1. What are the core ideas of the TAXPARENT solution?
2. What is the size of the elephant?
3. How would the global effective corporate tax ratio be determined?
4. Is the TAXPARENT solution compatible with…
5. What are the benefits which the TAXPARENT solution is supposed to bring?
Corporate anonymity is an anomaly allowing to perform immoral or criminal acts with impunity. Corporate anonymity emerged as an inevitable by-product of stock-exchanges when physical certificates were still traded.* Since the moment when financial markets became fully electronic, physical share certificates and the ensuing corporate anonymity lost their legitimate economic raison d’être. Today the only reason of existence is that they serve as a means for concealing tax evasion, money laundering and corruption. Corporate anonymity is thus an outstanding example of market fundamentalism threatening the long-term viability of free markets as such.
* Since trading with registered certificated securities containing the name of their holder (and the necessity to add the on the security certificate the name of the new holder) was impossible, “anonymous” bearer shares transferred only be physical handover were created in order ensure proper functioning of the early stock-markets.
The TAXPARENT solution pursues a triple objective: first, to increase transparency of corporate structures of multinational companies; second, to disincentive profit shifting to tax havens; third, to enhance competition on the market for public funds.
Companies using the privilege of corporate anonymity have to make a choice: go transparent or make sure that they pay a fair share to the society. In concrete terms, this would mean that the company in question could choose to:
– go voluntarily transparent and disclose its corporate structure up to the final beneficial owner(s) and its global effective corporate tax ratio to the general public;
– not to disclose its corporate structure and GECTR to the public, but be able to show to authorities upon request its corporate structure and prove that their GECTR in the previous fiscal year was above 11,25%, or
– not to disclose its corporate structure and GECTR to the public and sustain the forced disclosure of the corporate structure to the general public and of the GECTR for the previous fiscal year below 11,25% to the general public; or
– pay heavy fines for refusing to disclose the corporate structure and/or the GECTR to the authorities.
In line with latest results of behavioural science, regulations should not only prescribe or disincentivise, but also help achieve positive results. Therefore companies need to have, in addition, a positive motivation to be TAXPARENT – that is to voluntarily disclose their corporate structure and pay more than 11,25% in corporate tax. Rules alone will not stop bad behaviour. Thus, group of companies who would be voluntarily transparent could benefit from the possibility to use:
– basic EU TAXPARENT mark if they showed that their GECTR was at least 11,25%; or
– an upgraded NATIONAL TAXPARENT mark if they showed that their GECTR equals or is higher, for example, higher than the national statutory corporate tax rate.*
* In this respect, individual Member States could set the level of GECTR at lower level than their national statutory corporate tax rate, however, not below the EU level of 11,25%; also they could add additional requirements conditioning the use of the NATIONAL TAXPARENT mark, such as the delivery of the country-by-country report.
If the TAXPARENT solution was applied, it can be expected that:
– companies selling products to final consumers (B-C) would try to be voluntarily transparent and have the global effective corporate tax ratio at or slightly above the threshold allowing them to use the EU TAXPARENT mark (whether at the minimum EU level or at the higher nationally set level – allowing the use of EU TAXPARENT mark with or without the additional national sign, would depend on the requirements set by individual Member States) since the use of such mark would improve their reputation in the eyes of consumers;
– companies selling their products to other businesses (B-B) would not be voluntarily transparent since the use of the EU TAXPARENT mark (whether with the additional national sign or without it) would have less added value in improving their image with their clients, but would make sure that their GECTR is at or slightly above the minimum level 11,25% in order to avoid TAXPARENCY disclosure requirements.
An even more intolerable situation than when a company is not transparent and does not pay its fair share arises when such company is a beneficiary of funds from public budgets. In such situations the state pays out taxpayer’s money which are immediately directed to tax havens. A recent studies have shown that profitability of companies with non-transparent shareholding structure in public contracts is by 20 to 73% higher than the profitability of equivalent entities with transparent shareholding structure also participating in public contracts.* The principles of distribution of public funds warn against the dangers of allocating public funds to legal entities whose ownership structure is unknown or end up in tax havens, as allocated public funds may be used to implement corruption and other unfair practices (1.3). detail also Chap. V - uncovering and transparency.** Moreover, the OECD Principles of sound management of private (commercial) companies require that these companies are aware of their owners (1.1). If the state requires disclosure of the entire corporate structure from banks and insurance companies, i.e. entities to which people entrust their money with the possibility of recovering them, the state should do the same in respect of companies to whom it entrusts people’s money irrecoverably. Taxpayers have the right to know who are the ultimate beneficial owners of companies receiving public money or other public benefits. Authorities must make sure that taxpayer’s monies are not directly channelled out to non-transparent tax havens.
* “Public Money and Corruption Risks – A Comparative Analysis” 2013, Frank Bold organization, zIndex - Case study: Profitability of firms with paper bearer shares in public procurement, 2011.
