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A Timid Shift in the Mindsets and Practices of Intermediaries

The fight against tax evasion at the level of intermediaries was first based in the majority of countries on the tools of the fight against money laundering. The two have close ties, since tax evasion often uses the same tools as money laundering. Thus, the spread of an “anti-money laundering culture,” particularly among intermediaries in the financial sphere, makes it possible today to consider going further with regard to tax evasion. Moreover, since the explosion of the last financial crisis, we can see a timid evolution in this direction.

Despite these shortcomings and the clear lack of involvement of the various regulators in the fight against tax evasion, it is necessary to take the measure of a timid but real beginning of the evolution of the mentalities and practices of the financial intermediaries, which can no doubt be attributed in large part to the many measures adopted at the international and developed countries level to strengthen the fight against fraud. In this regard, the argument between past and recent discourses seems to illustrate the beginning of the evolution of behaviors. One important issue that must be highlighted is conflict of interest. Conflicts of interest are a central issue. Legislative developments have taken place on this point in several countries.

The issue of conflicts of interest goes far beyond the measures taken to ensure that designated people perform their functions with decency and impartiality. Here, we should discuss about the influence of financial players on the elites which covers the “the power of Goldman” and which sees rich countries devote part of their efforts to training administered elites to maintain the pool of financial company executives.

It should also be considered that the conflicts of interest that may exist at all levels of the units that animate finance: the management and employees of financial companies versus the long-term interests of the same companies through incentives compensation systems, auditors and rating agencies both judges and parties to the bodies in which they operate, financial firms and their clients in relationships where the duty of advice can be conflict with the interests of the institution.

The image of coiporatist finance has not lost its power over public opinion, nor has it been a thing of the past. The great silence of the banks in the face of the systematic diversion of national savings to tax havens by counterparts testifies to this. Rather, this theme has been enriched by new concerns about the strategic dimension of financial resources, the veiy strong international interdependencies that unify the global financial village and the constraints exerted by financial attractiveness to all decision-makers, financial company executives, regulators and supervisors.

This is conducive to conflicts of interest, where strategic phenomena and regulatory dilemmas can lead to systemic unbalances illustrated by the sequences that not only led to the last crisis of financial and economic arrangements, but also to those that a culture of indulgence or more simply the state reason can engender. It is certainly necessary to ensure that conflicts of interest are dispelled by applying the texts under review which are in line with an extension of the norms of good governance. Among other things, we must worry that it is not always done with enough rigor. Famous examples have been evoked that belong to the recent past. The Financial Markets Authority's position remains a question mark, noting that the international monetary fund shares them.

The rules of deportment are not sufficient to reassure the absence of any self-interested influence on decisions since they can only be sanctioned by adverse decisions, and not when they give satisfaction, assumptions where the collusion is the most to be feared. In addition, the missions of the Financial Markets Authority involve dissenting persons who may be involved in cases under investigation.

Beyond that, it is also necessary to create the conditions for an arrangement of structures conducive to the prevention of temptations. The latter objective involves a reflection on the organization of powers through a more balanced distribution of the prerogatives of all “stakeholders”, which must contribute to advancing an economic democracy that is particularly necessary in times when companies are given by the force of the facts but also by the evolution of legal frameworks a prescriptive force which must be considered for sharing.

In short, the approach of making conflicts of interest strictly individual phenomena that should be prevented and repressed seems too narrow, though necessary. The measures are particularly important. Thefirst step is to enrich social and economic democracy by putting fiscal compliance on the agenda of social dialogue and that of the assemblies’ of shareholder meetings. It is also a matter of strengthening democracies politico-administrative. Also, an Office of the High Commissioner for the Protection of Public Financial Interests should be created to credibility to the actions of public finances (as important measure of tax policy). So the crisis of people's confidence on the determination and impartiality of the fight against fraud reaches a climax, the measures taken to combat fraud may be affected in their credibility by the maintenance of a control system which cannot still be based on multiple number of inquiries to underpin its credibility.

While for many years the fight against tax evasion, considered to be the sole prerogative of each state concerned, has been the “poor relative” of international administrative and judicial cooperation, this seems to be the have evolved significantly in recent years, driven by the financial and banking crisis, and then by sovereign debt crises, which have highlighted the more unacceptable nature of the tax incivility of companies and companies. While some processes do not really reassure on the dynamics of the response to capital evasion, others are more promising.

