International Fiscal Policy Barometer: Tax offenders and tax exiles in the crosshairs
At a time of high national debt and tight budgets in many industrialised countries, the fiscal authorities are now in hot pursuit of tax offenders and greater pressure is being put on tax havens. This was reason enough for Ecovis to ask its international partner firms how the situation is developing in their respective countries from the point of view of taxpayers and more especially of business firms. “The overwhelming response shows how seriously the topics of tax compliance and tax redistribution are being taken,” says Dr. Ferdinand Rüchardt, member of Ecovis’ management board and an expert in international tax law. Partners of Ecovis in 33 countries participated in the fiscal barometer survey – more than ever before. To summarize: “Governments appear to be stepping up measures to acquire relevant tax data and are scrutinising tax declarations more closely, rather than the contrary,” says Rüchardt. Most particularly they are availing themselves of the opportunities afforded by digital information technology, but they are also relying more and more on tip-offs. At the same time, 88% of the countries surveyed allow taxpayers to file subsequent returns for taxable income not yet declared, thus permitting them to avoid criminal prosecution which would be the consequence if the fiscal authorities were to catch them out. However, in several countries additional penalties are imposed upon voluntary disclosure, in addition to the corresponding back taxes and interest payable on arrears.
Just how sensitive the topic of tax havens is becomes apparent in the answers to the question, “Would you consider your country as a “tax heaven”, making it attractive for international investors to invest in your country manly for reasons of low taxation?” In the responses of the partner firms, 27% place their country in this category; besides those you would expect, such as the Netherlands, with its tax-exempt licencing income, or Qatar, with its tax immunity or lower tax rates for foreign investors, we also find such states as Bulgaria, which scores points with generally low flat rates for income and corporate tax. Atina Mavridis, Ecovis partner in Sofia, hastens to add, “Our tax law, however, has very few exemptions and other loopholes.” According to Peter Owen, Ecovis’ partner in London, even the United Kingdom may be deemed a “tax haven” as defined in the questionnaire because of its low corporate tax. However, where private income tax is concerned, the United Kingdom imposes a top income tax rate of 45%, plus 2% national insurance, which brings it up to the EU average.
The end of tax havens
At least at first glance it would seem surprising that countries normally considered tax evasion favourites, such as Ireland, Cyprus, Malta, Singapore and Switzerland, can not or no longer be classified as tax havens according to the respective Ecovis firms in each of these countries. “It all boils down to the definition of a “tax haven” and the wording of the question says Andreas Karaolis, Ecovis’ partner in Nicosia. “Cyprus is a favourite destination for international investors because of several parameters such as our competitive 12,5% corporate tax rate, our network of Double Tax Treaties with the OECD Model Tax Treaty exchange of information article, our clusters of expertise such as in shipping, our robust common law based legal system, and more.”
On 5 April 2012 the OECD classified Malta as a jurisdiction where the legal and regulatory framework for exchange of tax relevant information is in place and all information in respect of ultimate benefiary owners is maintained according to OECD standards. “This means that Malta meets the international standards of transparency”, says Anthony Vella, Ecovis’ partner in Malta.
However, criticism has again recently been levelled at Ireland, for example, which is used as a tax saving platform for such IT groups as Apple, eBay and Google. It is true, says David Spicer, Ecovis’ partner in Dublin, that „There has been no change to the very favourable corporate tax rate of 12.5% for enterprises doing active business.” Besides this, Ireland continues to offer holding companies tax privileges such as favourable taxes on foreign dividends, tax exemption on profits earned on share deals and the possibility of writing off against taxes any interest earned on the acquisition of stock financed by borrowing. Contributions to the recapitalisation of the national budget mainly come from the higher income tax levied; this is something which, in turn, could be a deterrent to investors because of the greater expenses incurred in employing highly qualified skilled workers. This is why Ireland is now granting them income tax relief.
Switzerland is indeed no longer a safe place for foreign tax evaders to hide their money because of the growing pressure put on it by the USA and the EU. Tax evaders fleeing Switzerland will not find Singapore a safe haven for their dirty money either. This city state, which in 2009 signed the OECD document governing the exchange of information for tax purposes, is now putting these standards into actual practice by co-operating in the fight against cross-border tax offences. “Singapore is prepared to exchange information with every country with which it has concluded a double taxation agreement,” says Ecovis’ partner Jason Chen. The objective is for the fiscal administration to acquire the right to request banking and escrow information from financial institutes without applying for a court order beforehand.
Modern information technology to detect tax dodgers
Irrespective of the problem of tax evasion to low-tax countries, the global trend is towards the “transparent taxpayer” where national taxation is concerned. In 70% of the countries surveyed, businesses and institutes are legally obliged to inform the authorities of matters concerning third parties which are fiscally relevant, such as, for example, the payment of wages and salaries or the distribution of dividends. In almost every second country, these regulations have been on the increase in recent years, and in three of these (Japan, Portugal and Uruguay) in a pronounced manner. In the remaining countries, the situation has remained as it was. In none at all has a reduction in the flow of information been registered.
