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Learn More About the Mechanisms to Better Combat Capital Evasion

The past few years have seen a considerable legislative development effort against fraud. Since then, there is not a finance law that does not have its own provisions. This legislative continuity is bearing many fruits. But much remains to be done. The fight against tax evasion will only make significant progress if indelicate intermediaries understand that they will be treated with the same severity as the fraudsters themselves. In this regard, a clear preference for binding legislation and regulations over declarations of good intentions, codes of conduct and other “enhanced relations” with the administration—which delay in producing their effects beyond rhetoric is desirable. In addition, it should be remembered that while banks, tax consultancies and other websites play easily with borders and legal regimes, individuals are present on a given territory: it is on these the last of which effort must be made.

As initiatives and reflections on the subject multiply, it is necessary to insist on some strong and concrete proposals, aimed at strengthening the tax and judicial arsenal that can be used against intermediaries. The first task is for the tax authorities to act against tax evasion facilitators: to this end, an international “FATCA” scheme and a mandatory prepayment system for tax evasion and tax optimization schemes, as well as a reorientation of the tools and priorities of tax control are desirable. However, the means available to the tax administration soon appear too limited, making it imperative to entrust the judicial authority with a greater role in the fight against accomplices of tax evasion.

So this is not a question of creating an institutional framework conducive to the transparence of control systems? Indeed, the news has shown how the credibility of the control systems in the world can be achieved by “accidents” suggesting, rightly or wrongly, complacency on the part of their managers. A recovery effort must be undertaken that requires a fairly broad definition of the fight against conflicts of interest and the rigorous application of the “casuistic” mechanisms put in place, but also thr ough measures to strengthen the social and economic democracy and public institutions. The development of financial information with a tax dimension must go beyond the scope of banking institutions to concern at least companies that are going public. Business committees should be informed of the company's tax policy and be able to benefit from the necessary technical support.

The role of whistleblowers in tax investigations appears to be considerable. Beyond the measures designed to protect them legally from abusive retaliatory measures and the questions raised by the supervision of their interventions from the point of view of protection against defamation or a clear denunciation, a statute should be defined that would allow better consideration of their contribution to the fight against tax evasion, particularly the international one. In particular, this status should clarify the conditions under which their testimonies are collected, but more broadly the terms of the exchanges between whistleblowers and supervisors. Moreover, the protection of journalists’ sources and the definition of a status of repentance fall within this area of action, which must reconcile effectiveness and respect for essential privacy principles.

The global anti-money laundering guidelines should lead to this common-sense measure as they are supposed to provide for the extension of responsibilities in the event of a breach of the reporting procedure to a larger camp of people. The issues of international tax evasion, the cases that have raised the credibility of the political-administrative systems, rightly or wrongly, the multiplication of research on related issues reinforce the need to create the institutional conditions for greater credibility of the public policy in these areas. Also, it is to strengthen the function of economic and financial intelligence. Finance today is marked by characteristics that create opacity and thus risks through the lack of visibility it creates for supervisors: its international deployment, the complexity of organizations and products, the existence of opaque structures.

Control systems need to adapt. This requires an effort of economic intelligence that involves mobilizing statistical resources and exploiting them in order to finely identify deviating situations or more simply at risk. Monetary authorities must participate fully in this mission, which also involves the mobilization of expertise, public or not, in the economic field. It also appears justified that the world should have a very high-level training structure capable of providing multidisciplinary education on a fiscal reality that represents a considerable proportion of GDP with all the issues that are attached to this situation. On the other hand, from an operational point of view, the need for intelligence and analysis needs must be met.

Also, the financial intelligence unit of the different countries must have its status set up to give it all the necessary guarantees of independence; its means must be upgraded as well as its performance improved while its relationship with its ecosystem needs to be clarified. In particular, intelligence and action against clandestine financial circuits must be more systematically captured of the information collected and by financial supervisors. For its part, it must divest itself of its doctrine leading it to exclusively favor its spontaneous statements to the tax administration at the expense of its right of communication.

