On October 11th the international development charity ActionAid released a new report, entitled Addicted to tax havens, which aimed to provide the first comprehensive analysis on the use of subsidiary companies by UK businesses listed on the FTSE 100.

The report found that 98 of the 100 biggest companies on the FTSE make use of subsidiaries registered in jurisdictions that are regarded as tax havens. In total, the 100 companies have 34 216 subsidiaries, with 8 492 of the entities being located in tax havens.

The banking sector made the most use of subsidiaries registered in offshore financial centers, with the country’s four largest banks holding 1 649 subsidiaries in tax havens. Resource extraction companies were also significant users of entities in tax havens, with BP and Shell alone holding almost 1000 such companies between them.

Delaware was the most prominently used tax haven jurisdiction amongst the investigated companies, with nearly 2 461 subsidiaries being registered in this US state. The Netherlands were the second most popular jurisdiction, accounting for nearly 1 400 registrations.

The new research is based on data that was previously undisclosed by the FTSE listed companies. Last year ActionAid held an investigation into the use of subsidiaries by large UK entities, and it was found that many companies had not fully reported their offshore subsidiaries. The new data was made available when the UK Companies House requested the involved enterprises to re-file their annual returns and provide information on their registered subsidiaries.

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On January 31st the the UK HM Revenue and Customs (HMRC) released a statement stating that from the April 6th 2011 is scheduled to impose a steep hike in the penalties imposed on taxpayers for non-compliance with tax legislation arising from activities involving companies incorporated in offshore jurisdictions. The new penalty “enhancements” will be applicable to taxpayers for late filing of tax returns, inaccuracies in tax returns, and failure to provide the HMRC with adequate notice of a change in tax obligations.

The HMRC has stated that the new penalty rates for offenses will be based on the jurisdiction in which the activities arise, and the perceived tax transparency of that country. All countries will be relegated to one of three categories, with “Category 1” being considered to be the most transparent, while “Category 3” is considered to be the least transparent. Under the revised legislation, where tax offenses arise in a “Category 1” country, the applicable penalty rate will not be altered. Penalties on illicit activity in “Category 2” jurisdictions will be increased 1.5 times, and doubled in “Category 3” countries. The HMRC has listed 37 countries as those considered to be “Category 1 ” jurisdictions, consisting predominantly of OECD-member nations. The HMRC has stated that unprompted disclosure of tax discrepancies and subsequent cooperation with tax authorities could see the taxpayer’s penalty reduced.

The new penalties come on a rising tide of public anger and political indignation in the UK towards the apparent misuse of offshore financial centers by multi-national corporations and high-income earners. However, some international taxation analysts have come to question the motivation behind the new fines and their potential effectiveness, saying that the HMRC and UK will be poorly served by restricting the use of offshore financial centers. According to a HM Treasury report released in October 2010, in the second quarter of 2009 alone, UK banks received over USD 332.5 billion of net financing from Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Guernsey, Isle of Man, Jersey, Turks and Caicos Islands. The nine jurisdictions single-handedly account for over 60 percent of the total financial flows experienced by the UK banking system.

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Last week Global Financial Integrity (GFI), an independent international body aimed at eliminating the occurrence of illicit cross-border flow of capital, released the latest annual report on the severity of illicit outflows across the developing world.

The report stated that the magnitude of illicit capital outflows out of developing nations has increased by 18 percent per year since the year 2000, if viewed in current dollar terms. At the beginning of the decade illicit flows totaled approximately USD 369.3 billion per year, and By 2008 the level had risen to USD 1.26 trillion per year. Over the period between the year 2000 and 2008 cumulatively capital outflows are estimated to be USD 6.5 trillion.

Bribery, tax evasion, theft, trade mispricing and kickbacks were the primary forms in which illicit capital outflows occurred across developing nations. Cumulatively, between the years 2000 and 2008 China underwent the greatest levels of outflows, with an estimated USD 2.18 trillion. Russia was reported to be the second highest, at USD 427 billion, followed by Mexico at USD 416 billion. Saudi Arabia and Malaysia were reported to be the fourth and fifth highest, at levels of USD 302 billion and USD 291 billion respectively.

