Saturday, December 20, 2008
Tuesday, June 06, 2006
HP Settles with IRS: $443 Million Profit booster
Bloomberg.com: U.S.: "June 6 (Bloomberg) -- Hewlett-Packard Co., the world's biggest printer maker and No. 2 personal-computer seller, revised its second-quarter profit to reflect the benefit of a $443 million tax settlement.
Net income was increased to $1.9 billion, or 66 cents a share, up from the $1.46 billion, or 51 cents, reported on May 16, Palo Alto, California-based Hewlett-Packard said today in a statement. The company also increased its forecast for annual net income to $2.02 to $2.06 a share.
The settlement with the Internal Revenue Service relates to an audit of Hewlett-Packard's federal tax returns for 1996 through 1998. Because the agreement was signed before the company filed its financial statements with the Securities and Exchange Commission, Hewlett-Packard was required to include the settlement in the second quarter, which ended April 30.
Profit excluding one-time items "
Net income was increased to $1.9 billion, or 66 cents a share, up from the $1.46 billion, or 51 cents, reported on May 16, Palo Alto, California-based Hewlett-Packard said today in a statement. The company also increased its forecast for annual net income to $2.02 to $2.06 a share.
The settlement with the Internal Revenue Service relates to an audit of Hewlett-Packard's federal tax returns for 1996 through 1998. Because the agreement was signed before the company filed its financial statements with the Securities and Exchange Commission, Hewlett-Packard was required to include the settlement in the second quarter, which ended April 30.
Profit excluding one-time items "
Tuesday, April 18, 2006
Symantec hit with $1 billion tax claim
"Uncle Sam says Symantec, the maker of Norton antivirus software, owes more than $900 million in back taxes as a result of its $10.25-billion acquisition of Veritas" (see RED HERRING Symantec Faces Hefty Tax Bill)
There is a separate claim from the IRS against Symantec for $100 million. Both claims do not include charges for interest and penalties, which can be extremely aggressive.
The IRS is contesting Symantec's Transfer Pricing scheme for an Irish subsidiary used to distribute products around the world. Ireland is a well known and well used tax haven that attracts a significant amount of business through tax statutes that are favorable to companies.
The IRS is claiming that Symantec undervalued its product as it sold (transfered) the product from the US to Ireland, where it was later marked up and resold around the world.
Transfer Pricing is a term that loosely translated can be viewed as transfering profits. As the price in one locale goes up, the profits go up. As the price goes down the profits go down. Revenue Agencies around the world square off with companies and each other to insure that they each get their fair share of the taxable base.
There is a separate claim from the IRS against Symantec for $100 million. Both claims do not include charges for interest and penalties, which can be extremely aggressive.
The IRS is contesting Symantec's Transfer Pricing scheme for an Irish subsidiary used to distribute products around the world. Ireland is a well known and well used tax haven that attracts a significant amount of business through tax statutes that are favorable to companies.
The IRS is claiming that Symantec undervalued its product as it sold (transfered) the product from the US to Ireland, where it was later marked up and resold around the world.
Transfer Pricing is a term that loosely translated can be viewed as transfering profits. As the price in one locale goes up, the profits go up. As the price goes down the profits go down. Revenue Agencies around the world square off with companies and each other to insure that they each get their fair share of the taxable base.
Thursday, April 06, 2006
Double Residency with 183 day Rule? – Trick Question
Hypothetically, its possible for a person to be resident in two countries that both define residency requirements as maintaining presence in each country for 183 days during a year.
Every 4 years, during a leap year, the year is 366 days long. During a leap year, its possible to be present in 2 different countries for 183 days. Expect to have fun with your taxes during a leap year!
Relevance of Liable to Tax Phrase set out in OECD Model Treaty
What is the importance of the term ‘Liable to Tax’ as set out in the OECD Model Treaty?
The resident in question could posses a tax liability .
Charities and or a government can be liable to tax and posses a tax liability that is later reduced or eliminated by provisions relating to their status.
For example, a charitable organization in the US could lose its favorable tax treatment status. Thus having to pay its actual tax liability.
A person who does not pay any tax because of loss carryovers or deductions is also liable to tax. Their losses or deductions serve to reduce their liability.
The resident in question could posses a tax liability .
Charities and or a government can be liable to tax and posses a tax liability that is later reduced or eliminated by provisions relating to their status.
For example, a charitable organization in the US could lose its favorable tax treatment status. Thus having to pay its actual tax liability.
A person who does not pay any tax because of loss carryovers or deductions is also liable to tax. Their losses or deductions serve to reduce their liability.
Dividing Line My Resident is your Non-Resident
Dividing Line: My Resident is your Non-Resident
Why do Governments make such a big deal about determining if a person is a Resident or Non-Resident?
The simple answer is that this parameter ic used to classify the potential source of taxable income and capital. Based on the binary answer provided for this parameter, many countries have different taxation rules that will apply for each group.
It addition, this parameter helps countries identify the taxable source status of people that operate within multiple jurisdictions, ergo one countries non-resident may be a different countries Resident. Both countries will take an active role in tracking and possibly taxing the income, capital, estate taxes associated with the person in question.
Why do Governments make such a big deal about determining if a person is a Resident or Non-Resident?
The simple answer is that this parameter ic used to classify the potential source of taxable income and capital. Based on the binary answer provided for this parameter, many countries have different taxation rules that will apply for each group.
It addition, this parameter helps countries identify the taxable source status of people that operate within multiple jurisdictions, ergo one countries non-resident may be a different countries Resident. Both countries will take an active role in tracking and possibly taxing the income, capital, estate taxes associated with the person in question.
Saturday, June 02, 2001
Comparison of CFC Legislation between Germany and the United States
Introduction
The purpose of this paper is to compare the controlled foreign corporation legislation of the United States and Germany. The applicable legislation and codes will be identified and explored and then compared. This comparison will begin with an overall summary of the US controlled foreign corporation legislation followed by a similar summary of the German legislation. Next, the similarities between the two will be covered. Finally, the differences between the two pieces of legislation will be developed.
Background
Controlled foreign corporation (CFC) legislation is designed to prevent the accumulation of profits and income abroad. If corporations operating abroad are allowed to retain earnings indefinitely or at least for extended periods of time, the corporations home country may not ever see the funds flow from the corporation to the shareholders. Thus, taxation could be permanently or indefinitely postponed or avoided.
CFC legislation seeks to target those companies that might attempt to accumulate without distributing this type of income. Once identified the essence of this legislation is to create a liable to tax situation for the designated shareholders of the corporation. Since not all shareholders have controlling or even influencing control over a corporation, often times this legislation seeks to consider only those shareholders that have a significant influence. This type of influence is often measured by a percentage of value ownership or a percentage of profits received.
Furthermore, this legislation generally looks to controlling interest from a rather broad perspective. Ownership or control by related parties is often considered in this determination. The purpose of this consideration is to prevent the dispersal of ownership in form among relatives, business partners or trusts.
Since business is a fluid environment and ownership of a country might change throughtout the year, this legislation often establishes guidelines for the CFC designation. Once a CFC designation has been applied to a company the next phase is to assess what income will fall under the CFC legislation. Certain types of foreign business might do bussiness abroad that could potentially be designated as CFC, yet the purposes are not to avoid taxation or defer taxation to shareholders indefinitily. Therefore CFC legislation seeks to identify the company types that might engage in these transactions and the transaction types themselves.
Summary of US CFC
The United States controlled foreign corporation legislation referred to as Subpart F was the first of its kind. This legislation originally enacted in 1962 was instituted to determine pro rata tax liability on corporations operating with subsidiaries abroad that otherwise might never pay dividends.
In general there are two phases in determining CFC taxation. The first is to determine if a foreign corporation is controlled by a US citizen. If the tests according to statute determine that the foreign corporation is controlled, the next step is to evaluate the income to determine whether or not CFC income types exist and consequently taxed.
Identification
The first step is then to identify any U.S. shareholders of a foreign corporation. For CFC purposes, a U.S. shareholders would be any U.S. person owning at least 10% of the total combined voting power of the outstanding stock. Furthermore, rules of constructive ownership are applied in CFC cases as set forth in section 958 and 318(a)[1]. A stock under these rules is considered to be owned by the stockholder if the stockholder’s, spouse, child or controlled entity, which include partnerships, trusts, or corporations, owns the stock of the foreign corporation. If a foreign corporation is owned by another corporation, the ownership must be followed or flowed back to the actual person owning the stock of the corporation in question.
