Asian centres under spotlight as World Bank calls for abolition of tax havens

Asian risk and insurance managers will need to watch the reaction of international bodies such as the International Monetary Fund (IMF), World Bank and G20 and work closely with compliance and legal departments to make sure they are up to speed with an expected avalanche of new rules on tax avoidance. Tax havens are generally accepted by the international business community so long as rules are complied with. But one senior representative of the World Bank this month called for the total abolition of all tax havens during a high profile press conference at the bank’s spring meeting. As with all international tax havens, Singapore and Hong Kong have never made any secret of their role in the global financial market.hideThey promote themselves as fiscally friendly destinations for individuals and corporations to base themselves. The key is to make sure their laws are clear and that they firmly root out and stamp on any wrongdoing. International companies may seek to maximise their profits by minimising their tax bills in any way possible but they do not want to be seen to be tax dodging and breaking the law. This explains why it is important for the authorities in financial centres such as Hong Kong and Singapore to be seen to be taking matters like the Panama Papers scandal seriously. The Hong Kong authorities so far have only said they are aware of the Panama Papers allegations. The Monetary Authority of Singapore went one step further and said it was investigating and “will not hesitate to take firm action” against wrongdoers. It seems highly unlikely that either of the centres will take any significant action because most of the activity would have been actually legal under local laws and they will not want to stir up a hornet’s nest. Of more significance perhaps than individual cases, however, will be the reaction of global bodies such as the IMF, World Bank, G20 and standards-setters. The European Union (EU) has already reacted swiftly by announcing further measures to enhance corporate tax transparency in the EU, which European risk managers, insurance managers and compliance officers will be watching closely. Risk and insurance managers in the Asia-Pacific region would be well advised to watch developments on the international stage closely too. The IMF, the Organisation for Economic Co-operation and Development (OECD), the United Nations (UN) and the World Bank Group, for example, jointly announced on 19 April the details of an effort to intensify their cooperation on tax issues: the Platform for Collaboration on Tax. The bodies explained that the platform will formalise regular discussions between the four international organisations on the design and implementation of standards for international tax matters. They said it will also strengthen their capacity-building support, deliver jointly developed guidance and enable information-sharing on “operational and knowledge activities”. This effort was welcomed by the G20 finance minister at its February meeting in Shanghai. “Amid the growing importance of taxation in the debate to achieve the UN Sustainable Development Goals, a major aim of the Platform is to better frame technical advice to developing countries as they seek both more capacity support and greater influence in designing international rules,” explained the statement. “Among the Platform’s first tasks will be to deliver a number of ‘toolkits’ designed to help developing countries implement the measures developed under the G20/OECD Base Erosion and Profit Shifting Project and on other international tax issues,” it added. Emerging nations in regions such as Asia-Pacific be warned. The IMF, World Bank, OECD and G20 are coming to tell you how to collect and pay tax. Not surprisingly, the topic was raised at the press conference held during the World Bank’s recent spring meeting in Washington. The main spokespeople were Mauricio Cárdenas, minister of finance and public credit, Colombia; and Ravi Karunanayake, minister of finance, Sri Lanka. Mr Cardenas said the important projects such as infrastructure, humanitarian crises and social programmes that the World Bank supports all require domestic resource “mobilisation”. That, he said, calls for strengthening of tax systems and, interestingly, in quite a big step forward he called for an end to tax havens fullstop. “To strengthen our tax systems, we need international tax cooperation. That was mentioned in the very specific case of making a loud call so that we see an end to the existence of tax havens. Countries need to participate and engage in the exchange of tax information so that we can actually strengthen our own tax systems and that we collaborate at the global level with the information. So, the main message is to put an end to the existence of tax havens,” said Mr Cardenas. Mr Karunanayake was asked what action the Sri Lankan government would take regarding the Panama Papers scandal. The Sri Lanka finance minister responded: “On Panama papers, we have given the necessary authority to investigate all areas where Sri Lankan companies have been involved, which has not been disclosed. As you know, having a tax haven is not the problem; non-disclosure is the problem. So, we have been basically giving the authorities clear signals to get all the information possible.” Mr Karunanayake clearly does not agree with Mr Cardenas that tax havens ought to become a thing of the past, indicating how difficult such a move may be. On 6 April, Mitsuhiro Furusawa, deputy managing director of the IMF, gave the opening address at an open workshop on international taxation at the seventh IMF-Japan High Level Tax Conference for Asian Countries, in Tokyo. Tax evasion and the need for a vigorous Asian and international effort to stamp it out was clearly high on his agenda. “During the past few years, tax evasion and avoidance across national borders have risen to one of the top global policy agenda. At a time of rising fiscal pressures and modest global growth, and of growing concern around the world at increasing inequalities in income and wealth, it is not surprising that so many people are deeply frustrated—even angered—by the ability of some to escape paying what is seen as their fair share of tax,” said Mr Furusawa. The IMF executive said there is a widely shared recognition that too many multinational companies and wealthy individuals are “gaming” a creaking system of international taxation that was not designed for the modern global economy. He used a quote from a speech by US President John Kennedy given in 1963 to emphasise that this is not a new problem. “Recently, more and more enterprises organised abroad by American firms have arranged their corporate structures—aided by artificial arrangements between parent and subsidiary regarding intercompany pricing, the transfer of patent licensing rights, the shifting of management fees and similar practices which maximise the accumulation of profits in the tax haven—so as to exploit the multiplicity of foreign tax systems and international agreements in order to reduce sharply or eliminate completely their tax liabilities both at home and abroad,” said President Kennedy. Mr Furusawa said the good news is that progress has been made in recent years. He said the G20-OECD project on Base Erosion and Profit Shifting is an important step towards reforming a century-old system and preventing multinational companies from “artificially shifting” profits to low-tax locations. He also referred to the joint project mentioned above to establish the automatic exchange of tax information as a global standard. “[This] will make it harder for wealthy individuals to avoid income and wealth taxes by moving assets to offshore locations. This is a project with enormous potential for building fairer and more trusted tax systems,” said Mr Furusawa. The IMF executive added that tax authorities in both advanced and developing countries will continue to face big challenges in international taxation, including traded services, the shifting of intellectual property across borders and matters related to capital gains tax. But he said the game is changing. “We are moving into what may be a different world, as we enter into a phase of BEPS implementation,” said Mr Furusawa. IMF research has found that the revenue at stake on international taxation issues—relative to total revenue, or GDP—may actually be greater for non-OECD countries. Mr Furusawa said there are “hopeful” signs of a more inclusive discussion of international tax issues than has been the case in the past. The IMF and its partners will listen more closely to the concerns of taxpayers and emerging nations as well as the developed world, he promised.

Asian centres under spotlight as World Bank calls for abolition of tax havens

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