1. Optimisation, Avoidance, Tax Evasion
Jean-François Brun
Gérard Chambas CERDI
Module 8

2. Introduction
Tax avoidance: unintentional failure to comply with tax obligations (failure to make declarations, etc.) Penalties with interest for late payment (administrative procedure)
Tax evasion: intentional failure to comply with tax rules to reduce the amount of taxes to be paid. Penalties and prosecution
Definition specific to each country
Distinction not always clear between avoidance and evasion
Fiscal optimization of multinationals: avoidance or evasion?
In both cases: loss of revenue
EU Workshop Brussels 2014

3. Outline I - WHO? People involved in tax evasion
II - WHY? The causes of tax evasion: shortcomings in the collection and gathering of information, controls and sanctions
III - WHAT? Fiscal Optimization: high demand for exemptions and ad hoc measures
IV - HOW? Operational guidelines to reduce tax evasion
EU Workshop Brussels 2014

4. I People involved in avoidance and tax evasion
Large enterprises (manipulation of the result with transfer price, cost increases such as provisions, optimization)
Medium-sized companies (often hidden in presumptive regimes, simple evasion methods such as false invoices)
Liberal professions: declaration of lower amounts and failure to declare
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5. I forms of avoidance and tax evasion
Other forms of tax evasion (e.g. VAT)
Absence of declarations
Submission of implausible declarations to avoid penalties and exploit the lack of reactivity
Major falsifications (increase of VAT credits, sales without invoices)
EU Workshop Brussels 2014

6. I forms of avoidance and tax evasion
Multinationals: fraud and optimization difficult to reduce
Transfer prices
Location of remuneration abroad (control of exchange)
Lack of clarity in the mining sector
Strategic behaviour as regards controls
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7. What’s happening now with MNCs?
Source:
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8. II The causes of evasion: shortcomings in the gathering of information, controls and sanctions
Shortcomings in collection and gathering information: connection between customs and tax administrations not operational
Control programs biased with protected files, lack of transparency, risk analysis methods not implemented
Incapacity to deal with transfer prices, lack of capacity
Complexity of mechanisms at play (MNCs)
Weak and/or non-implemented sanctions
EU Workshop Brussels 2014

9. II A specific factor of tax and customs evasion: corruption
Corruption frequently endemic, favorable to evasion
Evasion feeds corruption
Tangible progress in modern administrations (audits, computerization, automation of procedures, incentives, sanctions, control)
EU Workshop Brussels 2013

10. III Fiscal Optimisation: Challenges
Exemptions easy to obtain (example, WAEMU has no common investment code)
Possibility for large businesses to obtain adaptations to tax rules: specific regimes via conventions
Use of complex mechanisms by MNCs, e.g. Ghana, SABMiller (Brewer) paid zero tax on profits for the period
Google, average tax rate: 2.4% (double Irish Dutch sandwich, etc.)
Developing countries defenceless
EU Workshop Brussels 2014

11. IV Operational guidelines for the reduction of evasion
Use of legislation in tax code and procedures with automaticity and transparency
Incentives must be in common law
Ethics and transparency
Computerization
Simplified tax
Modern administrative organization
Civic education and communication
Global fight against corruption
Country by country reporting (CBCR)
EU Workshop Brussels 2014

12. IV Operational guidelines for the reduction of evasion
Transfer prices - definition
“The price at which an enterprise transfers physical assets, intangible assets or provides services to affiliated enterprises” according to the OECD - import-export within the same group
World trade: 1/3 is intra-company trade
Provision of services concerned (administration costs, headquarters costs, royalties on patents or brands, etc.)
Arm’s length principle
Fixing transfer price affects the tax base of the countries concerned
EU Workshop Brussels 2014

13. IV Operational guidelines for the reduction of evasion
Transfer prices - the disadvantages
System very favorable for MNCs
Favors complex tax evasion or avoidance mechanisms and procedures (Google, etc.)
Separate entities favorable to tax evasion and tax avoidance (Amazon UK, etc.)
Major loss of revenue for states
Difficult to eliminate. Comparability of data is a problem
Need for dialogue between the tax administrations of different countries and capacity building in developing countries' revenue administrations
EU Workshop Brussels 2014

14. IV Operational guidelines for the reduction of evasion
The Need for Coordinated Global Action on Resource Transparency
Crucial to ensure a level playing field for all companies in the industry
Enhancing transparency on taxation, one of the key priorities during Britain's term as presidency of G8 group
Important that also resource-rich developing countries are involved to implement disclosure requirements and support transparency in their national extractive industries.
The Dodd Frank Act of 2009 in the US, requires large US and foreign oil, gas and mining companies listed on the US stock exchange to report payments on a project-by-project and country-by-country level.
EU Workshop Brussels 2014

15. IV Operational guidelines for the reduction of evasion
EU efforts to fight against tax evasion
The 2012 Communication on “An Action Plan to strengthen the fight against tax fraud and tax evasion” with an action plan for 2013 & 2014
The EU agreed on 9 April 2013 on a Country-by-Country Reporting (CBCR) for oil, gas and mining and forestry sectors
The EU proposal goes further than the US legislation in that it also targets large non-listed companies, as well as loggers of primary forests.
EU Workshop Brussels 2014

16. IV Operational guidelines for reducing evasion: unit tax
Unit tax - the principle
The profit generated by the company considered as a whole (global profit)
Does not seek to identify what amount of profit comes from which entity
Global profit is apportioned according to a formula that takes account of the actual activity in different locations
Taxation must be paid to the places where the profit is generated
Formula based on actual indicators (employees, installed capital, etc.)
Simplification
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17. IV Operational guidelines for reducing evasion: unit tax
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18. IV Operational guidelines for the reduction of evasion
Unit tax - the advantages
No need:
to closely examine the internal accounts in detail, prices used
to negotiate adjustments based on the ALP
to examine “diversion” of profits, in particular, complex techniques to place them into tax heavens.
to define rules of residence and source of profit
Simplification for tax administration and entities subject to tax
EU Workshop Brussels 2014

19. Initiatives for transparency concerning revenue derived from natural resources (1)
The Extracting Industries Transparency Initiative (EITI)
Based on the willingness of countries to report (oil, gas, mines) but participation becomes mandatory (private - public) if the country adopts the initiative.
Data per enterprise, per category of taxes (see below)
Willingness to give a global vision of countries participating (summary report)
23 countries applying the EITI, and 16 candidate countries in 2013, still few resource-rich countries
Natural Resources Charter (NRC) establishes principles for better management – Revenue Watch Institute (RWI)
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20. Initiatives for transparency concerning revenue derived from natural resources (2)
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21. Initiatives for transparency concerning revenue derived from natural resources (3)
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22. Thank you for your attention
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