Subpart F identifies certain corporations that are not to be considered CFC’s under US law. The first covers foreign corporations owned by eleven unrelated U.S. people, who each own 9.09% of the outstanding shares. The second part details a U.S. person how owns 50% of the outstanding stock, and 6 or more other unrelated U.S. persons own equal portions of the remaining 50%.
Finally, CFC designation is contingent upon meeting the above qualifications for a minimum of 30 consecutive days of the tax year in question.
Taxable Income
The second step covers the taxation of the shareholders after the CFC has been designated as such. There are two areas that comprise the majority of the CFC taxation. In general the U.S. shareholders are taxed as they would be if they owned a flow-through type entity such as a partnership.
The first area is Subpart F income is composed of for income types. The first type under 954(a)(1) and (c)[2] includes foreign personal holding company income, passive income from interest, dividends, rents, royalties and gains from sales of securities. The second type of income covered by 954(a)(2) and (d)[3] is foreign base company sales income. The third type covered by 954(a)(3) and (e)[4] is foreign base company services income. The fourth type covers air and sea transportation income.
The second area includes investment earnings of the foreign corporation from investments in property located in the U.S., securities issued from the U.S., or income derived from the licensing or sale of intellectual property used in the U.S. as mentioned in 956(b)(1)[5].
Exceptions
There are two general exception to these rules. The first is the De minimis rule. This rule eliminates the application of CFC taxation for any corporation that has gross foreign base company income less than the smaller of 5% of gross CFC income or $1 million according to 954(b)(3)(B)[6].
Foreign Personal Holding Company Tax (FPHC)
Identification
This in application can be simillar to that of the CFC rules. It will apply to any U.S. shareholders of foreign corporations if 5 or fewer U.S. residents/citizens own at least 50% of the stock and if foreign personal holding company income accounts for at least 60% of the foreign corporation’s income section 552(a)[7]. This rule does not have a de minimis exception similar to that found in the Subpart F CFC legislation.
Taxation
Undistributed income held by the foreign corporation that is considered foreign personal holding company income would be included in the U.S. shareholders ordinary income under section 551(a)[8]. Unlike non-foreign PHC income, which is does not include gains from the sale of stock as passive income(capital gains), FPHC tax would however passive investment income gains from the sale of stock into ordinary income per section 553 (a)(2)[9]. This could result in a higher tax rate than the capital gains tax charged for non-foreign PHC .
Exception
If the CFC rules above apply, they will override the FPHC tax and the CFC legislation will be followed instead[10].
Appreciated Foreign Stock
Under IRC ss 1248, U.S. shareholders are required to treat the gains on CFC stock sales as ordinary income to the extent of undistributed earnings and profits of the CFC[11]. This section prevents shareholders that might otherwise face CFC taxation from selling their CFC stock and only facing a capital gain tax liability from the sale of stock of a foreign corporation with a higher valuation partly resulting from undistributed profits and earnings. This applies to any U.S. person that owns contructively or directly 10% or more of a CFC. Unlike the requirements for CFC reporting, this section will consider a foreign corporation as a CFC, if it met the CFC requirements at any time over the past 5 years, whether or not the company is considered a CFC in the current tax year.
The gain is reported as a dividend to the extent that earnings and profits could have been attributed to the shareholder for the entire period that the stock was held.
Under IRC ss1246, Foreign Investment Company stock sales will be treated the same as in ss1248 above. If a shareholder owns directly or constructively less than 10% and 50% or more of the CFC is owned by U.S. persons and the CFC registered as a management company or primarily engages in trading or investing in securities or commodities, the sale of the stock will be treated as ordinary income as detailed under 1248 rules.
Finally, officers, directors and any shareholders owning a minimum of 10% of a CFC or a FPHC is required to file form 5471 if they are a U.S. citizen.
Summary of Germany CFC
(Preface on citations. The information that I gained relating to CFC legislation in Germany came entirely from the following location:
“Tax Haven Legislation in Germany — A Foreign Transactions Tax Act”., Oppenhoff & Radler., Portner, Rosemarie., 29 May 2001 found at http://themis.wustl.edu/ibll/Tax/Haven.htm
My attempts to find more direct sources were partially thwarted by time requirments and recent access problems with Lexis in late May, and difficulties in downloading Adobe pdf files on my mobile computer. It would appear that a great deal more information is readily available on this topic but in pdf format, which my rather old laptop can not handle.)
German Controlled Foreign Corporation (CFC) was instituted aproximately 10 years after the United States began to reclaim foreign corporation tax revenue. Germany’s CFC legislation was introduced under the Foreign Transactions Tax Act(FTTA) in 1972.
Identification
German CFC legislation applies if one or more people or corporations or entities that are subject to Germany’s unlimited tax liability control a foreign corporation operating in a low-tax area and this corporation generates passive income. Control provisions are met if 50% or more of the share capital or voting rights are held by individuals or legal entities subject to corporate tax in Germany. This control provision would be similar to the U.S. FPHC Tax. Germany also looks to individual shareholders who own more than 10% of a foreign corporation or who who through other persons or entities could exercise substantial control.
German legislation calls for a ‘low-tax’ test as mentioned above. If the income of a controlled foreign corporation does not fall within the countries of management nor residence, the income is subject to apportionment, the portion falling outside of German control subject to a minimum tax burden of 30% on income.
Taxable Income
Under the German provisions CFC income is considered that income of capital investment characterd. This would included income from the possession, preservation or administration of securities, receivables, valuable tender or commodities.
The German CFC is not intended to penalize but instead to promote the distribution of dividends, which would then enable shareholders to pay taxes. However, if the CFC legislation applies to a foreign corporation under the FTTA the amount that is subsequently identified as a pro rata distribution, called the apportionment, is considered to have been distributed after the end of the fiscal year of the CFC.
Reduction
Even though the German CFC legislation is not supposed to impose penalties, the requirement to treat apportionments as dividends can be burdensome. Fortunately, the FTTA does provide relief for any CFC that distributes actual profits in a dividend. The apportionment can be reduced by the amount distributed. The reduction cannot result in a credit, however, the reduction can go back to reduce apportionments over the past 4 years.
Exceptions
There are three statutory exclusions under the FTTA. The primary exclusion results from income from a company that a CFC owns at least 10 percent. It is also important to understand that apportionments or CFC distributions are considered to be dividends from the foreign corporation. With this status they are then covered under any of the tax treaties between countries. This can result in a lighter CFC burden when these issues are aimed at countries that Germany has a double taxation agreement (DTA).
Similarities & Differences
In Germany CFC legislation can be applied to corporations controlled by corporations or entities other than actual people as in the United States. Futhermore, Germany’s CFC legislation was originally instituted to deter or prevent corporations from establishing in foreign jurisdictions offering specific tax incentives to non-residents or in tax havens in general. Germany therefore establishes a clause “low-tax” when considering which foreign corporations might be considered under the FTTA.
Germany does go to the same lengths that the subpart F legislation does in identifying or defining a shareholder, who owns 10% or more. The main German test is for control of greater than 50%. While this is dissimilar to the CFC legislation it is similar to the US Foreign Personal holding company tax, which requires as one part of its rules that 50% or more of a corporation with passive income should be owned by 6 or fewer shareholders. German legislation does not specifically detail the flow through identification of controlling interest for shareholders identification. However, similar rules to those of Subpart F are identified through a German administrative circular.
Germany’s minimum tax burden follows the motivations of the FTTA intentions. For CFC’s that fall outside the realm of German taxability a minimum tax of 30% is charged. This would reduce the benefits of treaty shopping for German shareholders looking to tax havens.
The exceptions of the U.S. and German CFC legislation are quite different. The U.S. offers a de minimis rule to help exclude those corporations that might derive CFC income throught the normal course of business. However, this income does not subject the foreign corporation to the CFC application due to the minimal levels of income as compared to all other income of the original corporation. Whereas the German CFC legislation excepts income from corporations that a designated CFC has a holding of 10% or more.
