Mapping Financial Secrecy

The process by which a sophisticated tax payer plays off the tax systems of two different countries to obtain a tax benefit.

The term given to the practice of seeking to minimise a tax bill without deliberate deception (which would be tax evasion or fraud). The term is sometimes used to describe the practice of claiming allowances and reliefs clearly provided for in national tax law. It is, however, now generally agreed that this is not tax avoidance. If the law provides that no tax is due on a transaction then no tax can have been avoided by undertaking it. This practice is now generally seen as being tax compliant. The term tax avoidance now usually refers to the practice of seeking to not pay tax contrary to the spirit of the law. As such it is synonymous with the term aggressive tax avoidance. In this context tax avoidance is the practice of seeking to minimise a tax bill whilst attempting to comply with the letter of the law while avoiding its purpose or spirit. It usually entails setting up artificial transactions or entities to recharacterise the nature, recipient or timing of payments. Where the entity is located or the transaction routed through another country, it is international avoidance. Special, complex schemes are often created purely for this purpose. Since avoidance often entails concealment of information and it is hard to prove intention or deliberate deception, the dividing line between avoidance and evasion is often unclear, and depends on the standards of responsibility of the professionals and specialist tax advisers. An avoidance scheme which is found to be invalid entails repayment of the taxes due plus penalties for lateness.The UK’s HM Revenue and Customs has suggested that tax avoidance is identified by “transactions or arrangements which have little or no ‘economic’ substance or which have tax consequences not commensurate with the change in a taxpayer’s (or a group of related taxpayers’) economic position.”Compare with tax evasion and tax compliance.

The range of transactions that a country chooses to tax. A broad base includes a wide range of transactions. A narrow base includes relatively few transactions.

This term refers to the pressure on governments to reduce taxes usually to attract investment, either by way of reduction in declared tax rates, or through the granting of special allowances and reliefs such as tax holidays or the use of export processing zones. Applies mainly to mobile activities or business, but the competition to attract investment may result in an overall decline of corporation tax rates and in the amounts of corporation tax paid, often resulting in an increased burden on individuals. Some argue that the main role of tax havens / secrecy jurisdictions is in promoting tax competition which forces down the rates of tax in populous states. Others argue that this is the job of political parties elected by free and fair election and thus receiving democratic mandates. The term has also been confused by the OECD who refer to “harmful” tax competition but have despite this never been able to offer a suggestion of what “beneficial” tax competition might be.

Tax compliance is seeking to pay the right amount of tax (but no more) in the right place at the right time, where ‘right’ means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes. Compare with tax avoidance and tax evasion.

A term used by tax professionals to suggest getting away with paying as little tax as possible. Has no basis in economic theory, and is in fact a pseudo-concept employed to the advantage of the tax avoidance industry.

The illegal non payment or under-payment of taxes, usually by making a false declaration or no declaration to tax authorities; it entails criminal or civil legal penalties.