A few weeks after the massive collapse of the banking system, some 20 member countries of the Organization for Economic Co-operation and Development came together to strengthen the coordinated fight against “paradises”, “tax authorities”, whose opacity became unbearable with the onset of the financial crisis. A review of the list of these territories and the establishment of exchanges of “good practices” in the fight against fraud are put on the agenda.

But it is especially with the G20 that important announcements have been made to improve coordination and cooperation between industrialized countries in order to deal with the erosion of national tax bases and stem financial flows destinations and departures from offshore centers. The declaration proposes a series of measures aimed at cleaning up the financial system. With regard to the tax issue in particular, the declaration stated the commitment of States to take action against non-cooperative jurisdictions, including tax havens. Administrative information exchanges may involve individuals or corporations later, the Global Forum on Transparency and Exchange of Information for Tax Purposes (a forum for the Organization for Economic Co-Operation and Development members and non-members) is deeply redesigned to, among other tilings, get non-cooperative states and territories to accept and then enforce international tax transparency standards. To this end, the Global Forum establishes a peer review process to assess the degree of tax transparency of those states or territories. These assessments cover both the legal authorities in place and the effectiveness of the administrative assistance, and relate to the availability of information, the administration's ability to access it and to pass on to foreign relatives. To date, the program has assessed the legal framework of hundreds of states or territories, resulting in the formulation of more than 600 recommendations and the publication of these assessments, which has already prompted several of them to undertake reforms to comply with international standards.

This movement has also been accompanied by a revision of the various lists of tax havens drawn up by international bodies (Organization for Economic Co-Operation and Development, FATF, Financial Stability Board), lists whose changing contours underline the difficulty of defining these non-cooperative territories based on both objective and operational criteria, as well as an incentive for these states and territories (such as Lichtenstein for example) to make a number of commitments in relation to exchange of information and administrative cooperation. In fact, several countries have signed:

  • • several information-sharing agreements, with Jersey, Guernsey, Isle of Man, British Virgin Islands, Liechtenstein, Andorra, San Marino, Gibraltar, Cayman Islands, Bermuda, Turks and Caicos Islands, Bahamas, Vanuatu, Uruguay, St. Lucia, Antigua and Barbuda, St. Kitts and Nevis, Grenada, St. Vincent and the Grenadines, The Cook Islands, the Dutch West Indies, Belize, Costa Rica, Dominica, Brunei, Anguilla, Liberia and Aruba;
  • • several amendments to tax treaties relating to the exchange of information to implement the international standard of the Organisation for Economic Co-Operation and Development model, with Bahr ain, Luxembourg, Belgium, Switzerland, Malaysia, Singapore, Canada, Saudi Arabia Saudi Ar abia, Austria, Mauritius, the Philippines and Oman;
  • • and two new tax treaties, with Hong Kong and Panama.

The work undertaken by the Organization for Economic Co-Operation and Development is no longer limited to the fight against strict tax evasion, but, in recent months, has also been aimed at providing concerted solutions to the phenomena of “aggressive tax evasion” practiced by some large companies. UNAction Plan against the Erosion of Corporate Tax and Profit Transfer (BEPS) has been set up. The Action Plan identifies 15 specific measures to equip states with national and international legal instruments to prevent companies from partially or completely evading taxes. The plan recognizes the importance of addressing the borderless digital economy and developing a new set of standards to avoid double non-taxation. To this end, it emphasizes the need for greater transparency, better communication and closer international cooperation. Finally, it provides for the development of a multilateral instrument to serve as a reference for a change in bilateral tax treaties.

The erosion of tax bases and profit transfers is not only a specific problem than to developing countries (due their corrupt, poorly trained or poorly paid officials), but also a big question for western countries. Indeed, there is a real problem with the taxation of multinational companies at the global level. So today, tax circumvention has become the rale. Agreements that avoid double taxation mean that businesses no longer pay tax anywhere. As a result, everyone loses, except tax havens that attract artificial activities to record profits actually generated elsewhere. One of the concrete answers is the promotion of automatic exchange of information as a new standard for international cooperation. This is indicative in this regard of the rapid change in mentalities in this area and a significant lowering of the tolerance threshold of Western countries in the face of policies of financial opacity carried out by certain States.

Building on its long-term commitment to the principle of bank secrecy and the tax opacity it provides to clients of its financial institutions, some tax bets have sought to respond to the challenges they have was subjected to this without questioning the foundations of their banking systems. They have proposed to several major states bilateral agreements based on the principle of a fee-for-seivice-release carried out by their administrations on all accounts held at home by residents of the partner country. The purpose of this flat-rate tax is to allow the taxpayer to continue to enjoy confidentiality and to extinguish all tax claims to his state of residence. The tax is established and levied by the financial institutions, then dependent on their administrators to return the entire proceeds to the partner state. It was presented as an alternative to the automatic exchange of information, allowing confidentiality for holders of undeclared accounts to be reconciled with tax revenues for the partner state.