When determining the time of the distribution from a CFC the U.S. considers the tax year of the foreign corporation. The German statutes conversely identifies the distribution, apportionment, to have occurred after the end of the fiscal year of the identified CFC. The strength of the German FTTA is substantially lighter than the U.S. equivalent. The exceptions allowed for dividends per double taxation treaties substantially reduce the effectiveness of the German legislation as compared to the American Subpart F.
The U.S. Subpart F CFC legislation has a far wider scope than the German FTTA. The FPHC Tax as well covers more ground and prevents mitigation through sales of stock or investment in countries in which a DTA is in place.
_________________________
“Summary of U.S. Tax Rules Pertaining to International Corporations, LLCs, Partnerships and Trusts”., 20 May 2001., found at http://incorporateoffshore.org/index1.htm?Offshore/offshore-tax-rules.htm
“Tax Haven Legislation in Germany — A Foreign Transactions Tax Act”., Oppenhoff & Radler., Portner, Rosemarie., 29 May 2001 found at http://themis.wustl.edu/ibll/Tax/Haven.htm“Taxation of Ineternet Companies: Traditional Multinational Rules May Apply.”, Legal SiteCheck., Beck & Arad, LLP. 30 May 2001., found at http://www.legalsitecheck.com/taxation.html
[1] IRC ss958 & 318(a)
[2] IRC ss954(a)(1) and (c)
[3] IRC ss954(a)(2) and (d)
[4] IRC ss954(a)(3) and (e)
[5] IRC ss956(b)(1)
[6] IRC ss954(b)(3)(B)
[7] IRC ss552(a)
[8] IRC ss551(a)
[9] IRC ss553 (a)(2)
[10] IRC ss951(d)
[11] IRC ss1248
The purpose of this paper is to compare the controlled foreign corporation legislation of the United States and Germany. The applicable legislation and codes will be identified and explored and then compared. This comparison will begin with an overall summary of the US controlled foreign corporation legislation followed by a similar summary of the German legislation. Next, the similarities between the two will be covered. Finally, the differences between the two pieces of legislation will be developed.
Background
Controlled foreign corporation (CFC) legislation is designed to prevent the accumulation of profits and income abroad. If corporations operating abroad are allowed to retain earnings indefinitely or at least for extended periods of time, the corporations home country may not ever see the funds flow from the corporation to the shareholders. Thus, taxation could be permanently or indefinitely postponed or avoided.
CFC legislation seeks to target those companies that might attempt to accumulate without distributing this type of income. Once identified the essence of this legislation is to create a liable to tax situation for the designated shareholders of the corporation. Since not all shareholders have controlling or even influencing control over a corporation, often times this legislation seeks to consider only those shareholders that have a significant influence. This type of influence is often measured by a percentage of value ownership or a percentage of profits received.
Furthermore, this legislation generally looks to controlling interest from a rather broad perspective. Ownership or control by related parties is often considered in this determination. The purpose of this consideration is to prevent the dispersal of ownership in form among relatives, business partners or trusts.
Since business is a fluid environment and ownership of a country might change throughtout the year, this legislation often establishes guidelines for the CFC designation. Once a CFC designation has been applied to a company the next phase is to assess what income will fall under the CFC legislation. Certain types of foreign business might do bussiness abroad that could potentially be designated as CFC, yet the purposes are not to avoid taxation or defer taxation to shareholders indefinitily. Therefore CFC legislation seeks to identify the company types that might engage in these transactions and the transaction types themselves.
Summary of US CFC
The United States controlled foreign corporation legislation referred to as Subpart F was the first of its kind. This legislation originally enacted in 1962 was instituted to determine pro rata tax liability on corporations operating with subsidiaries abroad that otherwise might never pay dividends.
In general there are two phases in determining CFC taxation. The first is to determine if a foreign corporation is controlled by a US citizen. If the tests according to statute determine that the foreign corporation is controlled, the next step is to evaluate the income to determine whether or not CFC income types exist and consequently taxed.
Identification
The first step is then to identify any U.S. shareholders of a foreign corporation. For CFC purposes, a U.S. shareholders would be any U.S. person owning at least 10% of the total combined voting power of the outstanding stock. Furthermore, rules of constructive ownership are applied in CFC cases as set forth in section 958 and 318(a)[1]. A stock under these rules is considered to be owned by the stockholder if the stockholder’s, spouse, child or controlled entity, which include partnerships, trusts, or corporations, owns the stock of the foreign corporation. If a foreign corporation is owned by another corporation, the ownership must be followed or flowed back to the actual person owning the stock of the corporation in question.
Subpart F identifies certain corporations that are not to be considered CFC’s under US law. The first covers foreign corporations owned by eleven unrelated U.S. people, who each own 9.09% of the outstanding shares. The second part details a U.S. person how owns 50% of the outstanding stock, and 6 or more other unrelated U.S. persons own equal portions of the remaining 50%.
Finally, CFC designation is contingent upon meeting the above qualifications for a minimum of 30 consecutive days of the tax year in question.
Taxable Income
The second step covers the taxation of the shareholders after the CFC has been designated as such. There are two areas that comprise the majority of the CFC taxation. In general the U.S. shareholders are taxed as they would be if they owned a flow-through type entity such as a partnership.
The first area is Subpart F income is composed of for income types. The first type under 954(a)(1) and (c)[2] includes foreign personal holding company income, passive income from interest, dividends, rents, royalties and gains from sales of securities. The second type of income covered by 954(a)(2) and (d)[3] is foreign base company sales income. The third type covered by 954(a)(3) and (e)[4] is foreign base company services income. The fourth type covers air and sea transportation income.
The second area includes investment earnings of the foreign corporation from investments in property located in the U.S., securities issued from the U.S., or income derived from the licensing or sale of intellectual property used in the U.S. as mentioned in 956(b)(1)[5].
Exceptions
There are two general exception to these rules. The first is the De minimis rule. This rule eliminates the application of CFC taxation for any corporation that has gross foreign base company income less than the smaller of 5% of gross CFC income or $1 million according to 954(b)(3)(B)[6].
Foreign Personal Holding Company Tax (FPHC)
Identification
This in application can be simillar to that of the CFC rules. It will apply to any U.S. shareholders of foreign corporations if 5 or fewer U.S. residents/citizens own at least 50% of the stock and if foreign personal holding company income accounts for at least 60% of the foreign corporation’s income section 552(a)[7]. This rule does not have a de minimis exception similar to that found in the Subpart F CFC legislation.
Taxation
Undistributed income held by the foreign corporation that is considered foreign personal holding company income would be included in the U.S. shareholders ordinary income under section 551(a)[8]. Unlike non-foreign PHC income, which is does not include gains from the sale of stock as passive income(capital gains), FPHC tax would however passive investment income gains from the sale of stock into ordinary income per section 553 (a)(2)[9]. This could result in a higher tax rate than the capital gains tax charged for non-foreign PHC .
Exception
If the CFC rules above apply, they will override the FPHC tax and the CFC legislation will be followed instead[10].
Appreciated Foreign Stock
Under IRC ss 1248, U.S. shareholders are required to treat the gains on CFC stock sales as ordinary income to the extent of undistributed earnings and profits of the CFC[11]. This section prevents shareholders that might otherwise face CFC taxation from selling their CFC stock and only facing a capital gain tax liability from the sale of stock of a foreign corporation with a higher valuation partly resulting from undistributed profits and earnings. This applies to any U.S. person that owns contructively or directly 10% or more of a CFC. Unlike the requirements for CFC reporting, this section will consider a foreign corporation as a CFC, if it met the CFC requirements at any time over the past 5 years, whether or not the company is considered a CFC in the current tax year.
The gain is reported as a dividend to the extent that earnings and profits could have been attributed to the shareholder for the entire period that the stock was held.
Under IRC ss1246, Foreign Investment Company stock sales will be treated the same as in ss1248 above. If a shareholder owns directly or constructively less than 10% and 50% or more of the CFC is owned by U.S. persons and the CFC registered as a management company or primarily engages in trading or investing in securities or commodities, the sale of the stock will be treated as ordinary income as detailed under 1248 rules.
Finally, officers, directors and any shareholders owning a minimum of 10% of a CFC or a FPHC is required to file form 5471 if they are a U.S. citizen.