Any country or territory whose laws may be used to avoid or evade taxes which may be due in another country under that country’s laws.The Organisation for Economic Cooperation and Development defines tax havens as jurisdictions where: · Non-residents undertaking activities pay little or no tax;· There is no effective exchange of taxation information with other countries;· A lack of transparency is legally guaranteed to the organisations based there;· There is no requirement that local corporations owned by non-residents carry out any substantial domestic (local) activity. Indeed, such corporations may be prohibited from doing business in the jurisdiction in which they are incorporated. Not all of these criteria need to apply for a territory to be a haven, but a majority must.The Economist magazine uses a definition of a tax haven based on that offered by Colin Powell, a senior Jersey civil servant, who said “What ... identifies an area as a tax haven is the existence of a composite tax structure established deliberately to take advantage of, and exploit, a worldwide demand for opportunities to engage in tax avoidance.” http://en.wikipedia.org/wiki/Tax_havenThe US Internal Revenue Service has said “These jurisdictions are commonly referred to as "tax havens" because, in addition to the financial secrecy they provide, they impose little or no tax on income from sources outside their jurisdiction.” In so doing they reflect the order of importance of the available characteristics. http://www.irs.gov/businesses/small/article/0,,id=106568,00.htmlThe US Government Accountability Office has said it is unable to find a satisfactory definition of a tax haven but regarded the following characteristics as indicative of a tax haven: http://www.gao.gov/products/GAO-09-157· no or nominal taxes;· lack of effective exchange of tax information with foreign tax authorities;· lack of transparency in the operation of legislative, legal or administrative provisions;· no requirement for a substantive local presence; and· self-promotion as an offshore financial center.This reflects the OECD view. Senator Carl Levin said, when introducing the Stop Tax haven Abuse Act, that “A tax haven is a foreign jurisdiction that maintains corporate, bank, and tax secrecy laws and industry practices that make it very difficult for other countries to find out whether their citizens are using the tax haven to cheat on their taxes. In effect, tax havens sell secrecy to attract clients to their shores. They peddle secrecy the way other countries advertise high quality services. That secrecy is used to cloak tax evasion and other misconduct, and it is that offshore secrecy that is targeted in our bill.” http://levin.senate.gov/newsroom/release.cfm?id=308945See also secrecy jurisdiction. This is the preferred term for a tax haven. Secrecy jurisdictions are places that intentionally create regulation for the primary benefit and use of those not resident in their geographical domain. That regulation is designed to undermine the legislation or regulation of another jurisdiction. To facilitate its use secrecy jurisdictions also create a deliberate, legally backed veil of secrecy that ensures that those from outside the jurisdiction making use of its regulation cannot be identified to be doing so.

A period during which a company investing in a country does not have to pay tax under an agreement with that country’s government.

TIEAs are bilateral agreements under which territories agree to co-operate in tax matters through exchange of information. According to the OECD the purpose of Tax Information Exchange Agreements is to promote international co-operation in tax matters through exchange of information. They were developed by the OECD Global Forum Working Group on Effective Exchange of Information (“the Working Group”). The Working Group consisted of representatives from OECD Member countries as well as delegates from tax havens. The Agreement grew out of the work undertaken by the OECD to address harmful tax practices. The lack of effective exchange of information was one of the key criteria in determining harmful tax practices. The mandate of the Working Group was to develop a legal instrument that could be used to establish effective exchange of information. The Agreement represents the standard of effective exchange of information for the purposes of the OECD’s initiative on harmful tax practices. This Agreement, which was released in April 2002, is not a binding instrument but contains two models for bilateral agreements. In practice the model was little used until the G20 applied considerable pressure to tax havens / secrecy jurisdictions to sign such agreements. Few such agreements have yet come into effect. The evidence is that the few that are operational are little-used because of the considerable obstacles to making requests that are inherent within them. Until secrecy jurisdictions make data on beneficial ownership publicly available and the use of offshore trusts is better regulated, it is hard to see what impact Tax Information Exchange Agreements will have on transparency.

A phrase used by tax professionals when describing the desire to pay as little tax as possible.

A person, natural or legal, who is not seeking to be tax compliant.

A term used in two ways. It can be used as another term for tax mitigation. When, however, tax legislation allows more than one possible treatment of a proposed transaction the term might legitimately be used for comparing various means of complying with taxation law. In practice the difference is therefore typically established by an appeal to contextual factors.

The rate at which a tax is charged. This is usually expressed as a percentage of the chargeable tax base e.g. x% of income. It can, however, be expressed as a fixed sum e.g. $Y per transaction undertaken.

The official document on which a taxable person must declare either their liability to tax or details of the transactions which should give rise to tax. Historically these were paper based returns, and that remains true in many parts of the world, but on-line electronic filing is now becoming more commonplace. In either case the return will usually require the person submitting it to make a declaration that the information supplied is correct with criminal penalties arising if that statement is proved to be incorrect.