** The OECD Principles of Corporate Governance, p. 22.
Despite the fact that certain countries, lately the UK, proposed an obligatory lift of corporate anonymity, similar direct attack on corporate anonymity is unlikely to succeed. Too many wealthy and influential people have interests in not being revealed as secret shareholders. Moreover, the argument that by revealing the corporate structure, business activities would be harmed - however, paradoxical it is given that most of SMEs are already now obliged to have fully transparent structures - is difficult to prove or disprove. Therefore, it appears preferable to foresee the possibility to “pay out” of the corporate disclosure and thus create new additional revenues for public budgets.
In the perspective of the amount of tax revenues lost due to profit shifting arrangements, OECD BEPS documents mention the sum of USD 1900 billion of off-shore profits escaping the corporate tax. Corporate tax revenues of Member States in the period oscillated in the period 2000-2011 between 0,7 to 6,8 % of their GDP.* By how much would this amount increase if the TAXPARENT solution was adopted would have to be analysed and estimated on the basis of the existing statistical data, for example, on the basis of a previous study estimating the expected changes in tax revenues following a hypothetical increase of a VAT rate.
* Eurostat, Taxation trends in the European Union, Eurostat Statistical Books, 2013 Edition.
The global effective corporate tax ratio is a ratio of (i) the sum of money effectively paid in corporate tax in preceding fiscal year by all companies within the corporate structure up to the ultimate beneficial owners for the previous fiscal year*, and (ii) the sum of gross operating profit posted in the same year by all companies within the corporate structure up to the ultimate beneficial owners.
Global effective corporate tax ratio (GECTR) = Σ amounts paid in corporate tax by all companies within the group for the preceding fiscal year / Σ amounts of gross operating profits all companies within the group for the preceding fiscal year
* A voluntarily paid corporate tax above the statutory corporate tax level does not count into this sum.
The GECTR formula defined as the ratio of corporate tax paid on gross operating profit emanates from the so-called “micro backward looking methodology”. This methodology based on real life data and using financial statements to derive effective corporate taxation computes ratios of tax paid on gross operating profits. This methodology is particularly suited for cross-border situations and allows creating clusters of companies and assess differences in tax treatment between them. Moreover, it permits to reduce certain problems due to differences in accounting methods, in particular relating to depreciation. Last but least, gross operating profit is more comparable between countries than profit on ordinary activities.*
* Nicodème, G., Computing effective corporate tax rates: comparisons and results, Directorate General for Economic and Financial Affairs, Number 153, 2001, p. 10, 16 and 21.
If all companies within the corporate structure up to the ultimate beneficial owners taken together do not create any profit which could be taxed, they would fall outside the TAXPARENT solution; in the formula of the GECTR there would be zero in the denominator and the GECTR would not be possible to count the GECTR. Yet, given the global reach of the TAXPARENT solution, if a group of companies makes “artificial losses” in high-tax countries by shifting “profits” throughout their corporate structure from high tax countries to low-tax countries, this arrangement would have no influence on the formula for computing the global effective corporate tax ratio. Since this formula takes into account the global operating profit of the entire group, shifting profits through the corporate structure from one country to another will not alter the overall amount of the gross operating profit. By contrast, the TAXPARENT solution does not have an ambition to resolve the specific problem of base erosion or the transfer pricing. Specific tax aggressive arrangements, such as payment of royalties or intercompany loans shifting “profits” through the corporate structure in order to erode the tax base in high tax countries remain untouched by the TAXPARENT solution. Indeed, OECD BEPS initiative appears to bring adequate responses to these particular issues.
The final declaration of G8 leaders stipulated, amongst other, that companies should know who really owns them and tax collectors and law enforcers should be able to obtain this information easily in order to prevent companies shift their profits across borders to avoid taxes, and multinationals should report to tax authorities in which countries they pay which amount of tax. Point 2 of the Lough Erne (dated 18 June 2013) states should change the rules that allow companies to shift profits across borders to avoid taxes and multinational companies should notify the tax authorities to which taxes apply in that country. Under point 3 of the declaration companies should know who is the beneficial owner and the tax authorities and public authorities should have easy access to this information.
The TAXPARENT solution complies with objectives of BEPS Actions 12 and 13. Action 12 – Require taxpayers to disclose their aggressive tax planning arrangements indicates that “A key issue in the administration of transfer pricing rules is the asymmetry of information between taxpayers and tax administrations. This potentially undermines the administration of the arm’s length principle and enhances opportunities for BEPS. In many countries, tax administrations have little capability of developing a “big picture” view of a taxpayer’s global value chain. In addition, divergences between approaches to transfer pricing documentation requirements lead to significant administrative costs for businesses. In this respect, it is important that adequate information about the relevant functions performed by other members of the MNE group in respect of intra-group services and other transactions is made available to the tax administration” . In reaction it requests to “Develop recommendations regarding the design of mandatory disclosure rules for aggressive or abusive transactions, arrangements, or structures, taking into consideration the administrative costs for tax administrations and businesses and drawing on experiences of the increasing number of countries that have such rules. ” Furthermore, BEPS Action 13 states that “the rules to be developed will include a requirement that MNE’s provide all relevant governments with needed information on their global allocation of the income, economic activity and taxes paid among countries according to a common template.”*
The difference between the TAXPARENT solution and the BEPS action is in the approach: whereas BEPS seems to use the traditional “control-command” approach TAXPARENT solution is behaviourally oriented creating incentives and disincentives to induce positive behaviour.