Such agreements had been signed with several countries. But other countries, have rejected any proposal to do so, considering in particular that such an agreement amounted to a form of amnesty tax incompatible with their principles. In fact, tax havens seem increasingly isolated in then-defenses of such devices, while there are more and more voices calling for the generalization of an automatic information exchange mechanism between partner states. In this regard, the training effects induced by the entry into force of the “FATCA” law, passed by the States, play an essential role in the developments observed, in the implementation real international cooperation on tax evasion.

The Foreign Account Tax Compliance Act, which is designed to require foreign financial institutions to provide the Internal Revenue Service (1RS)—the U.S. tax agency—with information about the accounts held directly or indirectly by U.S. taxpayers, including financial flows and annual balances of these accounts. The U.S. client of the financial institution will have to agree to the transmission of this information; otherwise, the institution will be required to proceed for the benefit of the 1RS at a tax withholding equal to 30% of the amount of all payment from the United States. In the interests of efficiency, this law, of extraterritorial application, is addressed not only to states linked to the United States by an international cooperation convention, but also, in the absence of such a convention, directly to financial institutions, which face a de facto retaliatory risk if they refuse to comply with U.S. requests (30% levy on all payments issued from the United States on behalf of third parties).

In order to facilitate the implementation of this operation, several states negotiated a reciprocal agreement with the United States, which unproved tax cooperation with the United States (although in practice, the number of U.S. tax residents in these countries and the appointment of national tax residents in the United States are limited). In fact, by encouraging most States to enter into such an agreement with the US administration, this arrangement has prevented the principle of automatic exchange of information as a new standard of inter-state cooperation in tax matters. In practical terms, the issue was high: while the principle of “on-demand” cooperation still prevailed (a state suspecting one of its nationals of having an undeclared account in another state in demand confirmation to the latter), the introduction of automatic exchange of information has allowed administrations to be systematically informed of account openings, money transfers, company creations, etc. carried out by their nationals in partner countries, ahead of the opening of any administrative or judicial proceedings. Automatic exchange undermines banking secrecy for tax purposes.

This system is all the more likely to prosper as it is promoted by countries that are of significant weight in the world economy: thus, in the face of the risk of retaliatory measures to which its financial institutions would have been able to get some tax havens have signed agreements with the United States to implement the “FATCA”. The entry into force of the scheme is probably no stranger to the progress made globally to improve tax cooperation.

Taxation-one of the few areas that remains governed by the unanimity rule-can be seen as the “poor parent” of international cooperation. Cooperation mechanisms have certainly been adopted which have set up an automatic exchange of information on interest payments-but their scope has long been narrowed, leaving there are significant disparities between State laws not always very concerned with fiscal solidarity The reluctance of several countries in this regard is well known. However, these countries couldn’t remain impervious to the commitments made and to the clearly stated desire of several other countries to make significant progress on this issue.

With increased requirements for information exchange, it is in this context that the Directive on Administrative Co-operation in the Tax Field was adopted, aimed at strengthening the requirements of transparency and exchange of information between several countries. Its scope concerns all taxes, with the exception of value-added tax, tariffs, and excise duties social security contributions already covered by other legislation on cooperation, on associations or any other legal construction.

It stipulates that, from now on, countries can no longer refuse to transmit information simply because it is held by a bank, another financial institution, an agent or a person acting as an agent or trustee, or they relate to a capital participation of a person. In addition, the directive provides five categories of income and capital will give rise to an automatic exchange of information: professional income, attendance tokens, and life insurance products not covered by other directives, pensions, property and income from real estate. Finally, it strengthens the mechanisms for spontaneous exchanges between partners, for example where the competent authority of one state has reason to assume that there may be a loss of tax in another country.

Other provisions require paying agents to either declare the interests collected by taxpayers residing in other states or, in the case of Belgium, Luxembourg and Austria, to levy a withholding tax on interest collected

(35%). Similar provisions (exchange of information or withholding at source) are also applied in several countries on the basis of bilateral agreements. The scheme has been improved, extending its scope to legal entities, in order to ensure the imposition of interest payments through intermediary trust-type structures. It also includes interest-equivalent income from investments in various innovative financial products as well as certain life insurance products. In addition, simplifying the way the directive works make it easier to use the system and make it more efficient.

