals is not declared, this is illegal. Measures against this can be applied in addition to the detection of criminal offenses at various points: with the tax rates, the intensity of regulation, the tax base and the information requirements. If the existing tax havens are dried up, however, this can lead to the emergence of new tax havens in large countries.
Can the fight against tax havens be won?
Kai A. Konrad
The fight against tax havens is making progress. At least that is the impression the reader of the business press could get at the moment. Bulwarks collapse. The USA “cracks” Swiss banking secrecy, at least for American tax residents. The “Agreement between the United States of America and Switzerland for Cooperation to Facilitate the Implementation of FATCA” seems to be on the way. Luxembourg has recently moved and has signaled that it will relax banking secrecy by 2015. Austria buckles. An agreement on the exchange of information within the entire EU even seems to be possible for 2014.1 One reads that the British government wants to influence its overseas territories and crown holdings. The transparency of tax data is to be improved and the ownership structure of companies or foundations is to be disclosed. 2 CDs with the data of tax refugees or large data packages with explosive dossiers are acquired by tax offices or are circulated among investigative journalists. After the OECD put a number of states on a "black list", many of these states are trying to disappear from these lists through corresponding agreements. Large companies that legally relocate billions in profits from high-tax countries to tax havens and park there first instead of exposing them directly to the control of the tax authorities in their headquarters countries are in the public pillory.
However, looking back makes you less confident. Tax evaders didn't just exist yesterday, and the “fight against tax evasion” is old. Towards the end of the First World War, for example, the temptation for the wealthy to emigrate from Germany was even greater than it is today. Back then, politicians reacted with the “Law against Tax Evasion” .3 Tax scandals have been the focus of public debate for decades. Only the methods that are used change. The so-called Flick affair had its starting point in a threatened tax liability for the group, which resulted from a share sale in 1975. According to press reports, the corporate management succeeded in averting the tax liability through political influence.4 Many decades ago, the department store king Helmut Horten sold his group, emigrated to Switzerland, and - thanks to a loophole in tax legislation - the DM 1.2 billion remained Income tax-free. 5
Seen in this way, what we are observing today is not that unique. Rather, it is a new round in a competition that has been going on for many decades. As is well known, the modern information society creates a new situation. Modern international payment transactions, changes in international goods and service relationships, international trade integration, but also financial market innovations and the digital revolution in communication technology are changing the rules of the game. Information management faces new opportunities and challenges. "Privacy" is becoming more difficult, and this also applies to capital investments and financial market transactions. Both sides, i.e. the tax evaders as well as the tax authorities, will react to the new situation. In the long run, neither side will win, neither the high-tax countries, whose governments are very hungry for finance, nor the international companies or the rich or super-rich among the taxpayers.
The nature of the phenomenon
"Taxes are cash benefits that do not represent a consideration for a particular service", as stated in § 3 of the tax code in Germany. Overall, the state may do more or less useful things with the tax revenue. Ultimately, we tax ourselves - as Joel Slemrod and Jon Bakija describe the situation with their book title “Taxing Ourselves” aptly.6 But for the individual citizen, taxes are not offset by any concrete, measurable consideration that is directly and recognizable with his own tax payment and which could give him a direct sense of compensation for paying taxes. He therefore perceives his tax payment as a burden. No wonder he develops imagination and tries to avoid taxes. For corporations, saving taxes as a partial aspect of profit maximization is actually a component of the primary corporate goal.
Taxpayers and companies alike receive help from many sources. Guidebooks reveal “tax tricks” to simple taxpayers. Tax advisors also help the taxpayer. For example, you can draw attention to gaps in correspondence in tax law and point out forms of corporate financing or legal corporate structure that are particularly favorable for tax purposes.
But other helpers also come into play: the “tax havens”. These are mostly small states or territories that use their sovereignty or their special regulatory status to give taxpayers additional options for structuring taxes.7 For example, they can disguise the ownership structure of capital investments by private individuals from their countries of residence. In this way, capital income remains hidden from the tax office in the country of residence.
More imaginative and also lucrative and legal businesses open up in tax havens for companies. For example, a company that generates its sales with a patented product in a high-tax country can set up a subsidiary in a tax haven and transfer the rights to the patent to this subsidiary. The company can then decide to a certain extent what fees this subsidiary charges the company operating in the high-tax country for the use of this patent. In this way, the company can shift its profits from the high-tax country to the tax haven. There are initially no or almost no corporate income taxes. Only if the profits were to be distributed to the shareholders in the distant future would these profits have to be taxed.
There are a number of methods for shifting tax profits. Not only patents and trademarks, but also the financing structure of corporations can be used to shift profits to tax havens. These tax-saving models require tax havens, i.e. places in which companies can reinvest their profits for many years under very favorable tax conditions.