Summary of Germany CFC
(Preface on citations. The information that I gained relating to CFC legislation in Germany came entirely from the following location:
“Tax Haven Legislation in Germany — A Foreign Transactions Tax Act”., Oppenhoff & Radler., Portner, Rosemarie., 29 May 2001 found at http://themis.wustl.edu/ibll/Tax/Haven.htm
My attempts to find more direct sources were partially thwarted by time requirments and recent access problems with Lexis in late May, and difficulties in downloading Adobe pdf files on my mobile computer. It would appear that a great deal more information is readily available on this topic but in pdf format, which my rather old laptop can not handle.)
German Controlled Foreign Corporation (CFC) was instituted aproximately 10 years after the United States began to reclaim foreign corporation tax revenue. Germany’s CFC legislation was introduced under the Foreign Transactions Tax Act(FTTA) in 1972.
Identification
German CFC legislation applies if one or more people or corporations or entities that are subject to Germany’s unlimited tax liability control a foreign corporation operating in a low-tax area and this corporation generates passive income. Control provisions are met if 50% or more of the share capital or voting rights are held by individuals or legal entities subject to corporate tax in Germany. This control provision would be similar to the U.S. FPHC Tax. Germany also looks to individual shareholders who own more than 10% of a foreign corporation or who who through other persons or entities could exercise substantial control.
German legislation calls for a ‘low-tax’ test as mentioned above. If the income of a controlled foreign corporation does not fall within the countries of management nor residence, the income is subject to apportionment, the portion falling outside of German control subject to a minimum tax burden of 30% on income.
Taxable Income
Under the German provisions CFC income is considered that income of capital investment characterd. This would included income from the possession, preservation or administration of securities, receivables, valuable tender or commodities.
The German CFC is not intended to penalize but instead to promote the distribution of dividends, which would then enable shareholders to pay taxes. However, if the CFC legislation applies to a foreign corporation under the FTTA the amount that is subsequently identified as a pro rata distribution, called the apportionment, is considered to have been distributed after the end of the fiscal year of the CFC.
Reduction
Even though the German CFC legislation is not supposed to impose penalties, the requirement to treat apportionments as dividends can be burdensome. Fortunately, the FTTA does provide relief for any CFC that distributes actual profits in a dividend. The apportionment can be reduced by the amount distributed. The reduction cannot result in a credit, however, the reduction can go back to reduce apportionments over the past 4 years.
Exceptions
There are three statutory exclusions under the FTTA. The primary exclusion results from income from a company that a CFC owns at least 10 percent. It is also important to understand that apportionments or CFC distributions are considered to be dividends from the foreign corporation. With this status they are then covered under any of the tax treaties between countries. This can result in a lighter CFC burden when these issues are aimed at countries that Germany has a double taxation agreement (DTA).
Similarities & Differences
In Germany CFC legislation can be applied to corporations controlled by corporations or entities other than actual people as in the United States. Futhermore, Germany’s CFC legislation was originally instituted to deter or prevent corporations from establishing in foreign jurisdictions offering specific tax incentives to non-residents or in tax havens in general. Germany therefore establishes a clause “low-tax” when considering which foreign corporations might be considered under the FTTA.
Germany does go to the same lengths that the subpart F legislation does in identifying or defining a shareholder, who owns 10% or more. The main German test is for control of greater than 50%. While this is dissimilar to the CFC legislation it is similar to the US Foreign Personal holding company tax, which requires as one part of its rules that 50% or more of a corporation with passive income should be owned by 6 or fewer shareholders. German legislation does not specifically detail the flow through identification of controlling interest for shareholders identification. However, similar rules to those of Subpart F are identified through a German administrative circular.
Germany’s minimum tax burden follows the motivations of the FTTA intentions. For CFC’s that fall outside the realm of German taxability a minimum tax of 30% is charged. This would reduce the benefits of treaty shopping for German shareholders looking to tax havens.
The exceptions of the U.S. and German CFC legislation are quite different. The U.S. offers a de minimis rule to help exclude those corporations that might derive CFC income throught the normal course of business. However, this income does not subject the foreign corporation to the CFC application due to the minimal levels of income as compared to all other income of the original corporation. Whereas the German CFC legislation excepts income from corporations that a designated CFC has a holding of 10% or more.
When determining the time of the distribution from a CFC the U.S. considers the tax year of the foreign corporation. The German statutes conversely identifies the distribution, apportionment, to have occurred after the end of the fiscal year of the identified CFC. The strength of the German FTTA is substantially lighter than the U.S. equivalent. The exceptions allowed for dividends per double taxation treaties substantially reduce the effectiveness of the German legislation as compared to the American Subpart F.
The U.S. Subpart F CFC legislation has a far wider scope than the German FTTA. The FPHC Tax as well covers more ground and prevents mitigation through sales of stock or investment in countries in which a DTA is in place.
_________________________
“Summary of U.S. Tax Rules Pertaining to International Corporations, LLCs, Partnerships and Trusts”., 20 May 2001., found at http://incorporateoffshore.org/index1.htm?Offshore/offshore-tax-rules.htm
“Tax Haven Legislation in Germany — A Foreign Transactions Tax Act”., Oppenhoff & Radler., Portner, Rosemarie., 29 May 2001 found at http://themis.wustl.edu/ibll/Tax/Haven.htm“Taxation of Ineternet Companies: Traditional Multinational Rules May Apply.”, Legal SiteCheck., Beck & Arad, LLP. 30 May 2001., found at http://www.legalsitecheck.com/taxation.html
[1] IRC ss958 & 318(a)
[2] IRC ss954(a)(1) and (c)
[3] IRC ss954(a)(2) and (d)
[4] IRC ss954(a)(3) and (e)
[5] IRC ss956(b)(1)
[6] IRC ss954(b)(3)(B)
[7] IRC ss552(a)
[8] IRC ss551(a)
[9] IRC ss553 (a)(2)
[10] IRC ss951(d)
[11] IRC ss1248
Thursday, May 31, 2001
Comparison of Foreign Money Laundering Statutes: United Kingdom
United Kingdom Money Laundering Statutes
Drug Trafficking Offences Act of 1986[1] (DTOA) This act, which has mostly been repealed, did allow for the confiscation and seizuire of properties in connections with drug trafficking crimes.
Criminal Justice Acto of 1988[2][3]Among other things this act makes it a crime for a financial institution to allow the withdrawal of funds by a person is known or suspected to be engaging in criminal activity without the written consent of a constable. This crime can be punishable with up to 14 years in prison
Crimainal Justice Act of 1993[4] This declared activities criminal which relate to the laundering of proceeds of criminal conduct(non-drug). This act institutes the obligation to a report persons suspected of money laundering activities.
Drug Trafficking Act 1994[5][6] This act replaced The Drug trafficking Offences Act of 1986(see above). This law updated and strengthened money laundering provisions of the previous act.
Comparison
In comparing the money laundering statutes of the Untied States, Canada and the United Kingdom several similarities are apparent. Many of the statutes were set into law initiated by anti-drug policy. The United States Bank Secrecy Act being a partial exception to this. It would also appear that the anti-drug related legislation coincided along a similar timeline that could be a result of these countries with close economic and political ties.
In addition, the Canadian legislation would seem to mimic the United States legislation to include the establishment of an organization, FinTrac, similar in nature and utility to FinCen of the US. Along a similar vein both countries have cash transaction reporting mechanism established for activity over $10,000. However, the Canadian version has not kept pace with the additional tools given their American counterparts regarding Geographical Targeting of smaller transactions.
Other common threads in the various legislation would include the initiation of forfeiture laws first related to drug trafficking and later to non-drug offences and most notably money laundering activities. Another commonality can be found in the various requirements of financial institutions to report suspicious activity at penalty of criminal prosecution.
_________________________________
[1] The Drug Trafficking Offences Act 1986 and the Criminal Justice Act 1988, found at http://members.ozemail.com.au/~themis/churchill/321.htm , 31 May 2001.
