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Tax Avoidance & Evasion (Tax Evasion (HMRC has set out its offshore…
Tax Avoidance & Evasion
Tax Avoidance
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The UK and other onshore jurisdictions have sought to minimise the opportunities for tax avoidance by the implementation of anti avoidance legislation
Anti avoidance legislation is designed to remove the potential to use any arrangements that are purely used for the avoidance of taxation and involves using the tax laws to gain an advantage that Parliament did not intend
Attitudes to tax avoidance have changed significantly since the global financial crisis, while tax avoidance is not illegal, it is becoming more socially unacceptable
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Tax Evasion
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Could simply involve an individual filing to declare to the relevant tax authority their income, gains or profits that would be liable to tax resulting in a lower tax bill than would have otherwise been incurred
May involve the failure to declare income or gains received in respect of an offshore interest bearing bank account or the making of a fraudulent return by under declaring income to the authorities
Offshore administrators could find themselves inadvertently assisting clients to evade taxation in a number of circumstances and for a number of reasons
Aggressive tax avoidance schemes can become superseded by anti avoidance legislation and become tax inefficient as tax legislation changes. Administrators that do not keep up with changes or check the tax efficiency of the structures under their administration risk facilitating tax evasion
Tax advice may be perfectly adequate and outline clear advantages to the client in certain circumstances, however if the administrator fails to administer the case in accordance with the advice, this can have adverse consequences
Credit cards drawn on an offshore trust or company provides clients with access to funds in their home jurisdiction with them needing to receive funds into personal bank accounts in their home jurisdiction. This is open to abuse and offshore administrators should seek to understand any request for a credit card
There is a risk that administrators take a tick box approach when they are in receipt of tax advice, simply filing it and taking comfort from the fact that they have received it. Not checking the adequacy of the advice is a risk and it should be read to ensure if makes sense and is likely to be adequate
Tax advice that specifically states that it does not cover the clients country of residence or domicile may not give a full picture of the clients taxation circumstances
Offshore administrators sometimes find themselves with tax advice that outline advantages to their client on a particular basis (ie being resident /domicile in a certain jurisdiction). If it is clear to the administrator from their dealings with the client that this is not correct this should be questioned
It is unnecessary for offshore administrators to obtain tax advice in relation to every client relationship, it is good practice to consider obtaining tax advice if the client cites tax reasons for the business relationship or informs the administrator they already have tax advice
The UK government is working with the international community to pursue offshore tax evasion. Agreements such as the Liechtenstein Disclosure Facility, the US-Swiss Agreement on Tax Co-Operation and other agreements providing for the automatic reporting of information set a new standard in terminational tax transparency
The UK government has reached agreements with many offshore centres including the Isle of Man, Guernsey and Jersey and is providing disclosure facilitates to address historic tax evasion by UK taxpayers
HMRC has set out its offshore evasion stratify for 2013 and beyond in a document "No Safe Havens". The objectives of the new strategy are to ensure that
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The OECD
An international organisation with the mission to promote policies that will improve the economic and social well being of people around the world
Provides a forum in which governments can work together to share experiences and seek solutions to common problems
Tax evasion and what the OECD deems to be harmful tax practice are a problem the the OECD have been addressing for many years
Harmful Tax Competition
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In 2000, the OECD published a list of over 40 jurisdictions that met the criteria for tax havens
In mid 2002 the OECD published a list of uncooperative tax havens which did not make commitments to the exchange of information. Each of jurisdictions made the relevant commitments to implement the OECD standard. The last 3 jurisdictions were removed from the list in May 2009
Exchange of information
The OECD views transparency and effective information exchange as essential in baling countries to apply and enforce their tax laws
The OECDs focus on transparency and effective exchange of information is designed to ensure that a legal framework is in place to allow jurisdictions to cooperate with each other without violating their own laws
The standards of transparency and effective exchange of information that have been developed by the OECD are primarily contained in Article 26 of the OECD Model Tax Convention and the 2002 Model Agreement on Exchange of Information on Tax Matters
Model Tax Convention
Creates an obligation to exchange information that is relevant to the correct application of a tax convention as well as for the purposes of the administration and enforcement of domestic tax laws of the contracting states
Arise 26 of the OECD Model Tax Convention provides the most widely accepted legal basis for bilateral exchange of information for tax purposes
More than 3,00 bilateral treaties are based on the Model Convention
The international agreed tax standard developed by the OECD in conjunction with non-OECD countries also endorsed by the UN and G20, requires exchange of information on request in all tax matters for the administration and enforcement of domestic tax law, without regard to a domestic tax interest require or bank secrecy for tax purposes
Where information is exchanged, it is subject to strict confidentiality rules
Only information that is relevant may be exchanged and the requesting state should have pursued all domestic means to access the requested information except those that would give rise to disproportionate difficulties
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Transfer Pricing
Very large multinational enterprises operate on a global basis which gives them the opportunity to decide where to locate their business activities and to take advantage of difference pricing opportunities and to decide how profit should be allocated across the group
Whenever goods are sold or services provided, a price is charged by the seller and a price is paid by the buyer
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Where parties to a transaction are connected (eg both part of the same group of companies or the transaction is between an individual and a company they own), any price set in relation to the sale or transfer will be determined by market forces as would be the case if they were not connected
This enables the group to allocate some of its global profits to group members in low tax jurisdictions even though it may not have actually undertaken the activity from which the profits have arisen from within that jurisdiction
When a transfer price is set between connected parties, it does not impact the wealth of the common party however it may where two connected parties are located in different jurisdiction
The owner may structure the business so that profits are earned in the jurisdiction that pays the lowest rate of tax causing an unfair division of taxable profit between jrusidctions
The transfer of goods and services within multinational enterprises is a significant part of world trade and the transfer pricing issue which can artificially shift a tax liability from one jurisdiction to another, is an interest of the OECD
The OECD has issued transfer pricing guidelines on the issue and has endorsed the internationally recognised arms length principle
The arms length principle requires the actual terms of a contract to be replaced by the terms that wold have been achieved if the transaction was undertaken at arms length, profits should be recalculated accordingly when determining the tax liability
The guidelines also address the issue of minimising double taxation that can occur when multinationals operate. The UK has implemented the arms length principle
Amazon, Facebook and McDonalds recently in the news for tax avoidance