Wednesday, January 1, 2014
Netherlands - Governments need tax payments to stimulate national prosperity, welfare and an equitable economic development. Only through levying taxes they can fund facilities such as infrastructure, education, healthcare and a social safety net. Companies can contribute to these public facilities by paying a fair amount of tax. All countries, but especially developing countries need additional income to realise the mentioned facilities, and it is a heavy burden that companies and wealthy individuals avoid taxes on a large scale.
Each year developing countries miss an estimated US$ 104 billion of tax revenues due to corporate tax avoidance.1 Next to this, global tax avoidance due to undeclared private assets held offshore amounts to approximately US$ 156 billion per year.2 Not only developing countries miss out on significant tax revenues. Tax avoidance also takes place in countries that are members of the OECD.
Tax avoidance is a problem for everyone and provides relatively little benefits. This is the case for both poor and rich countries, and for both citizens and small and medium-sized enterprises. The premise of this case study is that companies should pay taxes where their economic activities take place. Taxation should be based on the nature and scope of the economic activities (the substance) which companies have in each jurisdiction they are active in, in accordance with the applicable tax regulations in these jurisdictions. Individuals with large financial wealth should also pay their fair share of taxes.
In this case study tax avoidance is defined as all practices of individuals and organisations which are intended to avoid the payment of taxes, whereby:
tax laws are not formally contravened, discerning tax avoidance from tax evasion which implies the use of illegal practices;
the intentions of tax laws are violated, i.e. loopholes in tax laws are used to obtain tax advantages that the government never intended;
transactions do not follow logically from the economic “substance” (assets, employees, revenues, etc.) of the company but are set up with the purpose to reduce tax liability.
While tax avoidance does occur within the boundaries of one jurisdiction, this study focuses on international tax avoidances which aim to exploit differences in tax rates and regulations between jurisdictions, as well as the limited international exchange of fiscal data. International transactions between companies which are based in different jurisdictions but belong to the same business group, offer many options for tax avoidance schemes. Multinationals can reorganize their financial flows (payments for goods and services, dividends, interest payments, etc.) and set up foreign subsidiaries which undertake no real economic activities, for the sole purpose of utilizing the differences in tax rates and regulations between jurisdictions. With such transactions often no tax laws are violated officially. Nevertheless, the tax regulations and tax rates in one jurisdiction are undermined by making use of more favourable tax regulations in another jurisdiction.
In many international tax avoidance structures tax havens play a prominent role. Tax havens are jurisdictions which have a legislative environment which provides opportunities to individuals and/or companies domiciled elsewhere to evade or avoid taxes due in other jurisdictions. Classic tax havens generally offer very low income tax rates and no withholding taxes, in combination with very limited disclosure requirements for companies and limited exchange of fiscal data with other jurisdictions. Tax-treaty jurisdictions generally have concluded tax treaties with many countries and have very low withholding tax rates, enabling financial flows to pass through the jurisdiction easily. In these jurisdictions, income taxes usually have a normal level and transparency is higher than in classic tax havens.
Your message has succesfully been placed