Illegalising Tax Avoidance – Making Tax Evasion Impossible: Action Plan to Tackle Cross-Border Tax Avoidance and Tax Evasion
Summary in English, October 2017
Social Democratic Party, Finland
Cross-border tax avoidance and tax evasion harm the economy and international development in many ways. Therefore, international organisations such as the European Union (EU), the OECD, the IMF and the United Nations (UN) unanimously consider tax avoidance and evasion must be tackled efficiently.
Tax avoidance and tax evasion cause inequality since they hinder levying higher rates and adequate amounts taxes especially on the wealthy taxpayers. They threaten the welfare model in the Nordic countries as well as development efforts in the Global South that are both largely dependent on public services such taxpayer-funded education and healthcare.
In this action plan, the Finnish Social Democratic party (SD) presents 23 concrete measures that Finland as well as other countries could utilise in tackling cross-border tax avoidance and tax evasion. These actions are categorised into three main categories.
First, SD would amend national legislation by consolidating the tax base and therefore making aggressive tax arrangements – now often deemed legal – illegal. Cross-border tax avoidance is based on profit shifting arrangements facilitated by base erosion provided by low tax countries or tax havens. E.g. limiting interest deductions in taxation would hinder benefits of these arrangements. These kind of amendments could be done next year when the EU Anti Tax Avoidance Directive (ATAD) is implemented across the EU countries.
Second, SD would increase transparency making it more difficult to hide income and assets in secrecy jurisdictions. SD would secure that tax authorities receive more comprehensive information about investment income including dividends and capital gains as well as on beneficial owner information of legal entities including companies and trusts. Effective exit tax rules should be introduced to tackle tax avoidance of unrealised gains by temporarily moving abroad.
Third, the action plan includes goals that should be thriven in international cooperation in the EU as well as globally, since tax avoidance and evasion cannot be fully tackled on a national level. SD believes the fundamental deficiencies in the international corporate tax system could be fixed based on the European Commissions proposal on Common Corporate Consolidated Tax Base (CCCTB). SD also supports a harmonised minimum tax rate on an international level.
Recently, many countries including Finland have adopted legislation that has evidently tackled tax avoidance and evasion. Furthermore, cooperation in the EU and the OECD have produced significant progress such as the introduction of ATAD and OECD common reporting standard (CRS) in the automatic exchange of information. This action plan builds onto this positive development. Recent research has provided evidence that legislation can efficiently tackle tax avoidance without harming the economy. Conversely, these actions would not only make taxation more equitable but also enhance economic growth by eliminating market distortions.
Please note this is a brief English summary of the SD Action Plan. The accurate descriptions of the actions are available in Finnish at the SD website. See contact details below for additional information.
National legal actions tackling tax avoidance
1. Making general anti tax avoidance rule (GAAR) more effective. This would be done by defining undesired tax avoidance unequivocally or by adopting specific regulation such as the UK diverted profit tax.
2. Adopting anti-conduit regulation to stop treaty shopping and directive shopping.
3. Defining transfer pricing amendment regulation based on the OECD Transfer Pricing Guidelines.
4. Defining rules regarding attribution of profits to permanent establishments based on the OECD report.
5. Removing the loopholes in the interest deduction limitation rules and thin capitalisation rules.
6. Making interests created in intra-group arrangements un-deductible.
7. Removing loopholes in the controlled foreign company (CFC) legislation. The legislation should cover all income shifted to low tax jurisdictions.
8. Adopting switch over rule to complement CFC legislation.
9. Broadening the corporate tax residency: place of registration and effective place of management should both constitute tax residency.
10. Withholding tax for tax haven payments.
Actions increasing transparency and tackling tax evasion
11. Defining beneficial owner concept using substance over form principle.
12. Effective exit taxation. Added value of investment should be taxed where it is generated
13. Transparent ownership of publicly listed corporations (all shareholders with no % threshold).
14. Public beneficial ownership registration (10 % beneficiary threshold).
15. Exhaustive country-by-country reporting for multinational corporations.
16. Exhaustive public tax reporting liabilities for tax consultancy service providers.
Goals for international tax policy
17. Active involvement in common corporate tax base (CCTB) and common corporate consolidated tax base (CCCTB) projects. Exhaustive tax base and effective anti tax avoidance rules should be adopted.
18. Minimum corporate income tax rate on an international level (e.g. EU-wide).
19. Removing loopholes of OECD CRS automatic exchange of information standard.
20. Identifying and amending legislation related to harmful tax competition.
21. Re-negotiating tax convention articles that facilitate tax avoidance.
22. Re-negotiating anti treaty shopping articles in tax conventions.
23. Strengthening tax administrations specifically in the developing countries.
Lauri Finér, Tax Policy Advisor, Social Democratic Parliamentary Group
Email: firstname.lastname@example.org Tel: +358 (0) 41 5012317 Twitter: @LauriFinest
Full report in Finnish