The findings call the attention of financial supervisors to the importance of their operational and social responsibility to prevent and repress the risks of fraud involving public order in its extra-financial dimension. The contribution of these bodies to tax compliance is set to increase. Progress must be continued, which requires efforts to develop on-the-spot controls, to respond quickly to the suspicions they raise, and to adopt a very firm attitude in the repressive aspect of their mission.

Limitations will have to be overcome: the issue of conflicts of interest must be addressed in the light of other-wise made doctrine sets out strong demands for exemplariness; agencies' investigative powers could benefit from being increased so that it has the same means as the authority of the financial markets; the direction of banking super-vision towards a more careful monitoring of flows in addition to consolidated control; the obstacle awaiting the opposition of professional secrecy by some States and the recognition that jurisdictions do not present any serious safeguards for anti-money laundering control need to be better taken into account and super-visors' responses need to be strengthened.

The global generalization of a system requiring banks or states to automatically and comprehensively exchange tax information or risk withholding their flows should be the major step in the fight against international tax fraud. Combined, those initiatives would deal a powerful blow to bank secrecy. The administration's taxes, of course, will have to gain from the adoption of such a device. Extended to tax havens, it would put an end to fraud since the amounts would appear directly in the pre-filled tax sheets. Admittedly, this is not as miracle solution: the very complex montages of the great fraudsters, who share their methods with organized crime, will continue to escape the states.

Even some banks say they expect positive consequences from the widespread exchange of information. Thus, automatic exchange would avoid the cunent situation which proves to be delicate: banks seem to be expected to carry out a mission of public power by regulating what must be. In reality, policy-makers must play their part and commercial actors have their responsibilities. In fact, intennediaries are relatively undistinguished by their zeal to encourage the tax citizenship of their clients. The establishing an international standard should not be limited to the generalization of an automatic exchange clause and the administrative cooperation, or even its extension to a few third states via the most favored nation clause. To leave it at that point would be to limit the system to a few states that are not and will not be at the heart of tax evasion and to leave it at the mercy of the goodwill of the partners: the disclosure of banking information must be extended to all banks in the world, or risk withholding the profits.

In the event that a global agreement does not emerge quickly, it would be interesting to use the enhanced cooperation mechanism, which allows for faster and more convincing results, with a smaller number of partners. FATCA's strength rests on the “critical mass” of the United States: no major bank can afford to have access to the U.S. market closed. The alliance of three or four ‘big’ Member States could achieve this critical mass, creating a ripple effect. The introduction of such a mechanism is not— and has never been—a matter of technical feasibility: it is a matter of political will.

In the meantime, it is important to be careful not to disarm the mechanisms for adapting the tax legislation of different countries to the realities of offshore taxation. One of the key tools in the fight against international tax evasion has been the tightening of tax regimes for offshore activities. However, the scope of these schemes is conditional on the coherence between the obstacles actually encountered in assessing the activities of companies and individuals in different countries and the consistency of the list of those countries. Country-by-country list policy achieved the same tendencies its deactivation than those observed at the international level. Western countries will have to bring forward a proposal to give all their extensions to the work of the Tax Forum global. The aim would be to secure a commitment that all partners will take appropriate internal measures to prevent tax avoidance opportunities offered by countries. In addition, a probation period should be provided before partners remove the newly co-operative steps from the lists that establish their domestic anti-tax and regulatory haven legislation. Finally, and above all, the commitment to link the listing on the internal list with the commitments made in terms of automatic exchange of information will have to be fully fulfilled.

“Institulea tine” an obligation to report fiscal optimization schemes to the administration should be an asset. Knowledge and understanding of optimization schemes are a crucial point in the fight against tax evasion: it is extremely difficult to dismantle the schemes of optimization first because they have to be found, secondly because they have to be proven that they have not complied with the law, and finally because their lawyer’s and tax directors are very competent. These schemes are most often designed, proposed and implemented through intermediaries. Also, intermediaries proposing tax optimization schemes should be subject to a pre-disclosure obligation to the tax authorities. The introduction of such a scheme would allow the administration to have substantial, accurate and up-to-date information on the main tax arrangements offered by intermediaries. With this knowledge of optimization schemes, the tax administration:

  • • would save valuable time in detecting and understanding complex schemes that could be subject to tax evasion;
  • • could conduct a risk analysis and launch tax investigations and controls on this basis;
  • • would provide a faster and more efficient individual, regulatory or legislative response to the fixtures;
  • • Would thus shorten the “lifespan” of these devices and thus the incentive to market them.