It must be said that, on the face of significant budgetary difficulties and the requirement to “clean up” their public finances by controlling, among other things, the weight of its public debt, Western countries have taken any their part of this movement to curb the opacity maintained in tax havens by financial institutions pleasant and bring back their territory resources due to them. At the same tune, national, administrative and judicial arsenals to combat tax evasion and the eroded financial resources have been substantially strengthened. The many measures may not meet the “big night” wish expected by some, but they do mean a significant strengthening of the powers of the tax administration and the judicial authority. These institutions should be equipped with new legal tools to better detect the potential anomalies and frauds, overcome the hostility or inertia of recalcitrant actors, and punish them more severely. In particular, the creation of a crime of tax evasion committed in an organized ganging some countries allows to better understand intermediaries who knowingly or out of complacency actively contribute to the illegal evasion of the financial hems.

What is the result of all the measures taken or announced? What about, first of all, international cooperation on tax evasion with territories traditionally considered being complete with regard to fraudsters? The involvement of these territories since the signing of new agreements or endorsements is still lacking, both in the number of responses to requests for assistance made (less than one in two response) only within a response time. However, this cooperation is far from negligible: tax havens are no longer the “bank fortresses” they used to be. For fraudsters, the possibility of hiding behind the banking or professional secrecy of their intermediaries in order to continue to evade the tax they are required to pay seems increasingly compromised:

  • • On the one hand, the extension of automatic information exchange mechanisms gradually leads to the consequential decline of the various compromise solutions (withholding at source) that had, until recently, been used. In this regard, tax havens are no longer in a state of decision to defend to their main partners mechanisms that allow fraudsters to benefit from the banking secrecy promised by its financial institutions ( see above);
  • • On the other hand, strengthening anti-money laundering requirements, which include laundering tax evasion, imposes on financial actors to be vigilant and reporting obligations that are not compatible with participation or, at least, conscious, fraudulent tax evasion.

In addition, banks and companies are obliged to publish the name and nature of their business, their turnover (or their product) is obliged to separate and regulate banking activities and net banking) and their workforce. This new requirement should give the government the means to identify financial institutions that may be involved in fraud or money laundering, or to develop an offshore business related to the country's economy.

Two elements invite a certain form of optimism in this regard. On the one hand, the new regularization procedure, put in place in some countries, seems to be producing effects. It should be remembered that this instruction set out the conditions under which taxpayers with undeclared assets abroad will be able to bring their situation into compliance with tax law. Files filed with the taxpayer's personal tax department, or directly with the National Directorate of Tax Audits, are processed by the taxpayer in order to ensure homogeneous processing of applications.

Under this circular, taxpayers will be required to pay full payment of evaded and non-prescribed taxes under the common law conditions, as well as corresponding penalties and fines. It does, however, open the possibility, in the context of a transaction, to reduce the markup for willful failure and the fine for failure to report assets abroad (these increases being reduced to 15% for the assets constituted under the framework an estate or donation or where the taxpayer was not resident in France, 30% in other cases). On the other hand, there is some evidence to suggest that some banks, once very complacent territories now tend to encourage their customers to declare their assets concealed and to settle their tax obligations.

This change in attitude must certainly be seen as the result of international pressure that threatens banking secrecy every day, particularly with the forthcoming entry into force of the FATCA scheme, the agreement between the Switzerland and the United States, the European Union and G20 plans for automatic exchange. Optimism to which these findings invite, however, it must remain measured: only Swiss banks would be affected to date. The problem remains with respect to institutions located in other states or territories, where assets were previously held in Switzerland, including a subsidiary of the same bank, can easily be transferred.

Is there, therefore, a real reversal of the trend, which will gradually irrigate to other territories increasingly driven by change, or simply cause a recomposition of financial flows in favor of states that will continue to make banking opacity an element of the very ness of their territory? The leaders of the major countries are now more than ever under the control of their public opinion. The street pressure is proving extremely strong in the UK, with citizens revolting against the fact that large multinationals in the country pay very little tax. 40% of Britons say they are ready to boycott the products of companies considered tax evaders. With parliamentary elections looming, politicians need to take a firm political stand. However, this must be nuanced because according to ExpertActions ExiGlobal Group, tax havens are not overly troubled by these changes, knowing trusts will continue to generate revenue for tax firms. Westerners are sincere and hypocritical: it is both do the fight against the tax evasion a priority, and is genuinely looking for a new tax revenues, but they don't deprive their businesses of the income that is provided: half of the tax havens around the world for employment. It hits the fat without attacking the muscle!

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