The picture is similar with regard to the digital methods of collating tax data, often before a tax return is submitted; it is now employed in 60% of the countries, including Argentina and Vietnam. In almost the same number of countries (55%) the fiscal administrations have upgraded their systems in the past three years, six of those i. e. 18% (Croatia, France, India, Portugal, United Kingdom and Uruguay) to a marked degree, according to the Ecovis partners in each of these countries. In no single country have the fiscal authorities reduced their efforts.
One of the countries which is tracing tax leaks with modern software is Ireland, debt-ridden following the banking crisis. Its financial administration has installed a programme called REAP (Risk Evaluation, Analysis and Profiling) to enable it to make targeted tax audits and which fully lives up to the literal sense of the acronym. The roughly 9,000 audits performed in 2012 harvested 359 million euros. “Generally speaking,” says David Spicer, “the number of tax audits has increased, resulting in additional tax revenue, interest on arrears and penalties.”
Increasing use of anonymous tip-offs
More and more countries are availing themselves of anonymous tip-offs to trace cases of tax fraud. Ireland is one of those countries. Here a law has been drafted to protect informants acting in the public interest for deliberation in the national parliament. “In Turkey we have several tax laws defining the status of those giving tip-offs,” says Celal Çelik, Ecovis’ partner in Istanbul. In 2012 the Turkish fiscal authorities paid the equivalent of 1.25 million euros for such tip-offs. Countries encouraging such tip-offs are still in the minority (36%). Seven countries have increased their use of this method of acquiring information in the past three years only, particularly India and Germany.
“In Germany the purchase of what are termed tax CDs, i. e. illegally procured data from Swiss and Liechtenstein accounts held by German nationals, has increased considerably”, says Rüchardt. “This has not only contributed directly to the detection of cases of tax fraud but, what is more important, has also pursuaded tax evaders to voluntarilly disclose inaccuracies, in other words to report their untaxed capital gains in their foreign accounts. As a result they can avoid criminal investigation and prosecution and only have to pay their taxes and interest on arrears.”
Voluntary disclosure a common phenomenon
Eighty eight percent of the countries surveyed are familiar with the voluntary disclosure of hitherto undeclared taxable income in order to avoid criminal investigation and prosecution. By contrast, misrepresentations in tax declarations and late payment of taxes are dealt with more severely by the financial authorities, for example with punitive taxes or penalties for late payment.
As a general rule, the voluntary correction of tax declarations which have already been submitted may only be exempt from prosecution if certain conditions are fulfilled, for example:
- in Austria, the Netherlands, Germany and Malta only if the financial authorities have not yet commenced their own investigations because they already have grounds for suspicion
- in Argentina, Great Britian and Germany if all previously undisclosed taxable income has been declared.
In Latvia, income tax declarations may only be corrected for the past three fiscal years.
“In Bulgaria, taxpayers may apply at any time for their financial results for the past five years to be reappraised”, says Atina Mavridis. “If this results in the disclosure of undeclared income, then the taxpayers, in most cases, will get away with paying their back-taxes with interest on arrears, and sometimes with an additional fine. However, they could be prosecuted if the undeclared income amounts to a considerable sum.”
In some countries, for example Ireland, Singapore and Spain, a reduction in the penalty payments due is granted in the case of voluntary disclosure, and in Portugal and France this is at the discretion of the authorities. In Uruguay, sometimes, under certain conditions, penalties could be reduced or forgiven by the fiscal authority. In Ireland the amount of the reduction allowed depends on whether the taxpayers submitted the corrected declaration of their own free will or upon demand, how far they co-operate with the financial authorities, and to what degree they have concealed their income.
Voluntary disclosure of deliberate tax evasion is most worthwhile in Singapore. “In such cases, the additional penalty payment due is only 200%”, says Jason Chen. Usually tax evaders (and those colluding with them) not only risk prosecution (with up to seven years imprisonment and fines of up to 50,000 Singapore dollars), but have to make penalty payments of 400%.
“In Turkey,” says Celal Çelik, “taxpayers only avoid a penalty payment after voluntary disclosure (equivalent to the amount of tax liabilities disclosed) if they can pay the arrears due including interest of 1.4% per month within 15 days of disclosure.”
In other countries the fiscal authorities always impose a penalty even after voluntary disclosure, for example in Malaysia and Slovakia. In Hungary an additional fee is due if taxpayers submit what is called a “self-audited assessment” of their back taxes and interest payment on arrears. “This is, however, much lower than the penalty imposed for tax evasion detected by the financial authorities,” says Gabor Szabo, who is a lawyer and Ecovis’ partner in Budapest. “It can get really expensive in China,” says Yi Wang, Ecovis’ partner in Shanghai, where penalties range from 50% to 500% of the amount of defrauded tax and with interest on arrears of 0.05% a day, i. e. roughly 18% p.a..