Such a scheme has benefits not only for the administration, but also for the taxpayers and intermediaries themselves: they gain certain legal certainty as to their respective obligations, as well as the guarantee competition in tax optimization. Such officials have already demonstrated their effectiveness in other countries, notably in the United Kingdom with the DOTAS Act, in the United States through the Internal Revenue Code or Canada and South Africa. In the United Kingdom, the device has produced very satisfactory results. They notably led to the adoption of anti-evasion measures, allowing the “retaining” of a tax base of nearly 12 billion pounds.

The scheme is based on a precise definition of the concept of a tax optimization scheme. The reporting requirement thus applies when the main benefit of a scheme is to provide a tax benefit, and meets certain criteria, defined by a tax statement, such as confidentiality or standardized character. Individuals or corporations who design, offer or manage these schemes are considered to be promoters of tax schemes. The read of covered taxes has been extended over the years, and now includes income tax, coiporation tax, capital gains tax, real estate transfer fees, social security contributions and tax on value added. Since then, the transfer of assets to a trust has also been subject to the declaratory regime. The requirement to report tax schemes beforehand is therefore originally compared to the majority of the devices experienced so far: it weighs above all on intermediaries-law firms or consultancies, experts accountants, financial institutions or wealth managers. In order to make it effective, deterrent penalties must be provided.

There are obvious difficulties in setting up such a complex system, the main one being the absence of a legal definition of a “tax optimization schema”. Once this difficulty has been resolved, it would remain to define the person, on whom the declaratory obligation is imposed, and then its terms and sanctions. It would also be necessary to create a dedicated service within the tax administration, with the training efforts that this entails. The British administration has been able to adapt and success tax instructions are able to identify criteria for a tax scheme. A transitional phase could be envisaged in the context of other countries, for example, in the form of an optional declaration, the time required to train tax officials.

This scheme could be part of a wider renovation of the tax rescript procedure, which allows a taxpayer to seek the advice of the administration on a point of law or a personal tax situation, and get a response within three months. The administration, which has to respond within a matter of months, has since sought to make better use of this procedure, but it remains insufficiently used, especially for complex fixtures. The tax rescript could thus be extended to intermediaries offering optimization schemes, if necessary in a mandatory manner. It is important, in any case, to ensure the confidentiality of tax scheme declarations, which are not intended to be made public. Thus, the scheme would preserve the competitiveness of companies that make it a comparative advantage and would not violate the solicitor-client privilege of lawyers and intermediaries— which would respond to the fears of professionals.

In advance of the action here recommended, it is necessary to call on the tax administration to exercise the utmost vigilance on the admission of financial companies to charge losses when determining their tax results.

In particular, unwavering vigilance must be applied in order to determine the responsibility of those caught in the difficulties suffered by favoring a strict interpretation of the jurisprudence in force in each country which requires a thorough verification of cases in order to qualify the failures of the control systems by identifying situations of possible complicity.

The fiscal administration's exercise of its missions in each country can be analyzed in two ways. From a material point of view, it punishes fraudulent schemes, including the application of anti-abuse schemes of our tax law. From an organic point of view, it punishes individuals who benefit from these schemes if they cannot properly punish the individuals who market them. However, as far as individuals are concerned, the administration has a margin of action: its ability to discount and transaction on tax penalties. The choice has thus been made, in several countries to put in place a mechanism to encourage regularization for taxpayers who own undeclared assets. This logic, since it does not constitute an amnesty, deserves to be explored. More specifically, the system is based on the articulation over time of two messages: on the one hand, the announcement of the next hardening of the fight against fraud, both nationally and internationally; on the other hand, the possibility of regularizing illegal situations as soon as possible with reduced penalties.

