Topics

Tax and Illicit flows

What are illustrative commitments

Illustrative Commitments

  • Introduction

    Taxation provides funds to invest in development, relieve poverty, deliver public services and build the physical and social infrastructure for long-term growth. Taxation is also a crucial part of the social contract that binds citizens and states, ensuring government is accountable. Fair and efficient tax systems can contribute to good governance by establishing a bargaining process between states and citizens. States that rely on their citizens for income also have to take their demands into account (Corbacho et al, 2013).

    Most OECD members have a broad base for direct and indirect taxes, with tax liability covering the vast majority of citizens and firms. Countries at lower incomes often face more severe social, political and administrative obstacles and so can be especially vulnerable to tax evasion and avoidance efforts of individual and corporate taxpayers.In addition, many of the same instruments and channels used to defeat tax systems – from opaque company ownership and accounts, to mispriced trade through secrecy jurisdictions (‘tax havens’) – are used for a range of other flows that undermine both public finances and governance. These include laundering the proceeds of crime, theft of state assets and bribery of public officials (van der Does de Willebois et al, 2011).

    International flows of investment and trade mean that policy decisions in one country can have far reaching impacts. A lack of financial transparency in one jurisdiction can allow assets and income streams to be moved around, and hidden in ways that undermine regulation and taxation in other jurisdictions. International rules and institutions are critical, but each country has a responsibility to raise its own standards – which will limit abuses and support improved corporate governance both domestically, and for trading partners.

    Financial transparency concerns the disclosure of all financial information that allows governments to effectively regulate and tax economic and financial activity, private sectors actors including investors to be confident others are operating by the same rules, and for civil society to hold all actors – public and private – accountable for their role in this (Murphy et al, 2009). It is crucial for well-functioning states and markets in several ways: it enables action against fraud and corruption, and enables public confidence in the effectiveness and fairness of taxation. It also improves market efficiency by facilitating price discovery, uncovering hidden costs, improving data quality and, more generally, by ensuring a level playing field and fairer market conditions and allowing better analysis of the risks to investment.

    States provide companies with their legal standing, mandate disclosures and collect information about those companies. A major, common benefit of incorporation is limited personal liability; and this requires effective financial transparency about company performance to ensure confidence of business partners, customers and tax authorities; and effective transparency about ownership to guard against fraud, market manipulation and other criminal misuse of corporate vehicles. In this way, businesses and society benefit from states ensuring effective transparency, with compliance at the heart of the virtual circle.  However, in many countries, it is not even possible to confirm the existence of a company without payment of a fee. Furthermore, data about companies acting in multiple jurisdictions is even more challenging to obtain and at times may only present a partial or highly limited view of the company. The limited access and availability of data about companies and their work facilitates money laundering, tax evasion, bribery, the theft of public assets, financing of terrorism, and excessive risk-taking which can lead to systemic vulnerability.

    References

    • Corbacho, A., V. Fretes Ciblis & E. Lora (Eds.), 2013, More than Revenue: Taxation as a development tool, IADB, http://www.iadb.org/en/research-and-data/dia-publication-details%2C3185.html
    • van der Does de Willebois, E., E. M. Halter, R. A. Harrison, J. Won Park & J.C. Sharman, 2011, The Puppet Masters: How the Corrupt Use Legal Structures to Hide Stolen Assets and What to Do About It, World Bank/UNODC Stolen Asset Recovery Initiative, http://star.worldbank.org/star/sites/star/files/puppetmastersv1.pdf
    • Murphy, R. & P. Sagar, 2009, ‘What is Financial Transparency?’, Mapping the Faultlines Series, Tax Justice Network, http://www.secrecyjurisdictions.com/PDF/FinancialTransparency.pdf
  • Expert Organisations

    Contributors

    This chapter has been developed by Alex Cobham of the Center for Global Development with valuable inputs from BMZ, the IMF, Tom Cardamone, Maya Forstater, Martin Hearson, Vanessa Herringshaw, Anthea Lawson, Markus Meinzer, Richard Murphy and Robert Palmer.

  • Standards &
    Guidance
  • Examples in Practice

    EU member states exchange tax information under the Savings Directive

    The EU Savings Directive came into force in 2005 and was further revised in 2011. The ultimate aim of the Savings Directive is to enable savings income in the form of interest payments made in one Member State to beneficial owners who are individuals resident in another Member State to be made subject to effective taxation in accordance with the laws of the latter Member State. It includes agreement on automatic exchange on several types of income in the form of interest payments.