Other than evading capital income taxes, many forms of profit shifting are perfectly legal. The finance ministers of high-tax countries have been trying for years to curb the legal possibilities through an increasingly dense network of regulations and restrictions. Shifting profits through internal transfer prices, in which parts of the group billed certain intermediate products at fantasy prices, used to be popular. The “fight” against such machinations is today due to a dense set of rules, compliance with which requires a lot of specialist knowledge, but provides the company with legal certainty and protects against double taxation. For profit shifting, transfer prices probably play a lesser role today: profit shifting takes place using other methods.
The tax haven has its services paid for. The presidents of tax havens or their authorities are rarely the direct service providers. Rather, privately organized helpers settle in the tax havens. Banks open their doors to tax evaders with their suitcases. Notaries, lawyers and other service providers help with the establishment and management of subsidiaries or group holding companies to which the profits are to be shifted from high-tax countries, or they offer constructions with which tax-relevant issues can be concealed in the manner desired by the client. The entire industry creates many good jobs in the tax haven. The tax haven benefits directly in the form of salaries, commissions and office rents, as well as administration fees and minor taxes.
The role of the market structure
Tax havens are in competition with one another.8 If there are different providers who ultimately offer similar products, this depresses prices. This also applies to tax havens. If there are many tax havens, each tax haven has a small share of the overall business. In addition, the margins that develop in the price war with other providers are then small. In extreme cases, individual tax havens are perfect substitutes for one another, have no capacity limits and compete with one another in Bertrand. The profits resulting from their business are then almost nil. In the discussion about the abolition of banking secrecy in Europe, reference is occasionally made to the competitive aspect in the relationship between Switzerland, Austria and Luxembourg. 9
Tax havens are trying to get around this competitive problem. It can be observed that tax havens are emerging that advertise with special business models, specialize in certain activities, or concentrate on customers from certain countries or groups of countries. Escaping the competition is a nice goal, but difficult to achieve. In view of the large number of providers, despite such attempts at product differentiation, there are overlaps in the products or product areas, so that competition arises. This competition depresses the margins of the tax havens.
In this world, the OECD and other multilateral or international organizations act as interest groups in the fight against tax havens. They exert political or economic pressure on the tax havens and work to get the tax havens to abandon or adapt their business model. In a situation in which business is split up among many tax havens and the competition also spoils margins, individual tax havens quickly give in to this pressure. The business doesn't yield much anyway, given the competition. A little pressure is therefore sufficient to induce some tax havens to close down business, or at least to discontinue those business models that are particularly burdened by public pressure. For the remaining tax havens, little changes at first, and so the process of drying out is proceeding quickly and promisingly. Maybe this is the phase we are currently observing.
However, if the process progresses sufficiently, the tax evasion business will become more and more lucrative for the oases that are still left. You are not only gaining the market share of the oases that have dropped out. Even more important: the competitive situation between the oases is eased. The margins that they can enforce in the new situation are getting higher. Each remaining tax haven has more customers, and each faces higher administration fees and taxes. If the pressure on the oases does not keep increasing, the process of leaving the market will come to a halt at some point. This is a situation where the number of tax havens is smaller than it is today. The core of the opportunities offered by tax havens remain intact. It is not clear whether this situation will improve everyone involved. Tax avoidance or tax evasion becomes more costly because the tax havens can enforce higher fees for their services. This may also reduce the extent to which tax havens are used. In any case, the remaining tax havens generate higher profits, and it is for these higher profits that the residents in the high-tax countries ultimately pay.
If the services of tax havens become more and more lucrative in the course of the consolidation process, one could also imagine that new tax havens will emerge that want to earn money. However, it is not easy to become a tax haven. A tax haven needs a business-friendly and well-functioning legal system. Above all, it must have the reputation it needs to give up the information protection it grants the refugees not a little later. Entering the business of tax havens is therefore difficult. So it is more the question of which tax havens will ultimately remain. The assumption is that these are the business places that can withstand the pressure well.
Natural candidates are therefore tax havens that have a large sovereign state power behind them and that concentrate their business on customers who are not based in the area of the state power concerned. Hong Kong, for example, is a good candidate to serve as a tax haven for the non-Chinese world and weather the current storm well. Similar local authorities could exist under the auspices of the US or Russia, or they could emerge there. Anyone who proclaims the end of tax havens today is therefore too optimistic.
- 1 See DW-online, http://www.dw.de/bankgeheimnis-in-der-eu-soll-endg%C3%BCltig-fallen/a-16827886 (May 21, 2013).
- 2 See SZ-Online, http://newsticker.sueddeutsche.de/list/id/1453326 (May 21, 2013).
- 3 Cf. K. A. Konrad, H. Zschäpitz: Debt without atonement? Why the crash in public finances affects us all, Munich 2010, p. 159.
- 4 See SZ-Online, http://www.sueddeutsche.de/politik/flick-affaere-die-gekaufte- Republik-1.804859 (May 21, 2013).