[2] Criminal Justice Act of 1988 , c. 33, found at Criminal Justice Act of 1988
[3] Suspicion of Money Laundering: What About My Human Rights?, Friedman, Paul., Baker and McKenzie, March 2001 found at http://www.bakerinfo.com/Publications/Documents/1585_tx.htm
[4] Crimainal Justice Act of 1993, c. 36, found at http://www.hmso.gov.uk/acts/acts1993/Ukpga_19930036_en_1.htm
[5] Drug Trafficking Act 1994, 1994 c. 37 , found at http://www.hmso.gov.uk/acts/acts1994/Ukpga_19940037_en_1.htm
[6] Drug Trafficking Act 1994 , 1994 c. 37,Continued found at http://www.hmso.gov.uk/acts/acts1994/Ukpga_19940037_en_6.htm
Drug Trafficking Offences Act of 1986[1] (DTOA) This act, which has mostly been repealed, did allow for the confiscation and seizuire of properties in connections with drug trafficking crimes.
Criminal Justice Acto of 1988[2][3]Among other things this act makes it a crime for a financial institution to allow the withdrawal of funds by a person is known or suspected to be engaging in criminal activity without the written consent of a constable. This crime can be punishable with up to 14 years in prison
Crimainal Justice Act of 1993[4] This declared activities criminal which relate to the laundering of proceeds of criminal conduct(non-drug). This act institutes the obligation to a report persons suspected of money laundering activities.
Drug Trafficking Act 1994[5][6] This act replaced The Drug trafficking Offences Act of 1986(see above). This law updated and strengthened money laundering provisions of the previous act.
Comparison
In comparing the money laundering statutes of the Untied States, Canada and the United Kingdom several similarities are apparent. Many of the statutes were set into law initiated by anti-drug policy. The United States Bank Secrecy Act being a partial exception to this. It would also appear that the anti-drug related legislation coincided along a similar timeline that could be a result of these countries with close economic and political ties.
In addition, the Canadian legislation would seem to mimic the United States legislation to include the establishment of an organization, FinTrac, similar in nature and utility to FinCen of the US. Along a similar vein both countries have cash transaction reporting mechanism established for activity over $10,000. However, the Canadian version has not kept pace with the additional tools given their American counterparts regarding Geographical Targeting of smaller transactions.
Other common threads in the various legislation would include the initiation of forfeiture laws first related to drug trafficking and later to non-drug offences and most notably money laundering activities. Another commonality can be found in the various requirements of financial institutions to report suspicious activity at penalty of criminal prosecution.
_________________________________
[1] The Drug Trafficking Offences Act 1986 and the Criminal Justice Act 1988, found at http://members.ozemail.com.au/~themis/churchill/321.htm , 31 May 2001.
[2] Criminal Justice Act of 1988 , c. 33, found at Criminal Justice Act of 1988
[3] Suspicion of Money Laundering: What About My Human Rights?, Friedman, Paul., Baker and McKenzie, March 2001 found at http://www.bakerinfo.com/Publications/Documents/1585_tx.htm
[4] Crimainal Justice Act of 1993, c. 36, found at http://www.hmso.gov.uk/acts/acts1993/Ukpga_19930036_en_1.htm
[5] Drug Trafficking Act 1994, 1994 c. 37 , found at http://www.hmso.gov.uk/acts/acts1994/Ukpga_19940037_en_1.htm
[6] Drug Trafficking Act 1994 , 1994 c. 37,Continued found at http://www.hmso.gov.uk/acts/acts1994/Ukpga_19940037_en_6.htm
Comparison of Foreign Money Laundering Statutes: Canada
Canada Money Laundering Statutes
Proceeds of Crime Act (Bill C-61) 1989[1][2] This act criminalized money laundering. This act allowed for the seizuire of property or profit resulting from drug or non-drug related crimes. Similar to the BSA act of the US and subsequent amendments this act required the filing of cash transaction reports for amounts of $10,000 or more.
Seized Property Management Act 1993[3] This act created a mechanism for sharing seized assets amongst the provinces as opposed to the seized items defaulting to the federal government.
Proceeds of Crime Money Laundering Act (Bill C-22)[4] This act replaced the earlier C-61 PCMLA. It created the Financial Transactions and Reports Analysis Center of Canada (FinTrac) to receive transaction reports and analyze international financial movements through cross border currency reporting requirements. Some of the goals of this new act included the following:
· Provide vital tools for law enforcement
· Strike a balance between privacy rights and law enforcement needs
· Minimize compliance costs for financial intermediaries
· Contribute to international efforts to combat money laundering
____________________________
[1]CANADIAN MONEY LAUNDERING LAWS AND PROGRAMS, Enforcement Efforts to Deter Money-Laundering found at http://www.crimes-of-persuasion.com/Criminals/law_efforts.htm
[2] Proceeds of Crime Act (Bill C-61) 1989, Proceeds of Crime Unit, found at http://cpinet.org/pservices/Solgen/backgrounder/Pcu-bkg5.htm
[3] Seized Property Management Act 1993, Proceeds of Crime Unit, found at http://cpinet.org/pservices/Solgen/backgrounder/Pcu-bkg5.htm
[4] Proceeds of Crime Money Laundering Act (Bill C-22) Finance CanadaProceeds of Crime (Money Laundering) Regulations - Consultation Paper: 1, 31 May 2001, found at http://www.fin.gc.ca/Monlaun/monlaun1_e.html
Proceeds of Crime Act (Bill C-61) 1989[1][2] This act criminalized money laundering. This act allowed for the seizuire of property or profit resulting from drug or non-drug related crimes. Similar to the BSA act of the US and subsequent amendments this act required the filing of cash transaction reports for amounts of $10,000 or more.
Seized Property Management Act 1993[3] This act created a mechanism for sharing seized assets amongst the provinces as opposed to the seized items defaulting to the federal government.
Proceeds of Crime Money Laundering Act (Bill C-22)[4] This act replaced the earlier C-61 PCMLA. It created the Financial Transactions and Reports Analysis Center of Canada (FinTrac) to receive transaction reports and analyze international financial movements through cross border currency reporting requirements. Some of the goals of this new act included the following:
· Provide vital tools for law enforcement
· Strike a balance between privacy rights and law enforcement needs
· Minimize compliance costs for financial intermediaries
· Contribute to international efforts to combat money laundering
____________________________
[1]CANADIAN MONEY LAUNDERING LAWS AND PROGRAMS, Enforcement Efforts to Deter Money-Laundering found at http://www.crimes-of-persuasion.com/Criminals/law_efforts.htm
[2] Proceeds of Crime Act (Bill C-61) 1989, Proceeds of Crime Unit, found at http://cpinet.org/pservices/Solgen/backgrounder/Pcu-bkg5.htm
[3] Seized Property Management Act 1993, Proceeds of Crime Unit, found at http://cpinet.org/pservices/Solgen/backgrounder/Pcu-bkg5.htm
[4] Proceeds of Crime Money Laundering Act (Bill C-22) Finance CanadaProceeds of Crime (Money Laundering) Regulations - Consultation Paper: 1, 31 May 2001, found at http://www.fin.gc.ca/Monlaun/monlaun1_e.html
Comparison Foreign Money Laundering Statutes: United States
United States Money Laundering Statutes
Section 2532 of the Crime Control Act of 1990[6] First, this act gave the Office of the Comptroller of the Currency (OCC) the authority to request assistance of a foreign banking authority in conducting and investigation, examination or enforcement action. Second, this gave the OCC the power to accommodate similar request in the reverse. The purpose of these exchanges is to allow the investigating body the opportunity to determine if a person has, is or will violate any banking or currency transaction laws or regulations.
Section 206 of The Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991[7] This act allows the OCC to disclose to foreign bank regulators or supervisory authorities information that the OCC may discover.
The Housing and Community Development Act of 1992(Annunzio-Wylie Anti-Money Laundering Act)[8] In addition to allowing regulators to close or seize institutions found guilty of money laundering activities. It also permitted the treasury to require financial institutions and their employees to report suspicious transactions relevant to possible violation of law or regulation. Plus it required financial institutions to adopt anti-money laundering programs.
Money Laundering Suppression Act of 1994[9] This act aimed to reduce and consolidate destination of Currency Transaction reports and it required certain “money transmitting businesses” to register with the Treasury.
