Tax Avoidance Evasion from the Perspective of a

Tax Avoidance & Evasion from the Perspective of a Small International Financial Services Centre Dr Malcolm Couch Isle of Man Assessor of Income Tax Side Event to UN ECOSOC Meeting, Geneva, 23 July 2007

Introduction q All countries have people and businesses who either fail to comply with tax law or in some cases wilfully break it q Financial markets are increasingly globalised q Criminal activity has also become increasingly multinational and resident to an extent within the global financial market

Introduction (2) q “Dirty money” may account for $1 trillion of crossborder capital flows each year (Raymond Baker) q Sources are corruption, criminality and illicit commerce q Any country can be part of the footprint of these capital flows

Introduction (3) q As an example of the indiscriminate global impact of dirty money, consider: "Criminals seeking to launder money, evade taxes or commit other crimes want to cloak their actions in secrecy, and right now, that's exactly what they get when they establish a US shell company. " (Carl Levin, US Senator)

Introduction (4) q Raymond Baker has called on the USA to state that it “welcomes money that is legally earned and transferred and that will be legally employed, but it will not be a safe haven for dirty money. ” q Baker suggests eight measures should be taken within the US jurisdiction to improve its financial system

Introduction (5) q “The concern of national tax authorities to ensure their ‘fair share’ of the tax base of international business is also counterbalanced by concerns to ensure their country maintains its international competitiveness in attracting investments and as a base for such business” (Sol Picciotto)

Terminology q The debate about tax evasion and avoidance almost always includes a focus on “tax havens”, “offshore” and “offshore finance centres (OFCs)” q What do these terms mean? q There can’t be anything intrinsically wrong with being a financial centre of excellence!

Terminology (2) q “A 1987 Report by the OECD recognised the difficulties involved in providing an objective definition of a tax haven. That Report concluded that a good indicator that a country is playing the role of a tax haven is where the country or territory offers itself or is generally recognised as a tax haven … this is known as the “reputation test” (OECD)

Terminology (3) q “…there is no unanimity on what constitutes an OFC. While authors have proposed various lists of what they consider to be OFCs, an empirical framework for uniform classification does not exist. ” (Ahmed Zoromé, IMF, April 2007) q “There does not exist a single, unambiguous definition of a tax haven or an OFC. ” (Tax Justice Network, July 2007)

Terminology - Conclusion q If everyone knows that they cannot define a “tax haven”, “offshore” or “OFC”, why do they bother trying? q Stigmatisation serves a useful purpose – the scapegoat carries the sins of others

OECD q “…some OFCs will have a secure future, not as “concealment” centres, but as “service” centres that have carved out niche markets in which activities can thrive in a lightly regulated, taxneutral environment. Those that continue in the old way of offering themselves up as places in which home taxes can be avoided will, however, in the author’s opinion, face extinction. ” (Jeffrey Owens, OECD, December 2006)

OECD (2) q Owens again (January 2007): “…if you want to be a serious player in the international environment – not going for sort of the dark side of this game, the illegal activities, the money laundering, the tax evasion – if you want to be a serious offshore financial centre, the key thing is reputation. And if you have a reputation for being a place that’s a bit seedy, without transparency, being prepared in fact to take on illegitimate transactions, then what you’ll find is that the legitimate business will not come your way. ”

UN q The UN Committee of Experts on International Cooperation in Tax Matters considered at their meeting in 2006 the possibility of a tax code of conduct that might: - set a moral tone for international tax community…undermine the social acceptance of international tax avoidance and evasion

UN(2) q Code of conduct concepts (continued) - give moral support to governments that wish to conform to international standards of conduct - create a level playing field for low-tax countries that are meeting their international obligations by putting pressure on non-complying countries to meet their own obligations

Summary q Global financial crime, including tax crime, is a major problem running alongside the legitimate international financial system q Ultimately, effective action to combat global financial crime will be founded on international cooperation, but may also require individual countries to make domestic legislative changes

Summary (2) q Benchmark standards in international tax cooperation should be developed by a broad coalition of countries seeking to understand the underlying problem areas and treating each other with respect – UN sponsorship of such work would give it great credibility q Standards should apply to all, and should define the legitimate global economic community

Contact Malcolm Couch can be contacted via: e-mail at malcolm. couch@gov. im phone on +44 (1624) 685355 (direct line)