- 5 See Spiegel Online, http://www.spiegel.de/spiegel/print/d-13525455.html (May 21, 2013).
- 6 See J. Slemrod, J. M. Bakija: Taxing Ourselves: A Citizen’s Guide to the Debate Over Taxes, Cambridge MA 1996.
- 7 Cf. for example the work of J. R. Hines Jr .: Treasure Islands, in: Journal of Economic Perspectives, 24th vol. (2010), no. 4, pp. 103-125; or J. Slemrod: Why Is Elvis on Burkina Faso Postage Stamps? Cross-Country Evidence on the Commercialization of State Sovereignty, in: Journal of Empirical Legal Studies, 5th year (2008), no. 4, pp. 683-712. The work shows that tax havens are typically small, have little further economic activity in relation to the financial sector they are home to, and have a good and functioning legal system.
- 8 See the theoretical analysis by M. Elsayyad, K. A. Konrad: Fighting Multiple Tax Havens, in: Journal of International Economics, 86th year (2012), no. 2, pp. 295-305.
- 9 See, for example, Spiegel Online, http://www.spiegel.de/wirtschaft/soziales/eu-gipfel-europaeer-vertagen-kampf-gegen-steuerflucht-a-901350.html (May 22, 2013).
Measures against tax avoidance: tax evasion versus aggressive tax planning
Jost H. Heckemeyer, Christoph Spengel
Combating tax avoidance is currently a central aspect of national and international tax policy. In addition to the EU, the OECD and the G20 countries are emphatically advocating such steps. When it comes to tax avoidance, a distinction must be made between tax evasion and so-called aggressive tax planning.
Tax evasion includes the failure to declare taxable income generated from assets held abroad. In these clearly illegal practices, the taxpayers do not comply with their legal obligation to pay tax by hiding income from the competent authorities of the country of residence. In Germany and other countries, the authorities have recently increased the pressure to search for foreign black money by means of sensational purchases of secret data from countries such as Switzerland and Liechtenstein.
In contrast to tax evasion, aggressive tax planning is not carried out by private individuals but by large multinational companies. They can use the existing law to reduce their tax liability to almost zero in certain regions. In contrast to tax evasion, so-called aggressive tax planning is usually not associated with any violations of the law. In addition, there is no strict definition of exactly where the line between normal and aggressive tax planning runs. For example, exploiting the international tax gap in financing foreign investments cannot be described as aggressive per se. It can be achieved through structuring that is economically motivated and not artificial
In general, the interest in a solid tax base and the containment of illegal tax evasion in particular is understandable and correct. However, it remains to be clarified how this can be achieved. The appropriate antidote to combating tax evasion is quite clear. Where information is unlawfully concealed, transparency must be created.However, this collides with strict banking secrecy, which is used by many financial centers to avoid the exchange of information with the country of residence. An alternative is the anonymous taxation of the investment income directly at the source with subsequent transfer of the income to the country of residence.
Politics at the level of the European Union
This solution was also agreed on a transitional basis when the EU Savings Directive was implemented in 2005 with Belgium, Luxembourg and Austria as well as the non-EU states Switzerland, Andorra, Liechtenstein, Monaco and San Marino Interest Directive, on the other hand, directly introduces an automated exchange of information about interest income. The extension of the scope of the Savings Directive to include foundations and trust funds has been waiting to be adopted for years. However, Luxembourg and Austria in particular are blocking the (extended) automated exchange of information.3 In addition, with a further directive, the EU has extended the automated exchange of information to other areas of direct taxation with effect from 2015.4 In addition, the EU is working Commission on a proposal to include dividends and capital gains in the automated exchange of information
Politics on a global level
The most agile force on a global level is the OECD. It created standards that essentially provide for an exchange of information on request. This is implemented through bilateral agreements, either within the framework of double taxation agreements or, if one does not exist, through so-called Tax Information Exchange Agreements (TIEA) .6 Since the G20 countries in London in 2009 vehemently advocated the exchange of information, 7 has been the The number of these agreements has risen from around 100 to over 900. 8
There is also a trend towards the automated exchange of information on a global level. The US is making progress, implementing comprehensive information access through bilateral agreements under the Foreign Account Tax Compliance Act (FACTA). FACTA agreements are even concluded with countries that have so far resisted, e.g. Switzerland.9 The OECD, encouraged and driven by the G8 and G20 countries, is also working on establishing the automated exchange of information.10 Ultimately, it turns out From today's perspective, the question is not whether this standard will exist, but only in what form it will be implemented.