________________________________
[1] United States Code ,TITLE 18 - CRIMES AND CRIMINAL PROCEDURE , PART I – CRIMES, CHAPTER 95 - RACKETEERING
[2] United States Code ,TITLE 18 - CRIMES AND CRIMINAL PROCEDURE , PART I – CRIMES, CHAPTER 95 - RACKETEERING , Sec. 1957. Engaging in monetary transactions in property derived from specified unlawful activity., found at http://www4.law.cornell.edu/uscode/18/1957.html
[3] The Bank Secrecy Act of 1970, Comptroller of the Currency Administrator of National Banks found at http://www.occ.treas.gov/launder/bsao.htm
[4] The Money Laundering Control Act of 1986, Comptroller of the Currency Administrator of National Banks found at http://www.occ.treas.gov/launder/mlca.htm
[5] The Anti-Drug Abuse Act of 1988, Comptroller of the Currency Administrator of National Banks found at http://www.occ.treas.gov/launder/adaa.htm
[6] Section 2532 of the Crime Control Act of 1990, Comptroller of the Currency Administrator of National Banks found at http://www.occ.treas.gov/launder/sotc.htm
[7] Section 206 of The Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991, Comptroller of the Currency Administrator of National Banks found at http://www.occ.treas.gov/launder/sotf.htm
[8] The Housing and Community Development Act of 1992, Comptroller of the Currency Administrator of National Banks found at http://www.occ.treas.gov/launder/hacd.htm
[9] Money Laundering: United States' Policy Decisions, Bitkower, Amy., 31 May 2001, found at http://members.aol.com/AJBRJJ/decide.html
The appropriate legal codes relating to money laundering include Title 18 U.S.C. 1956[1] and
Title 18 U.S.C.1957[2].
The Bank Secrecy Act of 1970(BSA)[3] This act is considered to be one of the initial legislative measures against money laundering in the US. Primarily targeted at tax fraud related activities, this act was also designed to create a paper trail for large currency transactions (Currency Transaction Report). Noncompliance could result in criminal and civil penalties.
The Money Laundering Control Act of 1986(MLCA)[4] This act officially made money laundering a crime.
It created three offenses for:
- Knowingly helping launder money from criminal activity.
- Knowingly engaging (including by being willfully blind) in a transaction of more than $10,000 that involves property from criminal activity.
- Structuring transactions to avoid Bank Secrecy Act (BSA) reporting.
Section 2532 of the Crime Control Act of 1990[6] First, this act gave the Office of the Comptroller of the Currency (OCC) the authority to request assistance of a foreign banking authority in conducting and investigation, examination or enforcement action. Second, this gave the OCC the power to accommodate similar request in the reverse. The purpose of these exchanges is to allow the investigating body the opportunity to determine if a person has, is or will violate any banking or currency transaction laws or regulations.
Section 206 of The Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991[7] This act allows the OCC to disclose to foreign bank regulators or supervisory authorities information that the OCC may discover.
The Housing and Community Development Act of 1992(Annunzio-Wylie Anti-Money Laundering Act)[8] In addition to allowing regulators to close or seize institutions found guilty of money laundering activities. It also permitted the treasury to require financial institutions and their employees to report suspicious transactions relevant to possible violation of law or regulation. Plus it required financial institutions to adopt anti-money laundering programs.
Money Laundering Suppression Act of 1994[9] This act aimed to reduce and consolidate destination of Currency Transaction reports and it required certain “money transmitting businesses” to register with the Treasury.
________________________________
[1] United States Code ,TITLE 18 - CRIMES AND CRIMINAL PROCEDURE , PART I – CRIMES, CHAPTER 95 - RACKETEERING
[2] United States Code ,TITLE 18 - CRIMES AND CRIMINAL PROCEDURE , PART I – CRIMES, CHAPTER 95 - RACKETEERING , Sec. 1957. Engaging in monetary transactions in property derived from specified unlawful activity., found at http://www4.law.cornell.edu/uscode/18/1957.html
[3] The Bank Secrecy Act of 1970, Comptroller of the Currency Administrator of National Banks found at http://www.occ.treas.gov/launder/bsao.htm
[4] The Money Laundering Control Act of 1986, Comptroller of the Currency Administrator of National Banks found at http://www.occ.treas.gov/launder/mlca.htm
[5] The Anti-Drug Abuse Act of 1988, Comptroller of the Currency Administrator of National Banks found at http://www.occ.treas.gov/launder/adaa.htm
[6] Section 2532 of the Crime Control Act of 1990, Comptroller of the Currency Administrator of National Banks found at http://www.occ.treas.gov/launder/sotc.htm
[7] Section 206 of The Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991, Comptroller of the Currency Administrator of National Banks found at http://www.occ.treas.gov/launder/sotf.htm
[8] The Housing and Community Development Act of 1992, Comptroller of the Currency Administrator of National Banks found at http://www.occ.treas.gov/launder/hacd.htm
[9] Money Laundering: United States' Policy Decisions, Bitkower, Amy., 31 May 2001, found at http://members.aol.com/AJBRJJ/decide.html
OECD Attacks on Harmful Tax Competition and Tax Havens
OECD Attacks on Harmful Tax Competition and Tax Havens
Issues
Over recent years the OECD and member countries have been taking aim at Tax Havens and areas that engage in harmful tax competition. To understand what the OECD is concerned about it is first necessary to understand what is considered harmful tax competition and a tax haven. Mr. Jeffrey Owens, Head of Fiscal Affairs for the OECD, in his article titled Harmful Tax Practices[1] states, “The main factors for being a tax haven are a) no or only nominal effective tax rates; b) lack of effective exchange of information; c) lack of transparency; and d) absence of a requirement of substantial activities.” Mr. Owens goes on to identify the factors of a harmful preferential tax regime as having the following, “a) no or low effective tax rates; b) ‘ring fencing’ of regimes; c) lack of transparency; and d) lack of effective exchange of information.”
In 1998 the OECD Harmful Tax Competition report created a forum on Harmful Tax Practices. It set guidelines for dealing with harmful or preferential tax regimes in OECD member countries. The report adopted a series of recommendations(40 Recommendations) to fight these harmful practices. Also, due to the geographic mobility of financial and other service related industries, the OECD is focusing on these areas to insure that tax havens and harmful regimes do not engage in a race to the bottom to attract this growing sector of the worlds economy.
In a different article titled Curbing Harmful Tax Practices[2] by Jeffrey Owens, he identifies several issues that spurred on this report and subsequent OECD action. The first issue concerns the rapid spread of harmful tax regimes. He elaborates the problem with this thread stems from the purpose of this spread. According to Mr. Owens the purpose of the spread occurs due to, “predatory policies whose main purpose is to siphon off part of another country’s tax base.”
Another important issue regards convincing business and political groups within each country that a increasing tax competition is not necessarily beneficial. The OECD argues that in simplistic terms the taxpayer might consider tax competition a good choice since conceivably tax rates will decrease. In actuality this competition increases compliance costs, thus reducing tax savings. Instead of tax revenues moving to the government, substantial portions are diverted to the service industries for work that might be unnecessary given a less complex tax code.
Furthermore, increased complexity and compliance costs usually result in an increase in tax evasion and reduced tax revenue collections, which beget a whole host of other problems for governments and society. Abhijit Ghosh, Senior Tax Manager at PricewaterhouseCoopers Services Pte Ltd, in the article No Country Wins in Harmful Tax Competition[3], puts it this way in a discussion on tax competition, “It may also result in economic inefficiencies. For example, if an organization makes an investment in a country only because of certain tax incentives offered by that country, the resources are neither used in the best possible location nor in the most efficient way from an economic standpoint.”
Of course it may appear easy for the OECD backed by the G-8 to complain about tax competition. Opponents claim that the OECD is attempting to make it less attractive for investors to operate in smaller less developed nations that might offer these tax incentives. The issue often focuses around the argument that multinationals are taking advantage of smaller nations as opposed to the idea that larger nations are making it more difficult for these smaller nations to compete for the business of multinationals. Plus, many small nations that the OECD considers tax havens or engaged in harmful preferential tax regimes rely a great deal on the business generated from these multinationals. If this source of income is diverted back to G-8 or OECD countries, these G-8 countries may find themselves supporting through financial aid and incentives these same small countries that are financially weaker and less stable politically. A report by Mike Godfrey of Tax-News.com, refers to the concept of ‘Fiscal Colonialism’. He states in an article titled Is The US Treasury Department Poised To Distance Itself From OECD Blacklist?, “they(OECD) will not find it so easy to continue with international policies designed to protect the tax base in rich countries through a program of what has been called 'fiscal colonialism' aimed at discomfiting the offshore tax havens.”[4]
History
1989 FATF formed to combat money laundering. 1990 FATF publishes 40 recommendations on money laundering. Nov 1997 EU outlines plan to fight harmful tax competition. This plan included a business taxation code of conduct, minimum withholding tax on capital income provisions, and an elimination on withholding taxes on interest and royalty payments between companies across internal EU borders. [5] April 1998 The OECD published Harmful Tax Competition: An emerging Global Issue, otherwise known as the “1998 report.” May 1998 The OECD endorsed the report Harmful Tax Competition: An emerging Global Issue.