At the same time, it is a question of bending the common law while taking into account the spontaneous approach. The circular thus rales out any amnesty, any derogatory condition to the common law, any anonymity and any covert negotiations. Taxpayers must pay the full amount of taxes owed, as well as late interest at the rate legal. The incentive to “return” therefore lies in the mitigation of the penalties provided by the general tax code, which the administration has the ability to modulate and which the circular provides for. The common lowing of some countries provides for an increase for willful non-compliance of 40% of the tax due, as well as an annual fine for failure to report being capped at 5% of the value of the assets as of December 31 of the year in question. The circular will allow these penalties to be modulated according to the degree of intentionality of the fraud. It thus distinguishes between “passive” fraudsters (for assets received in succession or gifts, or constituted by the taxpayer when it was not a tax resident), and “active” fraudsters (for assets constituted by the taxpayer while he was a tax resident in their countries).

Taxpayers wishing to regularize their situation will be welcomed in a central and homogeneous manner by the national tax audit services, and more specifically through a “Corrective Declarations Processing Service.” The initial results of this policy are encouraging. Thus, if the current period is good, especially because of the age of many of the people involved. This process is positive for public finances and morals by avoiding tax evasion being co-designed as non-condemnable. The second type of case is made up of people who have earned money abroad, and who for quite a variety of reasons have patriated him to their country. These cases pose problems that are currently poorly addressed, such as reporting accounts abroad. People benefit from pension plans paid by international companies and fed abroad. They report their income but may have failed to check the right box on the form. Finally, people have fed accounts abroad during their lifetime, also for several reasons. Some were reluctant to tax, others wary of a money then regularly devalued.

In addition, consideration could be given to the conditionality of the rebates practiced by the administration. For example, reduced penalties could apply to fraudsters who agree to include repatriated funds in the national economy. After regularization, the taxpayer remains entirely free from the use of the sums that remain at his disposal and can indifferently maintain or modify its destination. It is not a question of establishing an obligation to employ these funds, which would then be contrary to property rights, but rather of creating an incentive to invest them in the real economy. Several criteria could be defined: industry, training, research, housing or renewable energy. Limited to investing in the national economy, the scheme would be a “win-win” offer with virtue effects for growth. As with the current policy of regularization, this possibility should not in any way be as correspond to an amnesty. Taxes due will have to be paid in full, only penalties can be reduced and not eliminated.

Tax control as well as financial supervisors could probably achieve productivity gains through better coordination of their actions, by extending their prerogatives or by developing the capital, which calls for continuous training. On the other hand, changes in forms of control (by strengthening targeted controls) or the modalities of re-election with taxpayers through the introduction of standards must go in this direction. But these productivity gains requiring for some tune and are not so assured that they can be anticipated in budgetary arbitrages. Moreover, the predictable and, in any case hoped for, influx of tax normalization files leads with the sophistication of the montages but also the persistence of very mundane forms of fraud to wish that the means are sufficiently calibrated to achieve the expected success. These provisions can become more efficient knowing that the tax law of countries includes several anti-abuse schemes designed to combat fraud and evasion. Tax, their effectiveness is veiy uneven but real, as the general tax code on transfer pricing has, for example allowed several countries to enhance an average tax base of 3.5 thousand dollars. Thus, we need to talk about the need to change several devices available to the tax authorities:

  • • Abuse of law: Tax procedures allow for the sanctioning of schemes with the exclusive puipose of evading or mitigating tax burdens by relying on a literal application of the texts, but contrary to the intention of their authors. Although its effectiveness has been demonstrated, the scheme nevertheless suffers from a major weakness: it is not applicable when a montage has an “essentially” tax puipose, not “exclusively” tax.
  • • Hybrid devices: these fixtures, which play with the difference in the legal qualification of the same operation between two countries, lead to a situation of double non-taxation. The standard treats the subject from the perspective of artificial indebtedness, whereby companies generate locally deductible financial expenses that are considered non-taxable capital gains abroad. However, the case of other hybrid devices remains unresolved.
  • • Transfer pricing: The general tax code allows a local profit to be taxed that has been transferred by reducing or increasing the purchase or sale prices between related companies. The finance law in some countries aims to reverse the burden of proof in transferring functions or risks to a related company.
  • • A “life insurance account file”: the bank account file lists account of any kind (banking, postal, savings, etc.) opened in the national territories and allows the exploitation of this information by agents authorized to tax control and tax collection procedures. However, life insurance accounts are not subject to such a reporting obligation, even though they are an important vehicle for tax evasion. Extending the file to global life insurance is imperative.