Implementation and implementation of the automated exchange of information
If one compares the implementation of the exchange of information on a global level with the procedure within the EU, one essential difference is that the EU basically pursues a multilateral approach, while bilateral procedures dominate on a global level. An interesting consideration on this can be found in Elsayyad and Konrad.11 Ultimately, according to the theoretical analysis, a sequential, bilateral approach to multilateral agreements is associated with increased costs. Since the “market” of tax havens only slowly dries up with a step-by-step strategy, it will become more and more profitable for the remaining non-cooperating states to resist cooperation in the future after initial successes in the fight against opacity. It does indeed seem unrealistic to expect a simultaneous multilateral solution to introduce the automated exchange of information on a global level. Nevertheless, it is valuable to point out the potential costs of the sequential bilateral approach.
Beyond the implementation process, the question arises of how the exchange of information is organized effectively and efficiently. While the institutions for enforcing Community law are in place in the EU, a supervisory body has yet to be established, especially at the global level. The central mechanism for monitoring the obligations from the TIEA agreements is a review process located at the OECD, which first assesses the legal implementation of the agreements and, in a second step, also evaluates the practical implementation of the obligations entered into. However, not all reviews have been completed yet.12 Therefore, little can be said about their disciplining effect at the moment.
The effectiveness of the information exchange also depends on the data available. The beneficial owners of offshore companies and foundations are often anonymous and therefore unknown even under national law. This also applies to stock corporations with bearer shares. Reforms of national company law also appear necessary to remedy such data gaps. To what extent this is realistic and enforceable remains at least questionable.
Ultimately, it is important to establish IT standards for an efficient exchange of information. Given the current dynamism and speed of developments, which are being driven not least by individual major players such as the USA and the EU, this is a not insignificant challenge. At least there are currently various information formats, the parallel application of which is associated with considerable costs for the financial sector. Here, too, the OECD plans to establish the necessary global standards. 13
Curbing Aggressive Tax Planning: No Easy Solutions
While the exchange of information and the associated creation of transparency appear as consistent measures against illegal tax evasion, aggressive tax planning cannot be curbed by it. Tax planning is regularly carried out using applicable law, so that arrangements are not hidden per se, but are known to experts and are also published. 14
So if there are no information deficits and aggressive tax planning is legal, the question remains, what measures should be taken against undesirable models. The legislators are therefore called upon to change the legal framework.
If one looks at the functioning of the structures to be contained, it becomes apparent that some states are obviously foregoing their taxation rights. The most prominent example here is the USA. US corporations regularly resort to arrangements in which income generated abroad is not transferred to the USA, but rather to tax-favorable locations, often in the Caribbean. The repatriation of profits will be postponed indefinitely in order to avoid the taxation of dividends triggered in this case at the US tax rate of 35%. In order to counteract such a “lock out” of profits, the US tax system, like many other countries, has rules on so-called additional taxation, which under certain conditions lead to the income accruing in foreign subsidiaries no longer being subject to US taxation are shielded, but are taxed directly with the US shareholder. However, the prerequisites for additional taxation to take effect are such that they can be approved by means of tax planning measures. The US could relatively easily restore access to the profits shifted to tax havens by reforming its additional taxation. Why this has not happened so far can be explained by the fact that the US government wants to give its corporations a competitive advantage with de facto zero taxation of their foreign profits.
Tax related to the country of destination?
Basic measures could be taken. The most far-reaching would be an internationally coordinated system changeover to a tax linked to the country of destination. The tax base would no longer be the companies' reported profits, but their sales as a - possibly more suitable - measure of their economic activity. This would mean that the corresponding tax revenue would also be driven by domestic sales. Here a core problem becomes apparent: rules of international taxation coordinate the intergovernmental distribution of taxation powers and the resulting tax revenue. The question of distribution always arises in the last instance. Taxation linked to sales would place small economies with strongly internationalized companies, e.g. the Netherlands, in a worse position compared to the status quo. But also much larger countries like Germany would refrain from foreign investments.
From today's perspective, a coordinated, far-reaching reform of international taxation appears unlikely. In addition, there is no consensus as to which of the conceivable ideal-typical taxation principles - residence, - source or even destination principle - leads to international welfare maximization and should therefore guide any reform considerations.
It therefore makes sense to initially accept the traditional structure of international taxation and use it as a starting point for preventing zero and double taxation. The “Action Plan” of the OECD announced for July 2013 will also fit into this logic.15 It will probably include numerous individual proposals. For example, the possibility of a double interest deduction in the context of hybrid arrangements is a thorn in the side of the OECD. In addition, questions of withholding taxation, but also the delimitation of permanent establishments, will play a role.16 All of this also appears to be very ambitious.