The Report created a Forum on Harmful Tax Practices,
set forth Guidelines for Dealing with Harmful Preferential Regimes in Member Countries,
adopted a series of Recommendations1 for combating harmful tax practices 7 May 1998 G-7 Outlines plan to attack harmful tax competition. Identifies four areas for attack 1) information sharing of tax information 2) Encourage the reporting of suspicious movements of assets to address money laundering concerns 3) design prototypes for standardized exchange of information 4) authorize law enforcement officials to utilize suspicion transaction reports.[6] 19 Nov 1998 Edwards Report published. States that British territories of Guernsey, Jersey and the Isle of Man with offshore financial centers were well regulated.[7] 19 June 2000 Six jurisdictions comprised of Bermuda, Cayman Islands, Cyprus, Malta, Mauritius, and San Marino made commitments ") to eliminate harmful tax practices by the end of 2005. These commitments were known as advance commitments and they covered the international standards for exchange of information, fair tax competition and transparency. 26 June 2000 The OECD issued a report titled, Towards Global Tax Co-operation, which identified a list of jurisdictions considered tax havens and OECD member countries with preferential regimes. This list is sometimes referred to as a ‘black list’ of 35 low tax or tax haven countries that would not agree to cooperate with the OECD. 18 October 2000 OECD issued a statement that 23 of the 35 blacklisted jurisdictions had offered some expression of a cooperative intent.[8] 10 January 2001 OECD created a joint working group comprised of representatives from OECD countries, Caricom, the Commonwealth, and the Pacific Island Forum. This group will work to find an acceptable political process for the countries involved make commitments on the principles of transparency, non-discrimination and exchange of information on tax matters. 7 February 2001 Panama refuses to sign commitment with OECD.[9] 19 February 2001 Caricom approves plan to deal with OECD pressures including seeking legal counsel to address concerns with WTO.[10]
_____________________________________________
[1] Harmful Tax Practices. Jeffrey Owens, This article can be found on the web at www.oecd.org/daf/fa/harm_tax/harmtax.htm
[2] Curbing harmful tax practices. Jeffrey Owens. This article can be found on the web at www.oecd.org/publications/observer/215/e-owens.htm
[3] No Country Wins in Harmful Tax Competition. Abhijit Ghosh, Business Times found on the web at www.pwcglobal.com/extweb/ncinthenews.nsf/DocID/D85BBCE272CE73F28525688E00214E8F
[4] Is The US Treasury Department Poised To Distance Itself From OECD Blacklist?, Godrey, Mike. Tax-News.com26 Feb 2001; found at www.tax-news.com/asp/story/story.asp?storyname=2404
[5] Nations to Fight "Harmful" Tax Competition. PwC International Tax Group, 4 June 1998; found at www.pwcglobal.com/extweb/indissue.nsf/DocID/5568A3873608666385256708005477C7
[6] Nations to Fight "Harmful" Tax Competition. PwC International Tax Group, 4 June 1998; found at www.pwcglobal.com/extweb/indissue.nsf/DocID/5568A3873608666385256708005477C7
[7] Offshore Pitfalls. Roper, P & Ware, J, Butterworths 2000 found at Information Center - Memorandum - Tax Havens. , www.manageme.com/info/offshore/20000830_taxhavens.html
[8] New Coalition Strikes Back at OECD Tax Haven Campaign. Goulder, Robert., Tax Analysts, December 2, 2000 (2000 WTD 234-2) found at www.freedomandprosperity.org/Articles/articles.shtml
[9] No to blank check demanded by world powers: PANAMA WILL NOT SIGN COMMITMENT WITH OECD. Berrocal R., Rafael E., El Panamá América., 7 Feb 2001 found at http://www.freedomandprosperity.org/Articles/epa02-07-01/epa02-07-01.shtml
[10] CARICOM approves action plan for OECD'S campaign. 19 Feb 2001, found at http://www.freedomandprosperity.org/Articles/cana02-19-01/cana02-19-01.shtml
Issues
Over recent years the OECD and member countries have been taking aim at Tax Havens and areas that engage in harmful tax competition. To understand what the OECD is concerned about it is first necessary to understand what is considered harmful tax competition and a tax haven. Mr. Jeffrey Owens, Head of Fiscal Affairs for the OECD, in his article titled Harmful Tax Practices[1] states, “The main factors for being a tax haven are a) no or only nominal effective tax rates; b) lack of effective exchange of information; c) lack of transparency; and d) absence of a requirement of substantial activities.” Mr. Owens goes on to identify the factors of a harmful preferential tax regime as having the following, “a) no or low effective tax rates; b) ‘ring fencing’ of regimes; c) lack of transparency; and d) lack of effective exchange of information.”
In 1998 the OECD Harmful Tax Competition report created a forum on Harmful Tax Practices. It set guidelines for dealing with harmful or preferential tax regimes in OECD member countries. The report adopted a series of recommendations(40 Recommendations) to fight these harmful practices. Also, due to the geographic mobility of financial and other service related industries, the OECD is focusing on these areas to insure that tax havens and harmful regimes do not engage in a race to the bottom to attract this growing sector of the worlds economy.
In a different article titled Curbing Harmful Tax Practices[2] by Jeffrey Owens, he identifies several issues that spurred on this report and subsequent OECD action. The first issue concerns the rapid spread of harmful tax regimes. He elaborates the problem with this thread stems from the purpose of this spread. According to Mr. Owens the purpose of the spread occurs due to, “predatory policies whose main purpose is to siphon off part of another country’s tax base.”
Another important issue regards convincing business and political groups within each country that a increasing tax competition is not necessarily beneficial. The OECD argues that in simplistic terms the taxpayer might consider tax competition a good choice since conceivably tax rates will decrease. In actuality this competition increases compliance costs, thus reducing tax savings. Instead of tax revenues moving to the government, substantial portions are diverted to the service industries for work that might be unnecessary given a less complex tax code.
Furthermore, increased complexity and compliance costs usually result in an increase in tax evasion and reduced tax revenue collections, which beget a whole host of other problems for governments and society. Abhijit Ghosh, Senior Tax Manager at PricewaterhouseCoopers Services Pte Ltd, in the article No Country Wins in Harmful Tax Competition[3], puts it this way in a discussion on tax competition, “It may also result in economic inefficiencies. For example, if an organization makes an investment in a country only because of certain tax incentives offered by that country, the resources are neither used in the best possible location nor in the most efficient way from an economic standpoint.”