According to the report, the Middle East and North African (MENA) region experienced the greatest growth in illicit capital outflow levels since the year 2000, at 24.3 percent per annum. Over the same period, developing Europe was reported to have average growth of 23.1 percent per year. Africa, Asia and the Western Hemisphere were reported to have yearly increases of 21.9 percent, 7.85 percent, and 5.18 percent respectively.

According to GFI estimates, the weakened economic conditions seen in 2009 will lead to significantly lowered outflow growth levels in the next iteration of the report. According to the authors of the publication Dev Kar and Karly Curcio, it should be shown that reduced levels of international trade had a deep negative impact on trade mispricing activity and tax evasion. It is estimated that illicit flows will only be shown to have grown by 2.9 percent in 2009, a sharp drop from the levels seen in the previous year.

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On January 7th the Internal Revenue Service (IRS) published a new set of proposed rules regarding the treatment of bank accounts in the US held by non-residents. Under the potential changes, all US-based commercial and private banks, credit unions, brokerage institutions, and other financial service providers, must inform the IRS of the identity and details of non-residents holding an account which receive over USD 10.0 in interest throughout the year.

The new proposal could be seen as an effort by the US to show an element of “goodwill” to foreign governments, as all information collected could potentially be shared through the US’s network of tax exchange agreements. Previously no division of the US Government held any official records of non-resident bank account holders.

As the new rules pave a way for the US to gather and share information regarding non-US resident account holders, the changes could potentially allow the US to participate in the European Savings Tax Directive (ESTD). If the US joins the ESTD it will have much greater access to information regarding US-residents with bank accounts held across the 27-member nations of the European Union.

In a recent press release Andrew Quinlan, president of the Center for Freedom and Prosperity, a non-for-profit market liberalization lobby group, stood in stout opposition to the proposal, saying that it could be harmful to the economy. He claimed that there is approximately USD 10.6 trillion worth of capital passively invested in the US economy by non-US residents, USD 3.6 trillion of which is directly accounted for by interest-earning deposits in banks and financial institutions. Andrew Quinlan pointed to a study carried out on a similar law proposal in 2001, which suggested that the US economy could lose USD 88 billion in investments if the rule change is carried out. He claimed further that if the legislative change was completed “…it could drive hundreds of billions of dollars out of the U.S. economy and harm America’s already shaky financial system.” In its proposal the IRS maintained that there would be no significant investment loses pursuant to the extra filing requirements. However, the IRS made no stipulation as to the potential investment losses that could occur because of the heightened possibility of international information sharing.

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Recently the tax authorities of Belgium released a long-awaited circular intended to clarify a tax law that was introduced into the Belgian tax code on December 23rd 2009. The law concerned the reporting requirements for Belgian resident and non-resident business entities operating in the country which transfer funds or make payments to tax haven jurisdictions.

The law became effective on January 1st 2010, although the concerning legislation was largely regarded as unclear and ambiguous. Commenting on the regulations’ original state and the tax industry’s reaction to the new circular Dirk Van Stappen, tax partner at KPMG Belgium, was quoted as saying, “… the circular on tax havens has been anticipated eagerly, as the legislation was not clear on some points.”

The reporting laws are applicable to all Belgian based companies which make transfers exceeding an amount of EUR 100 000 to countries considered to be tax havens by Belgian authorities, and to any country listed as an “uncooperative jurisdiction” by the Organization for Economic Cooperation and Development (OECD). The new law requires a strict time frame for reporting any transactions to tax havens. Belgian tax authorities also clarified that for the purposes of the legislation all transfers of cash, any interest payments, and transactions involving balance sheet adjustments will be required to be reported. Further, companies and individual taxpayers must be able to provide sufficient evidence that the payments serve a genuine “industrial, commercial or financial need,” which are paid and valued at appropriate accordance with “the arm’s length standard,” and are not constituent to any illicit or suspicious behavior.

Failure to appropriately meet any of the requirements of the new law clarified in the new circular could result in action by tax authorities, with a potential for penalties or disallowance of a deduction for the payments in question. However, the circular reveals that the tax authorities have conceded that some of the requirements may be waived when international information disclosure and movement of capital treaties are applicable.

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