Evidence submitted by Mr Tom Sheard (tav0001)

Contents

An Introduction to Corporate Tax Evasion

Tax Evasion vs. Tax Avoidance

Causes of Corporate Tax Evasion

Prominent Cases of Tax Evasion

‘Double Irish with a Dutch Sandwich’

Transfer Mispricing

Political Responses to Corporate Tax Evasion

OECD’s BEPS Action Plan

Actions 8-10

Action 12

Evaluation of BEPS Action Plan

Diverted Profits Tax

Evaluation of Diverted Profits Tax

European Commission Task Force

Evaluation of the European Commission Task Force

Conclusions Drawn from the Evidence Presented

References

An Introduction to Corporate Tax Evasion

Corporate tax evasion has seldom received as much interest in the UK as it has in recent years. The current controversy surrounding the tax practices of several high-profile corporations has drawn considerable scrutiny from the media and inevitably, the general public. As such the question arises: is it possible to eliminate corporate tax evasion, or must it simply be managed? This essay will investigate the arguments surrounding tax evasion/avoidance and the legislative attempts of governments to prevent such behaviour. Tax evasion is no new concept – Plato famously wrote that when the taxes fall “the just will pay more and the unjust less” (Plato, 2007). The rise of corporate tax evasion, however, is a far more recent phenomenon. The rapid expansion of globalisation, alongside the growth of transnational corporations (hereafter TNCs) led to the ubiquitous presence of such entities, in all countries around the globe. This has enabled TNCs to capitalise upon the individual laws of sovereign nations, and in particular, capitalise upon mismatches in tax regimes from country to country. For example, a TNC may operate in a certain country, yet actually register sales in another country with a lower rate of corporation tax – as a result, the sale is still made in the original country yet the TNC pays the lower tax rate. This has resulted in the establishment of so-called ‘tax havens’, broadly defined as “any low-tax country with a goal of attracting capital, or simply any country that has low or non-existent taxes on capital income” (Gravelle, 2009). These tax havens aim to attract investment from TNCs to thus generate economic activity and create employment. This does, however, have a significant impact upon the tax revenues of the countries that TNCs are avoiding taxes in. The US Treasury estimates that it may be losing over $345 billion each year due to a variety of tax avoidance/evasion schemes (US Treasury, 2009). Furthermore, a UK government report estimated that between the years 2005 and 2006, 220 of the biggest 700 companies paid no corporation tax whatsoever (National Audit Office, 2007). The critical issue lays in the fact that such tax evasion/avoidance “disable[s] the capacity of governments to provide education, healthcare, security, pensions, clean water, or [to] redistribute wealth to eradicate poverty and provide a peaceful and equitable society” (Sikka, 2010). Therefore by engaging with tax evasion/avoidance, TNCs deprive their host countries of essential resources which could be used to support its citizens, and ironically, could also be used to develop and maintain vital infrastructure that the TNC is likely dependent upon.

Tax Evasion vs. Tax Avoidance

The distinction between tax evasion and tax avoidance is not a clear one, but several attempts have been made to clarify the difference. A theoretically simplistic approach defines tax evasion as direct violation of the law, whereas tax avoidance is simply taking advantage of ambiguities in the law to reduce the tax burden. Interestingly, the courts of India have in the past considered tax avoidance with the explicit intention of evading taxation to be tax evasion (Tanzi and Shome, 1993). A more complex approach, however, considers behaviour to be tax evasion only if “as a result of the actions of an agent, a tax liability has been crystallised under a tax code and is not satisfied by the agent” (Hasseldine and Morris, 2013). Therefore, as long as any tax liability incurred after the behaviour occurs is satisfied, then unsuccessful attempts at tax avoidance should not be technically classified as tax evasion. In such cases, even though an attempt at tax avoidance was made, the response from the TNC is not in any way deceitful, fraudulent or corrupt. For the purposes of this paper, all attempts to reduce the tax burden through manipulation of law or morally unfair practices shall be considered to be tax evasion.

Causes of Corporate Tax Evasion

The cause of corporate tax evasion is a little easier to understand – directors of TNCs operating in  capitalist societies believe that “there is one and only one social responsibility of business; to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game” (Friedman, 1962). Indeed, Section 172 of the UK Companies Act 2006 requires company directors to act in such a way that would support the lasting success of the company for the sake of the shareholders (Legislation.gov.uk, 2006). As a result of such legislation, many company directors appear to believe that they are ‘duty-bound’ to maximise their profits, despite their additional obligation to other stakeholders including the wider community. This is further exacerbated by the permeation of tax evasion in the corporate world – even if one corporation observes entirely moral and fair tax practices, the larger profits of a tax evading competitor would force them to explore their options in reducing their tax burden to stay competitive. As such, the motivation for corporations to partake in tax evasion is clear – directors are under pressure to maximise shareholder dividends and remain competitive, and tax evasion might appear to be an attractive solution to these problems. However, in recent years the Organisation for Economic Cooperation and Development (OECD) and many sovereign governments have made a concerted effort to prevent such licentious tax evasion, including the development of the BEPS (Base Erosion and Profit Shifting) anti-avoidance scheme. Conversely, some countries have taken this opportunity to lower their corporation tax rates, in a bid to make them a more competitive location for investment - countries such as the UK and Thailand are both prime examples. This can be seen in the reductions in corporate tax rates of 10% over the period 2006 - 2016 in both of the aforementioned countries (KPMG, 2017). As a result of these significant incentives, it comes as no surprise that corporate tax evasion is a widely adopted strategy in the realm of TNCs. The question must thence be considered: can corporate tax evasion be eliminated or can it only be managed? In order to consider this question accurately, this paper will look at the evasive tax structures of TNCs and the responses of political bodies to these behaviours.