It is worth taking a look at withholding tax
So there are no simple solutions in any case. But what should the focus be on? A look at withholding taxation appears interesting here. In almost all international tax arrangements, cross-border cash flows in the form of interest and license fees flow between the group units involved. Within the EU, this is done without withholding tax in almost all relevant cases due to the Interest License Fee Directive17. In most cases, this does not apply to payments from within the EU. However, there are exceptions: The Netherlands in particular has concluded extremely favorable double taxation agreements with numerous non-EU countries, including some so-called tax havens, that provide no or low withholding taxes. Under national law, no withholding tax is levied on license payments at all. Their role in tax structures for shifting profits out of Europe is correspondingly significant. Almost all payment outflows to non-European countries therefore take place via group units in the Netherlands. Against the background of the current discussion, the withholding tax exemption for interest and license fees must be questioned. Because the international nesting and the shifting of profits across borders is the core of international taxation. As soon as taxation starts here, most of the structuring should become obsolete.
Withholding taxation is therefore a powerful lever that can be used. In contrast to the unilateral interest deduction restrictions introduced in some countries, such as the German interest rate barrier or any potential “license barriers”, the risk of double taxation is immediately averted if withholding taxes are reintroduced: The international double taxation agreements provide that withholding taxes paid abroad are payable on a any tax liability of the recipient will be offset. Tax havens can thus be effectively dried up.
Compared to a less focused “OECD Action Plan” or a “general abuse norm” currently being discussed at EU level, 18 which are vaguely linked to substance characteristics that are often less critical from a tax planning point of view and which are simply related to substance characteristics, a promotion of withholding taxation appears to be the most concrete, most concentrated and effective step to contain complex international tax arrangements. However, this requires an international consensus that includes the will of the EU member states to amend the Interest and License Fee Directive.
- 1 Fundamental to the legitimation of international tax planning O. H. Jacobs, D. Endres, C. Spengel: Internationale Unternehmenssteuererung, 7th edition, Munich 2011, p. 911 ff.
- 2 Council Directive 2003/48 / EC of June 3, 2003 as well as the corresponding interest rate agreements between the EU and the five non-EU states mentioned.
- 3 In April 2013, Luxembourg specifically announced that it would take part in the automated exchange of information on interest income from 2015 onwards.
- 4 Council Directive 2011/16 / EU of February 15, 2011 on administrative cooperation in the field of taxation.
- 5 European Commission: Combating tax fraud and tax evasion, contribution of the Commission to the European Council on May 22, 2013, p. 7.
- 6 R. T. Kuderle: The OECD’s harmful tax competition initiative and the tax havens: from bombshell to damp squip, in: Global Economy Journal, 8th year (2008), pp. 1-23.
- 7 G20 declaration on strengthening the financial system, London 2.4.2013.
- 8 A. Gurría: The fight against tax evasion is a global task, guest article in: Süddeutsche Zeitung from April 20, 2013. Gurría is Secretary General of the OECD.
- 9 Switzerland and the USA signed the bilateral FACTA agreement on February 14, 2013.
- 10 P. Saint-Amans: The automatic data exchange will be standard in a few months, interview conducted by S. Israel, A. Valda, in: Tages-Anzeiger, May 10, 2013. Saint-Amans is director of the OECD's Anti-Tax Avoidance Unit.
- 11 M. Elsayyad, K. Konrad: Fighting multiple tax havens, in: Journal of International Economics, 86th year (2012), pp. 295-305.
- 12 A. Gurría, loc. Cit.
- 13 On the challenges listed on the way to an effective exchange of information, see also P. Saint-Amans, op.
- 14 R. Pinkernell: A model case for international tax minimization by US corporations, in: Steuer und Wirtschaft, 2012, pp. 369-374.
- 15 A. Gurría, loc. Cit.
- 16 Finance Committee: Minutes of the 132nd meeting of the Finance Committee on March 20, 2013 (Minutes 17/132). Oral statement by A. Pross, Head of the Department for International Cooperation and Tax Administration at the Center for Tax Policy and Tax Administration of the OECD.
- 17 Council Directive 2003/49 / EC of 3.6.2003.
- 18 European Commission: Recommendation on aggressive tax planning, C (2012) 8806, Brussels, December 6, 2012.