Of course it may appear easy for the OECD backed by the G-8 to complain about tax competition. Opponents claim that the OECD is attempting to make it less attractive for investors to operate in smaller less developed nations that might offer these tax incentives. The issue often focuses around the argument that multinationals are taking advantage of smaller nations as opposed to the idea that larger nations are making it more difficult for these smaller nations to compete for the business of multinationals. Plus, many small nations that the OECD considers tax havens or engaged in harmful preferential tax regimes rely a great deal on the business generated from these multinationals. If this source of income is diverted back to G-8 or OECD countries, these G-8 countries may find themselves supporting through financial aid and incentives these same small countries that are financially weaker and less stable politically. A report by Mike Godfrey of Tax-News.com, refers to the concept of ‘Fiscal Colonialism’. He states in an article titled Is The US Treasury Department Poised To Distance Itself From OECD Blacklist?, “they(OECD) will not find it so easy to continue with international policies designed to protect the tax base in rich countries through a program of what has been called 'fiscal colonialism' aimed at discomfiting the offshore tax havens.”[4]
History
The Report created a Forum on Harmful Tax Practices,
set forth Guidelines for Dealing with Harmful Preferential Regimes in Member Countries,
adopted a series of Recommendations1 for combating harmful tax practices
_____________________________________________
[1] Harmful Tax Practices. Jeffrey Owens, This article can be found on the web at www.oecd.org/daf/fa/harm_tax/harmtax.htm
[2] Curbing harmful tax practices. Jeffrey Owens. This article can be found on the web at www.oecd.org/publications/observer/215/e-owens.htm
[3] No Country Wins in Harmful Tax Competition. Abhijit Ghosh, Business Times found on the web at www.pwcglobal.com/extweb/ncinthenews.nsf/DocID/D85BBCE272CE73F28525688E00214E8F
[4] Is The US Treasury Department Poised To Distance Itself From OECD Blacklist?, Godrey, Mike. Tax-News.com26 Feb 2001; found at www.tax-news.com/asp/story/story.asp?storyname=2404
[5] Nations to Fight "Harmful" Tax Competition. PwC International Tax Group, 4 June 1998; found at www.pwcglobal.com/extweb/indissue.nsf/DocID/5568A3873608666385256708005477C7
[6] Nations to Fight "Harmful" Tax Competition. PwC International Tax Group, 4 June 1998; found at www.pwcglobal.com/extweb/indissue.nsf/DocID/5568A3873608666385256708005477C7
[7] Offshore Pitfalls. Roper, P & Ware, J, Butterworths 2000 found at Information Center - Memorandum - Tax Havens. , www.manageme.com/info/offshore/20000830_taxhavens.html
[8] New Coalition Strikes Back at OECD Tax Haven Campaign. Goulder, Robert., Tax Analysts, December 2, 2000 (2000 WTD 234-2) found at www.freedomandprosperity.org/Articles/articles.shtml
[9] No to blank check demanded by world powers: PANAMA WILL NOT SIGN COMMITMENT WITH OECD. Berrocal R., Rafael E., El Panamá América., 7 Feb 2001 found at http://www.freedomandprosperity.org/Articles/epa02-07-01/epa02-07-01.shtml
[10] CARICOM approves action plan for OECD'S campaign. 19 Feb 2001, found at http://www.freedomandprosperity.org/Articles/cana02-19-01/cana02-19-01.shtml
Friday, April 06, 2001
You get what you pay and it better cost less soon!
You get what you pay for and it better cost less soon or I’d pay an 80% tax rate to stay young and live forever.
As you mention in your tutorial taxpayers pay a tax for the service the government provides. This service can come in many forms. The type of tax and how much tax we are willing to pay/tolerate depends on the degree of return we receive from the government for our tax dollars. A group of people might be willing to accept the imposition of a “sin” tax or punishment, if they perceive that they are benefiting. Maybe as a whole they feel they need help curbing the appetites of their society. Maybe they are hoping to benefit as a society from intangibles like reduced health care cost related to lower consumption of cigarettes.
The funny thing about tax is that once you have it its hard to dump it. As people become accustomed to the entitlement they receive from the government in exchange for their tax dollars, they often don’t wish to forego this entitlement even for the benefit of more money. In this age of efficiency people have come to expect that even despite inflation, things and services should be able to be created and achieved for a lower cost. They expect their taxes to go down and their benefits to remain the same.
Governments that charge too much for too little are overthrown or avoided
I also believe that people will go where the deal is. If they can’t then they will do everything in their power to make a new deal. Theories relating to the ‘Social Contract’ and the purpose of ‘Revolution’ do not answer all questions, but they do explain some things on the surface. Other countries and mobile taxpayers will avoid a country with a rate of tax that they perceive to be to high in relation to the benefits proffered. If they can’t avoid the tax, the social angst generated will eventually drive for change. This change can be peaceful or violent, but it is the exception rather than the rule that the status quo of a system out of balance will endure.
Governments that charge to little for too many services fail due to lack of funds to support an onslaught of attention.
This is the flip side of my last point. A government in this situation will not be able to sustain itself and will drown in the volume of people that wish to partake of their benefits. Certain nations with large quantities of natural resources may feel exempt from this rule, but in reality they are taxing their people by spending the resources that the nation as a whole owns. In reality they may charge a low monetary tax rate but their ‘real’ (dollars and barrels of oil for example) are probably quite high. Many countries today are trying to come to terms with the increase in emigrants. This natural balancing of the world population is a physical example of the worlds population moving to an area supported with one form of benefit or another. While diversity is extremely important and vital to the success of any nation, there must come a point of saturation when the economy of the state can not sustain the growth.
One final note
I would hazard to offer that many people might be willing to pay a higher possibly unlimited tax rate for the right benefits from their government. This may be contrary to the entrepreneurial attitude that many capitalists feel is integral to society's evolution. However, this attitude is not shared or practiced by all. I for one might be willing to forego a substantial portion of my income in return for perpetual youth and happiness (all sorts of worst case exceptions and scenarios could be proffered here). Others might choose to exchange their income in return for certain physical substances that create a feeling of euphoria. Some groups might be willing to live a Spartan lifestyle in exchange for job security and perceived equality. All these deals proffered by the government (substitute your evil deity of choice here) are interventionistic at the extreme, but it is the proposition of ideals and the compromises for these ideals that sometimes lead society awry. Of course who knows maybe one day or in some dimension a government will get it right and be able to offer to everyone their hearts desire for a nominal amount and still prosper and progress.
As you mention in your tutorial taxpayers pay a tax for the service the government provides. This service can come in many forms. The type of tax and how much tax we are willing to pay/tolerate depends on the degree of return we receive from the government for our tax dollars. A group of people might be willing to accept the imposition of a “sin” tax or punishment, if they perceive that they are benefiting. Maybe as a whole they feel they need help curbing the appetites of their society. Maybe they are hoping to benefit as a society from intangibles like reduced health care cost related to lower consumption of cigarettes.
The funny thing about tax is that once you have it its hard to dump it. As people become accustomed to the entitlement they receive from the government in exchange for their tax dollars, they often don’t wish to forego this entitlement even for the benefit of more money. In this age of efficiency people have come to expect that even despite inflation, things and services should be able to be created and achieved for a lower cost. They expect their taxes to go down and their benefits to remain the same.
Governments that charge too much for too little are overthrown or avoided
I also believe that people will go where the deal is. If they can’t then they will do everything in their power to make a new deal. Theories relating to the ‘Social Contract’ and the purpose of ‘Revolution’ do not answer all questions, but they do explain some things on the surface. Other countries and mobile taxpayers will avoid a country with a rate of tax that they perceive to be to high in relation to the benefits proffered. If they can’t avoid the tax, the social angst generated will eventually drive for change. This change can be peaceful or violent, but it is the exception rather than the rule that the status quo of a system out of balance will endure.
Governments that charge to little for too many services fail due to lack of funds to support an onslaught of attention.
This is the flip side of my last point. A government in this situation will not be able to sustain itself and will drown in the volume of people that wish to partake of their benefits. Certain nations with large quantities of natural resources may feel exempt from this rule, but in reality they are taxing their people by spending the resources that the nation as a whole owns. In reality they may charge a low monetary tax rate but their ‘real’ (dollars and barrels of oil for example) are probably quite high. Many countries today are trying to come to terms with the increase in emigrants. This natural balancing of the world population is a physical example of the worlds population moving to an area supported with one form of benefit or another. While diversity is extremely important and vital to the success of any nation, there must come a point of saturation when the economy of the state can not sustain the growth.
One final note
I would hazard to offer that many people might be willing to pay a higher possibly unlimited tax rate for the right benefits from their government. This may be contrary to the entrepreneurial attitude that many capitalists feel is integral to society's evolution. However, this attitude is not shared or practiced by all. I for one might be willing to forego a substantial portion of my income in return for perpetual youth and happiness (all sorts of worst case exceptions and scenarios could be proffered here). Others might choose to exchange their income in return for certain physical substances that create a feeling of euphoria. Some groups might be willing to live a Spartan lifestyle in exchange for job security and perceived equality. All these deals proffered by the government (substitute your evil deity of choice here) are interventionistic at the extreme, but it is the proposition of ideals and the compromises for these ideals that sometimes lead society awry. Of course who knows maybe one day or in some dimension a government will get it right and be able to offer to everyone their hearts desire for a nominal amount and still prosper and progress.
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