Prominent Cases of Tax Evasion

‘Double Irish with a Dutch Sandwich’

One of the most widely discussed cases of tax evasion in the UK is that of Google. Whilst reportedly earning over €22bn (£18.9bn) of sales revenue in 2016 from their Irish-registered company, Google Ireland Limited, they only paid €47m (£40.4m) in tax (The Guardian, 2016a). Evidently, there are huge discrepancies between the tax that Google has paid and the amount they would ordinarily be due to pay. In the case of Google’s operations in Ireland, a scheme referred to as a ‘Double Irish with a Dutch Sandwich’ was employed. This scheme involves a total of four companies – two Irish companies, one Dutch company, and one company in a tax haven (in the case of Google: Bermuda). When Google receives profit from its activities in the US, a large royalty sum is paid to the first Irish company – this dramatically reduces the tax liability in the US since royalties are tax deductible. The Irish tax on the royalty payments is very low, and due to a loophole in Irish tax law Google is able to transfer the profits to the Bermudan tax haven where they remain untaxed and invisible for many years. The second Irish company is required for evading taxation on economic activity in European countries, and is also taxed at a very low rate. This second Irish company can be used to send profits (tax-free) to the first Irish company by rerouting their profit through the Netherlands using an intermediary Dutch holding – when managed correctly, no tax is paid anywhere and the first Irish company again has all of the profits which can then be sent off to Bermuda (Investopedia, 2017). Here, the benefits to firms of aggressive tax avoidance schemes are evident – a significantly reduced tax burden with seemingly no repercussions. This is because it is technically entirely legal, if not unethical. Fundamentally similar schemes have also been undertaken by other notable TNCs such as Apple, who paid just $50 in tax for every $1 000 000 profit it made from sales outside of the US in 2014 – an effective tax rate of 0.005% (Kottasova, 2016). Interestingly, this method of tax evasion is not condemned by Irish authorities – in reality, Irish tax authorities appear unfazed by such behaviour.

Transfer Mispricing

Another major type of tax evasion is ‘transfer mispricing’. This is more prominent in developing countries, and involves two companies that are part of the same international group trading with each other and setting artificially distorted prices in order to ensure that as little profit is recorded in high-tax regimes as possible, and that the rest of the profit is registered in a tax haven (Tax Justice Network, n.d. b). This allows the TNC to reduce its overall tax bill considerably – it is estimated that transfer mispricing results in a loss of $160 billion (£129 billion) of tax revenue in developing countries annually (ChristianAid, 2008).  A prominent example of transfer mispricing can be found in Greenpeace International’s investigation of Danzer Group’s operations in the Democratic Republic of Congo (Greenpeace International, 2008). In this paper, the focus will be upon the relationship between Silforco (a Danzer Group logging subsidiary, based in the Democratic Republic of Congo) and Interholco (the Danzer group timber trading subsidiary, based in Switzerland). The Greenpeace investigation found that Silforco agreed to sell timber to Interholco for an internally fixed price which, as stated in a draft contract between the companies, “for business reasons, is set too low”. Internal records from 2002 show that Silforco intended to under-invoice Interholco by an average of 35% across all of their products, including sawn timber, logs and veneer. The difference between the under-invoiced price and the total price (which is set at an actual market price, as recommended by the “arm’s length principle” – this will be explored more in-depth later in the paper) is then made up through internal invoices by means of credit note, which is then transferred to an offshore account held in the name of Silforco, but managed by Interholco. This allowed Silforco to avoid paying a large portion of their taxes, as their recorded income was far lower than it would be when allowing prices to be determined by market forces. A 2007 price list obtained by Greenpeace indicated that, as an example, 100m3 of wenge timber would’ve been charged at €47 854 (by Silforco) and yet Interholco would have paid €112 146 into the offshore account held by Silforco. Effectively, the combined total price of the wenge timber was €160 000, but only 30% of this transaction was recorded in official documentation, allowing 70% of the sale value to bypass the Democratic Republic of Congo’s customs and tax authorities. Whilst this example is one of the most extreme cases, the effectiveness of this scheme is undeniable – this is exacerbated by the ineffective and underequipped tax authorities in countries such as the Democratic Republic of Congo, which are not armed to deal with the licentious tax practices of TNCs. Using an unpublished 2006 report from Silforco, Greenpeace were able to calculate the amount of tax Silforco evaded through transfer mispricing. Assuming that they achieved their average rate of under-invoicing (35%), and utilising their own declared local export values, it can be estimated that the Danzer group – through Silforco and Interholco alone – managed to evade nearly €280 000 of export-related taxation in the years 2002-2004. Whilst this figure pales in comparison to the tax evasion undertaken by Google or Apple, it is still a significant figure in relation to the size of the Democratic Republic of Congo’s economy – the tax revenue it might have received had the Danzer group stuck to its corporate social responsibility statement claiming “Integrity, reliability and responsibility” (Danzer, n.d.) might have helped to expand the availability of healthcare or the provision of education for the citizens of the Democratic Republic of Congo. It is important to remember that transfer mispricing is not limited to the operations of the Danzer group alone, as it is a globally prevalent issue. Another significant - albeit more general - case can be seen in SABMiller’s behaviour in Africa where it is estimated that they evaded tax of up to £20 000 000 in 2009 across the entire continent (ActionAid, 2012). The abundance of loopholes such as those that enable transfer mispricing, and the difficulty that governments in developing – and oftentimes developed – countries face in closing them suggests that total elimination of corporate tax evasion may well be impossible. Rather, a comprehensive attempt at managing corporate tax evasion may prove more fruitful.