    Jersey requires beneficial owners to be identified and recorded by the JFSC Company Registry

    Jersey requires the beneficial owner to be identified and recorded by a government body, the JFSC Companies Registry within the Financial Services Commission, which is responsible for the regulation and supervision of the financial services industry. Beneficial ownership information provided at the time of application is checked against an external database and an internal regulatory database, and applicants often need to be (and in practice frequently are) asked to provide additional information.

    The Dodd-Frank Act in the US requires companies to report on how much they pay governments for access to oil, gas and minerals

    In July 2010, the U.S. Congress passed Section 1504 of the Dodd-Frank Act, a measure requiring companies registered with the Securities and Exchange Commission (SEC) to publicly report how much they pay governments for access to oil, gas and minerals.

    Dodd-Frank 1504 adds to existing stock listing requirements in the US by obliging all extractive companies to publish the payments they make to the US and foreign governments in the countries where they operate. This information is to be disclosed in an annual document to the US Securities and Exchange Commission.

    All companies that are listed in the US and engage in the commercial development of oil, gas and other minerals (defined in Dodd-Frank 1504 as exploration, extraction, processing, export and other significant actions) will be covered. This includes eight of the ten largest mining companies and 29 of the 32 largest internationally active oil companies.

    Companies that engage in the commercial development of oil, natural gas or minerals will have to report – The type and total amount of payments made for each project, and, – The type and total amounts of payments made to each government.
    These payments cover report taxes, royalties, fees (including license fees), production entitlements and bonuses.

    The EU requires extractive companies to publish their payments on a country-by-country and project-by-project basis

    In July 2013 European Parliament approved the EU Transparency and Accounting Directives, which will oblige all extractive listed companies (and large non-listed) to publish their payments on a country-by-country and project-by-project basis. The European Commission  Accounting Directive, introduces a new obligation for large extractive and logging companies to report the payments they make to governments. Reporting would also be carried out on a project basis, where payments have been attributed to specific projects.

    The Directive introduces a new obligation for listed and large non-listed extractive and logging companies to report all material payments to governments broken down by country and by project, when these payments have been attributed to a specific project. Production entitlements, taxes, royalties, dividends, bonuses, licence fees and payments for infrastructure improvements must be reported.

    The UK Companies House makes company information available to the public

    The UK Companies House examines and stores company information for all registered companies in the UK, and makes this information available to the public. Its WebCHeck service offers a searchable Company Names and Address Index which is free of charge and which allows anyone to search for information on more than 2 million companies. The searches can be carried out on a company either by using its name or by using its unique company registration number. The WebCHeck service also allows users to view a company’s filing history and purchase copies of document images, as well as a selection of company reports, all online.

    The UK has committed to establish a central registry of information on beneficial ownership

    The G8 Action Plan Principles to prevent the misuse of companies and legal arrangements from 2013 state that “Beneficial ownership information on companies should be accessible onshore to law enforcement, tax administrations and other relevant authorities including, as appropriate, financial intelligence units. This could be achieved through central registries of company beneficial ownership and basic information at national or state level.”

    To ensure adherence to the Principles, G8 countries have committed to publish national Action Plans based on these principles.

    UK’s Action Plan includes a commitment to “Amend the Companies Act 2006 to require that information on companies’ beneficial ownership is accurate and readily available to the authorities through a central registry of information on companies’ beneficial ownership, maintained by Companies House. Consult on whether information in the registry should be publicly accessible.”

    The US EDGAR system allows anyone to access and download company information for free

    In the United States, all companies, foreign and domestic, are required to file registration statements, periodic reports, and other forms electronically through EDGAR (the Electronic Data Gathering, Analysis, and Retrieval system). Anyone can access and download this information for free. EDGAR performs automated collection, validation, indexing, acceptance, and forwarding of submissions by companies and others who are required by law to file forms with the US Securities and Exchange Commission.

    The US FACTA legislation is laying the groundwork for an international system of automatic information exchange

    The US Foreign Account Tax Compliance Act (FATCA), effective from 2013, includes measures designed to achieve full financial information exchange on all offshore financial activities globally and is laying the groundwork for an international system of automatic information exchange. FATCA is designed to achieve three objectives: 1) report both US and foreign source income for US taxpayers, 2) determine if US taxpayers are the ultimate beneficial owners of foreign entities (shell companies, trusts, foundations) and 3) review of all customer accounts within an extended foreign financial institution group to identify US taxpayers globally.