Tax evasion in times of crisis: design, volume and measures
Markus Leibrecht, Margit Schratzenstaller
Competition between states that are largely sovereign in tax policy for mobile capital is nothing new as a by-product of the globalization of the world economy. From a normative perspective, tax competition does not necessarily have to be detrimental to the national economy. If, however, tax havens are involved, then the classification of the tax competition for mobile capital by supranational and international organizations as "harmful" is clearer.1 Tax havens are sovereign areas that attract mobile capital with low or zero taxation and not with foreign capital Tax authorities cooperate, have non-transparent taxation rules or grant low taxation even if there is no real activity by the foreign legal or natural person.2 They therefore offer strong incentives and opportunities to shift profits and not declare income, which can be classified as harmful .3
For several reasons, the now decades-old problem of tax evasion and tax havens has recently moved back to the top of the political agenda. The tight public budgets and the consolidation measures, which are often burdening broad sections of the population, immediately raise the question of the contribution made by the wealthy and internationally active corporations. The offshore leaks data on the wealth of private individuals invested in tax havens and the recently known examples of extremely low tax payments by large multinational corporations (Amazon, Google IKEA, etc.) substantiate the assumption that various possibilities of tax evasion are the effective enforcement of taxation high incomes and wealth as well as the profits of multinational corporations. This means that the taxpayers involved evade an adequate financial contribution for the public services they use. At the same time, some more recent academic studies4 as well as analyzes by the OECD and, most recently, the Household Finance and Consumption Survey of the European Central Bank show the long-term increasing concentration of income and wealth in the OECD and the euro zone. There is also increasing empirical evidence that the more difficult taxation of capital and its income also contributes to the often observed, growth and employment policy problematic shift in the overall tax burden to the much less mobile and tax-less taxable factor of work.5 In addition, the inadequate factor implies Enforcement of the taxation of multinational companies discrimination against domestically oriented small and medium-sized enterprises and corresponding competitive disadvantages. Last but not least, the availability of multiple options for legal tax avoidance for multinational corporations can undermine the tax ethics of all taxpayers.
Many facets of design
A differentiated debate about the extent and consequences of tax evasion and suitable countermeasures must take into account the many facets of tax evasion with regard to the actors, manifestations and instruments involved.First of all, a distinction must be made between natural persons and their assets (income) on the one hand and legal persons (companies, but also foundations and other assets) and their profits on the other. You can commit tax evasion in the form of legal tax avoidance, illegal and therefore punishable tax evasion or unlawful tax avoidance through abusive arrangements
The individual forms of tax evasion are not equally relevant for the various actors. For natural persons, tax avoidance is of less importance as it usually requires a relocation of residence. However, legal tax avoidance without relocating is also possible here via the interposition of foundations and the skilful use of international taxation rules. In the private sphere, tax evasion often takes the form of illegal tax evasion. The existence of tax havens is therefore of particular importance for the possibility of tax evasion by natural persons.
In the operational area, tax evasion is unlikely to play a role due to the high probability of detection, especially since multinational companies can hardly afford tax evasion scandals. Tax avoidance dominates here: through the relocation of company or investment locations, but even more through the shifting of taxable profits. In principle, it is always about allowing the largest possible part of the taxable profit to accrue in low or non-taxing countries in order to minimize the group-wide tax burden. Instruments are transfer prices for intra-group deliveries of goods, interest payments for intra-group loans, leasing or license payments.7 The limit to tax avoidance is exceeded if, for example, transfer prices are set inappropriately high or mailbox companies in tax haven countries with which service relationships (e.g. in the form of commission payments) are shown that are not backed by any real activities.
Since incentives to shift profits are based in particular on nominal tax rate differences, tax evasion through profit shifting does not necessarily depend on the existence of tax havens. Avoiding profit shifting therefore requires a broader approach than avoiding tax evasion by natural persons via tax havens.
It is in the nature of the phenomenon of tax evasion that the extent of the tax base affected and the resulting tax evasion cannot be precisely quantified. The ranges of the available estimates are correspondingly large, which differ in the estimation approach, the data used, the times or areas analyzed and the delimitation of tax evasion and tax evasion countries. Even if the existing estimates are subject to considerable uncertainty and the specific figures determined must be treated with appropriate caution, 8 it is in any case certain that the volumes of private investment income and profits of multinational corporations, which are not or under-taxed through tax evasion, are considerable and both result in significant tax losses for both industrialized and developing countries.
For Germany, the German Institute for Economic Research recently determined a tax gap between macroeconomic and tax-recorded corporate profits of almost 92 billion euros for 2008, which can be explained in part by the transfer of profits by international companies to lower or non-taxable countries. 9 Earlier estimates show profit shift volumes between a good US $ 2 billion and EUR 65 billion. 10 Dharmapala and Riedel estimate for 25 EU countries for the period 1995 to 2005 that an average of 2% of the additional profits from parent companies to daughters in lower taxing countries within the EU.11 According to Huizinga and Laeven, the profit shift-related shortfall in corporate tax for 1999 amounts to almost 3.2 billion US $ for Germany, and almost 2.8 billion US $ for the EU. 12 According to Clausing escape the US Treasury through profit shifting US K corporate tax revenue of US $ 90 billion. 13
Regardless of the specific values, the conclusion that the cross-border shifting of profits by internationally active companies is likely to have a significant extent is supported by empirical studies that show that multinational companies have a below-average or falling effective tax burden and that international tax rate differentials have a strong influence on their reported profits .14
The estimation of private (financial) assets invested offshore, i.e. outside of one's place of residence, has been devoted mainly to management and investment consulting companies as well as non-governmental organizations for a decade and a half. The volumes identified in the most prominent studies relate to individual years between 1997 and 2008 and range between US $ 1.7 billion and US $ 11.5 billion. 15 In a study published a year ago on behalf of the non-governmental organization Tax Justice Network takes Former McKinsey chief economist James S. Henry, based on a thorough methodological criticism of these earlier estimates, presents his own estimates for the volume of private financial assets that are largely tax-free in offshore locations: According to his calculations, this amounts to 21 trillion to 32 trillion US $, resulting in a tax shortfall of up to $ 280 billion, of which up to $ 160 billion for developing countries (as of 2010) .16
In view of the considerable fiscal and non-fiscal effects of tax evasion that have been outlined, the question arises as to who should act against it using which instruments and at what level. Measures can be of a unilateral, bilateral or multilateral nature. The appropriate measures also differ in some cases according to the different actors (natural versus legal persons) and the starting point (with the actors themselves, with financial intermediaries or with states).