Moreover, in order to combat tax evasion effectively, it is important that the various legal tools of tax control are mobilized, starting with a more systematic use of the right of communication with regard to intermediaries. This right, provided for by the various tax procedures, allows the tax administration to take notice and, if necessary, copy documents held by third parties (private companies, administrations, institutions and various agencies, etc.). The information collected on this occasion may be used to establish the base and control of all taxes, either from the individual or corporation with which it is exercised, or from third parties to that person and including his lawyer, banker or wealth manager. The national tax investigation services of several countries have carried out several large-scale operations in this regard, although the results of these transactions are mixed given that the use of the right of communication with banks is more of a deterrent control operation. The procedure would therefore benefit from being more targeted with regard to banks, and also extended to other intermediaries likely to intervene in tax evasion. However, the reorientation of the tools of tax control is rapidly reaching its limits for intermediaries, due to procedural safeguards benefiting the taxpayer.

It should be noted that tax intermediaries are not sufficiently targeted by the tax authorities. The statistical tool tax control does not allow results to be returned on collections involving financial arrangements or the use of financial intermediaries, a limit, however, understandable given the precision of such categories. In reality, it seems that the tax administration is not in the best position to combat the indelicate and illegal practices of tax intermediaries. Certainly, the number of accounting audits and personal tax status reviews of figure and law professionals could be increased. This attention must be made clear in the context of the programming of each country's tax control operations, and be expressed in “national strategic directions” and then, in the international directorates of federal control, in “international plans for tax control”. But increasing tax controls on intermediaries is not a totally satisfactory solution, for two reasons: first, because it would be unfair beyond a certain point; secondly, because the information obtained during a tax meeting provides information about the situation of the controlled intermediary, but does not say anything about that of its clients. An intermediary can thus very well “trade” tax evasion while being itself up to date with all its obligations.

Moreover, the exercise of the right of communication with an intermediary in order to obtain information about one of his clients cannot in any way lead to a tax check of that intermediary. The right of international communication is indeed a passive and limited record of information, which cannot relate to the situation of the third party questioned. This would then be a de facto tax check, tainted by irregularities: the tax procedures of many countries predict that, before carrying out an accounting audit, the administration is required to notify the taxpayer through an audit notice, which must include specifying the years subject to audit, as well as the taxpayer's ability to be assisted by a board. Its absence results in the nullity of the taxation procedure. The communication droit is therefore useful in collecting fraudulent taxpayers, but is hardly relevant to attacking their indelicate advice.

In the case of tax control, it is mainly the implementation of the right of domicile, or “tax search”: this intrusive procedure must be authorized by an order of the judge of freedoms and holding. In this regard, it is regrettable that the authority has, de facto, a quasi-monopoly in the use of tax searches, which would benefit from being more practiced by the interservice national governments. The administration can then have more reliance on means National Anti-Repression Tax Delinquency Service in some countries, as part of the procedures accelerated confidential fiscal investigation.

Finally, on the occasion of a complaint by the administration for tax evasion, it can draw the attention of the public prosecutor's office to the possible complicity of one or more intermediaries, the judicial authority having the power to extend the research liability for the offence to others other than those directly affected by the complaint. At this time respect, it is necessary regrets that in practice in several countries, the majority of tax evasion cases do not result in sufficient judicial investigations to allow the questioning of accomplices. While it is indeed difficult to establish complicity in this matter, it is regrettable that no judgment has yet been made in this regard. Strengthening action against intermediaries therefore necessarily requires joint action by the fiscal administration and the judicial authority.

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