Moreover, the TAXPARENT solution is fully in line with recommendations of the OECD Aggressive Tax Planning Steering Group and of the Forum on Tax Administration, in particular with the recommendation to “continue to share relevant intelligence on aggressive tax planning schemes on loses, their detection and response strategies, and measure the effectiveness of the strategies used, for example, in terms of additional tax revenue assessed/collected, or in terms of enhanced compliance”, “consider the introduction of co-operative compliance programmes, where appropriate to a country’s circumstances, based on the benefits to both taxpayers and tax administrators” and “consider the introduction or the revision of disclosure initiatives targeted at aggressive tax planning schemes on losses. **
Last but not least, TAXPARENT solution accords with the conclusions and recommendations of the 2011 OECD Report on Disclosure Initiatives: TACKLING AGGRESSIVE TAX PLANNING THROUGH IMPROVED TRANSPARENCY AND DISCLOSURE which stipulates, among others, that “disclosure initiatives can help to fill the gap between the creation/promotion of aggressive tax planning schemes and their identification by tax authorities” and that OECD member countries “continue to share experiences on the design and implementation of disclosure initiatives to assist in creating a compliance framework that benefits both government and taxpayers at large.
* OECD (2013), Action Plan on Base Erosion and Profit Shifting, OECD Publishing.
** Corporate Loss Utilisation through Aggressive Tax Planning, OECD, 2011, p.79
The TAXPARENT solution is perfectly compatible with recent investigations started by the European Commission tax decisions affecting Apple, Starbucks and Fiat Finance and Trade in Ireland, the Netherlands and Luxembourg on whether these tax rulings do not represent measure incompatible with the EU state aid rules.
The TAXPARENT solution does not anyhow affect sovereignty of Member States in these areas. It does not lead either to direct or indirect harmonisation of statutory corporate tax rates in Member States nor does it give any incentive to diverge from the established statutory rates.
If, today the information about the direct shareholders of limited liability companies is generally available to the public, in particular about limited liability companies with direct final shareholders – physical persons which are mostly micro-enterprises or SMEs, the same information about ultimate shareholders is usually not available for joint-stock companies or group of companies, especially when they have a corporate cross-border structure or when their corporate structure ends in non-transparent tax-havens. This apparent and unreasonable discrimination between the ultimate owners of small companies and large companies would be eliminated by the TAXPARENT solution.
At the same time, it would do away with the discrimination of direct owners of other assets and owners of company shares. For example, if, one the one hand, the identity of owners of immovables is in general made public through state property registration offices (in certain Member States called cadastres), the identity of owners of shares of joint-stock companies is not revealed to the general public by the state or even not registered. Moreover, continuing the example of immovables, there is a further discrimination between direct owners of immovables and indirect owners of immovables. If a physical person owns and immovable directly, his or her identity is made public in the cadastre whereas if it owns the same immovable via a joint-stock company its identity can be effectively concealed – the respective cadastre will show the joint stock company as the owner of the immovable in question, however, the owner of this joint-stock company, the same physical person, will be able to keep his or her identity in secret.
The unmatched advantage of money laundering through disbursement of dividends via corporate structures is that it provides legitimate reason for a payment of money of originally illegal source. Payment of money to a company under a fictitious contract and disbursement of the same amount to the “anonymous” shareholder as a dividend represents the safest means of money-laundering: in the company the “dirty” money gets mixed with the “clean” money making it usually impossible to trace and legally prove that the money disbursed by the company to the “anonymous” shareholders are still “dirty” money. TAXPARENT solution would significantly improve the accessibility of information about corporate structures, in particular of those extending beyond the EU, for all types of public authorities, such as tax authorities, authorities charged with control of money laundering, public prosecution authorities etc.
Fiscal revenues of Member States from the corporate tax could be increased. Since corporate anonymity provides a means for corporate tax evasion, if it was lifted, public revenue from corporate taxes could be increased. The voluntary transparency coupled with tax-related behavioural incentives could lead to more direct increases in fiscal revenues of Member States from corporate taxes. One can suppose that a large number of companies whose global effective corporate tax ratio was below the disclosure threshold of 11,25% would try to increase its global effective corporate tax ratio over this threshold in order to escape the disclosure obligations.
Due to better information on the competitive structures on the market for public funds and resulting more intensive competition on this market, important savings public funds could be expected. These savings would however not take the usual form of reduction of amounts of inflated public spending, but would materialise in the form of „getting more for the same amount of public money“ which would be beneficial both for public authorities as well as for economic operators.