Individual states can implement unilateral tax measures paired with strict controls and audits in order to lower or reduce incentives and opportunities for tax evasion. Examples of such measures, which start with the actors themselves, are the definition of an extended limited tax liability for natural persons or the application of the arm's length principle and the additional taxation within the framework of an "external tax law", the lowering of nominal tax rates on capital income or the introduction of an interest cap as it has been practiced in Germany since 2008). With a view to tax havens, pressure can be put on domestic financial institutions and large corporations that do business with tax havens. Or the tax havens themselves can be induced by political and economic pressure to conclude and comply with bilateral agreements with national tax authorities. Possible measures here are the capping of business relationships with tax havens (import and export bans), the approval of market access for foreign companies only under the condition of tax cooperation by their countries of residence or the imposition of increased cooperation and verification obligations for financial institutions and large companies that business relationships with Maintain listed tax havens. The general obligation to disclose profits and tax payments by country (country-to-country reporting) is also a possible unilateral approach that increases the transparency of corporate taxation.
At the bilateral level, for example, tax agreements are possible that make tax evasion, in particular tax evasion, more difficult or reduce incentives to do so. These include intergovernmental agreements that provide for an automatic exchange of information (AEOI) with the participation of the financial intermediaries concerned with regard to the capital income of natural persons (such as the US FATCA agreement or the EU interest tax directive). The AEOI has the advantage that the country of residence principle of international taxation can also be implemented if the country of residence taxes foreign investment income progressively. This is not possible with bilateral agreements that provide for anonymous withholding tax, possibly paired with a one-off payment on account of assets and a tax amnesty to legalize illicit money.17 A major disadvantage of withholding tax vis-à-vis the AEOI in the fight against tax evasion is the maintenance of anonymity whereas in the AEI the country of residence receives information about the investor's portfolio of assets in the country of investment, which may allow conclusions to be drawn about past tax evasion or a dubious origin of the assets in question. In the event of tax dishonesty, a comprehensive AEI is arguably the most effective means of avoiding tax evasion. 18
The role of the EU
Since tax evasion is mostly of a multilateral nature, coordinated approaches by groups of countries appear to be particularly promising. Examples of this are the long-term initiatives of the OECD to include an exchange of information on request or an AEOI in intergovernmental agreements19.
In any case, the European Union should play a central role in the fight against tax evasion. By taking an active pioneering role, it can set signals that prevent the fight against tax evasion from coming to a standstill. This is particularly important because important tax havens and low-tax countries are located in the middle of Europe and / or are in the direct sphere of influence of EU countries. The economic and political links with these countries or sovereign territories should therefore be used to induce tax cooperation. With the European Court of Justice there is an instance within the EU that monitors compliance with the supranational legal framework and whose decisions are binding. This is a major advantage over international coordination measures, in which such an authority is missing and will probably not be set up in the near future either. In addition, the EU can fall back on already existing preparatory work in the area of tax coordination. In particular, the concept of a Common Consolidated Corporate Tax Base, which would make it more difficult to shift profits at least within the EU, the Interest Yield Directive including AEOI and the Directive on administrative cooperation in the area of direct taxes, which also provides for AEOI for certain types of income, are 20 important instruments for a containment of tax evasion already exists or at least worked out as a concept. The agreement of supranational agreements also implies that less far-reaching and therefore less effective bilateral agreements between individual EU countries and tax havens lose their validity. After all, the EU itself has implemented tax measures (such as the Interest License Fee Directive) that have increased incentives to shift profits. The EU is therefore also the appropriate level to defuse these measures.
The increasing debts of public budgets as a result of the financial and economic crisis have breathed new life into the commitment to counter harmful forms of tax competition, also at the political level. The EU must play a pioneering role, not least in order to prevent the fight against tax evasion from returning to normal after the budgetary situation has normalized.
- 1 OECD: Harmful Tax Competition - an Emerging Global Issue, Paris 1998; Primarolo Group: Report of the Code of Conduct Group on Business Taxation, Press Release, No. 4901/99, Brussels 2000.
