Tax havens - sanctions and defensive measures

There have been various comments in different media from TJN about possible sanctions that could be applied to the tax haven problem. Richard Murphy did an overview of some of the broad issues here (with some Jersey-focused ones here - and for those interested in Jersey, note our Jersey background blog yesterday).

This blog is just a reminder of some of the things that have been considered before. It does not constitute a definitive list of sanctions.

This, below, is a list of "Possible Defensive Measures" outlined by the OECD in its 2004 Progress Report in its "Project on Harmful Tax Practices." Forgive the dense legalese. Note that the OECD proposals ought to be considered the lowest common denominator in terms of sanctions - although it has had good ideas it has also, for years, been feeble (largely neutered) in terms of actually cracking down on the problem. So if even the OECD can propose these, they should be considered an absolute minimum. Note also that the OECD is a rich countries' club and it is not really mandated to defend the interests of developing countries.

Beneath that, we look at two key elements of the Stop Tax Haven Abuse Act (which we analyse in more detail here.)

OECD 2004: paragraph 30

• The use of provisions having the effect of disallowing any deduction, exemption, credit or other allowance in relation to all substantial payments made to persons located in countries or jurisdictions engaged in harmful tax practices except where the taxpayer is able to establish satisfactorily that such payment do not exceed an arm’s length amount and correspond to bona fide transactions [with an unrelated party].
  
  
• The use of thin capitalization provisions restricting the deduction of interest payments to persons located in jurisdictions engaged in harmful tax practices.
  

• The use of legislative or administrative provisions having the effect of requiring any resident who makes a substantial payment to a person located in a country or jurisdiction engaged in a harmful tax practice, enters into a transaction with such a person, or owns any interest in such a person to report that payment, transaction or ownership to the tax authorities, such requirement being supported by substantial penalties for inaccurate or non-reporting of such payments.
  
  
• The use of legislative provisions allowing the taxation of residents on amounts corresponding to income that benefits from harmful tax practices that is earned by entities established abroad in which these residents have an interest and that would otherwise be subject to substantially lower or deferred taxes.
  
  
• The denial of the exemption method or modification of the credit method. Where a country levies no or nominal tax on most of the income arising therein because of the existence of harmful tax practices, it may not be appropriate for such income to receive an exemption otherwise intended to relieve double taxation. Member countries that permit foreign tax credits may wish to modify those rules to prevent the pooling of income benefits from harmful tax practices with other income. In addition, these countries may wish to implement systems to verify the amounts claimed actually constitute creditable taxes.
  
  
• The use of legislative provisions ensuring that withholding taxes at a minimum rate apply to all payment of dividends, interest and royalties made to beneficial owners benefiting from harmful tax practices.
  
  
• The use of provisions for special audit and enforcement programs to co-ordinate enforcement activities involving entities and transactions related to countries and jurisdictions engaged in harmful tax practices.
  
  
• Terminating, limiting and not entering into tax treaties. Participating countries could adopt, and make public, a policy of not entering into tax conventions with countries and jurisdictions involved in harmful tax practices. Those that are parties to conventions with such countries and jurisdictions may wish to take appropriate measures to ensure that these condition are limited or terminated. Alternatively, participating countries could consider that all existing or proposed treaties with a country or jurisdiction engaging in harmful tax practices contain a limitation-of benefits clause that would prevent the benefits of the treaty from being claimed by third-country residents who had no real connection with the country or jurisdiction. With respect to terminating an existing treaty, it is recognized that such action has important implications which go beyond the revenue impact of the treaty.

(The OECD had a more limited series of defensive measures in its 2001 progress report.)

Stop Tax Haven Abuse Act

The U.S. Stop Tax Haven Abuse Act would (amongst other provisions) establish two rebuttable presumptions for U.S. persons:

1. a U.S. person (other than an entity with shares regularly traded on an established securities market) (“publicly traded entity”) who directly or indirectly formed, transferred assets to, was a beneficiary of, or received money or property or the use thereof, from an entity, including a trust, corporation, limited liability company, partnership or foundation (other than a publicly traded entity) formed, domiciled, or operating in an offshore secrecy jurisdiction, is presumed to exercise control over the entity.
   
   
2. if a U.S. person (other than a publicly traded entity) received any amount or thing of value directly or indirectly from an account or entity an offshore secrecy jurisdiction, the amount or thing of value will be presumed to be income in the year of receipt; and (2) any amount or thing of value paid or transferred by or on behalf of a U.S. person (other than a publicly traded entity) directly or indirectly to an account or entity in any offshore secrecy jurisdiction is presumed to be previously unreported income of the U.S. person taxable in the year of transfer.