- 2 See ibid.
- 3 See J. R. Hines: Tax Havens, Office of Tax Policy Research, Working Paper, No. WP 2007-3.
- 4 Cf. e.g. T. Atkinson, T. Piketty, E. Saez: Top Incomes in the Long Run of History, in: Journal of Economic Literature, 49th vol. (2011), no. 1, pp. 3-71.
- 5 Cf. P. Genschel, P. Schwarz: Tax Competition and Fiscal Democracy, TranState Working Paper, No. 161, 2012, and the literature cited here.
- 6 This delimitation, which is not handled uniformly in the relevant literature, is based on K. Tipke, J. Lang: Steuerrecht, 21st edition, Cologne 2013.
- 7 For an introductory overview, see OECD: Addressing Base Erosion and Profit Shifting, Paris 2013.
- 8 For a detailed criticism of the methodology and data bases, see, for example, C. Fuest, N. Riedel: Tax Evasion and Tax Avoidance in Developing Countries: the Role of International Profit Shifting, Oxford University, Center for Business Taxation, Working Paper, No. 10 / 12, 2010.
- 9 S. Bach: Corporate Taxation: High Profits - Moderate Tax Income, in: DIW Weekly Report, Volume 80 (2013), No. 22/23, pp. 3-12.
- 10 J. H. Heckemeyer, C. Spengel: Extent of profit shifting by multinational companies - empirical evidence and implications for German tax policy, in: Perspektiven der Wirtschaftsppolitik, 9th year (2008), no. 1, pp. 37-61. Due to different regional delimitations and / or the data sources used, the authors of the individual studies give the estimated volumes in different currencies.
- 11 D. Dharmapala, N. Riedel: Earnings Shocks and Tax-Motivated Income Shifting: Evidence from European Multinationals, in: Journal of Public Economics, 97th year (2013), no. 1, pp. 95-107.
- 12 H. Huizinga, L. Laeven: International Profit Shifting within European Multinationals, CEPR Discussion Paper, No. 6048, 2007.
- 13 K. A. Clausing: The Revenue Effects of Multinational Firm Income Shifting, Tax Notes, March 28, 2011, pp. 1580-1586.
- 14 For a detailed overview of current studies, see OECD: Addressing Base Erosion ..., loc. Cit.
- 15 OECD: The OECD’s Current Tax Agenda 2009, Paris 2009.
- 16 J.S. Henry: The Price of Offshore Revisited, London 2012.
- 17 See, for example, the agreements between Switzerland and Liechtenstein and Austria. These agreements are intended to bring Austria a one-off EUR 1.5 billion (down payment) and then around EUR 75 million annually in withholding tax on future investment income.
- 18 Cf. also T. Rixen: The fight against tax competition and tax evasion: development lines of international tax policy, in: Quarter-year books for economic research, 82nd year (2013), no. 1, pp. 61-75.
- 19 See OECD: Automatic Exchange of Information. What It Is, How It Works, Benefits, What Remains To Be Done, Paris 2012.
- 20 Cf. Official Journal of the European Union, Directive 2011/16 / EU of the EU Council, L 64/1, 11.3.2011.
The end of tax havens?
On a long way from the Stone Age to the present, large parts of humanity have come to the realization that it is part of their natural tasks to help people and countries who have come to the dark side of life. This happens on the one hand through the provision of public offers, for example in the field of education, which those affected could not afford themselves in comparable quality, on the other hand through transfers from the high-income to the weaker.
Illegal tax havens have to answer for the fact that they sabotage both: By sucking tax revenue from other countries, which depresses the public services offered. And by massively hindering the redistribution efforts of these countries. But other countries share this responsibility because they have tolerated the hustle and bustle of tax havens for decades with incomprehensible forbearance.
The activities and temptations of the tax havens mainly affect income tax and corporate tax, which in Germany account for a third and a fifth of tax revenue, respectively. An important difference, which also requires different processing, is that corporate taxes are often “only” about what may be perceived as disreputable but ultimately legal tax avoidance. Income taxes, on the other hand, are mostly about tax evasion, i.e. a criminal offense.
Damage from tax havens
The secrecy of the industry does not, of course, allow reliable statements to be made about the damage that has occurred. At least some number games that can be modified according to personal assessments signal the magnitude and relevance of the problem: A study commissioned by the Tax Justice Network comes to the conclusion that in the more than 80 tax havens of the world, conservatively estimated, there are foreign private assets worth Hide 25 to 38 trillion euros.1 The Boston Consulting Group comes to a significantly lower value of almost 7 trillion euros. Assuming an annual return of 7%, 2 these assets result in annual capital income of between 420 billion and 2,660 billion euros. At a marginal tax rate of 50%, these would lead to tax revenues of between 210 billion and 1,330 billion euros, which the investors' home countries would not see. With a share of around 8%
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