Political Responses to Corporate Tax Evasion

In recent times, there have been several significant changes to the profile of corporate taxation. This has included efforts from sovereign governments and international political bodies, with the general aim to reduce the possibility and profitability of corporate tax evasion.

OECD’s BEPS Action Plan

Globally, the Organisation for Economic Cooperation and Development (hereafter OECD) have been developing the Base Erosion and Profit Shifting Action Plan (commonly referred to as BEPS) in order to provide countries with the tools to “ensure that profits are taxed where economic activities generating the profits are performed and where value is created” (OECD, n.d.). KPMG describes it as “one of the most significant changes to the international corporate tax landscape since the League of Nations proposed the first bilateral tax treaty in 1928” (KPMG, 2015). It is a wide-reaching initiative, with “over 100 countries and jurisdictions” (OECD, n.d.) collaborating to implement the new tax framework on an international scale - of specific interest to this paper are Actions 8-10 and Action 12 of the OECD’s BEPS Action Plan.

Actions 8-10

Actions 8-10 directly attempt to tackle transfer pricing by reinforcing the strength of the “arm’s length principle”. The “arm’s length principle” is a general rule in most tax regimes which, broadly speaking, dictates that the value of transactions between subsidiaries of TNCs should be set at the market price (i.e. at the same price that they would sell the same good/service to another entirely separate firm). The OECD recognises that current application of the arm’s length principle, “with its perceived emphasis on contractual allocations of functions, assets and risks … has also proven vulnerable to manipulation”, and thus has resolved to strengthen “the guidance on applying the arm’s length principle to ensure outcomes where profits are aligned with the value created through underlying economic activities”. The aim of this Action is to allow countries to receive the tax revenue that they are due, and ensure that TNCs pay taxes in countries where the value is created, rather than in countries with the lowest tax regimes. The arm’s length principle was chosen over alternative proposals such as ‘formulary apportionment’ due to the complexity of developing international agreements on key issues which, according to the OECD, “countries do not believe to be attainable in the short or medium term” (OECD, 2015). Instead, the arm’s length principle allows governments to look at comparable markets and determine the equitability of transactions within a corporate group. With the aid of the BEPS’s Actions 8-10, previous issues with the arm’s length principle and “hard-to-value” intangibles have been addressed since tax administrations can now utilise ex-post results of pricings as “presumptive evidence about the appropriateness of the ex-ante pricing arrangements”, and TNCs cannot argue that the pricing was accurate due to uncertainty if ex-post evidence reveals transfer mispricing - these enhancements of the arm’s length principle make transfer mispricing far more difficult and far less lucrative.

Action 12

Action 12 of the BEPS Action Plan recommends that countries develop a mandatory disclosure regime which requires tax payers (the TNCs themselves) and tax planners (accounting firms which promote and sell methods of ‘creative compliance’) to declare their tax compliance methods to tax authorities if they bear “certain features or hallmarks” (OECD, 2015). This allows tax administrations to develop counter-measures to tax evasion schemes as quickly as possible, with minimal loss of tax receipts. The increased information symmetry is especially important for developing countries that are heavily dependent on tax revenues to support their economic development and progress, as a drain on such an income can be prove extremely detrimental to economic growth. It is significant that Action 12 does not recommend disclosure of all tax planning, as this is recognised as being impractical and unwieldy. Instead, only transactions that fall within the features or hallmarks decided by each individual regime must be disclosed to authorities. These hallmarks can be divided into two categories: specific and generic. Specific hallmarks concern areas of particular concern to each country and often examine the use of losses, whilst generic hallmarks scrutinise features that are common to schemes promoted by tax planners.

Evaluation of BEPS Action Plan

The Organisation for Economic Cooperation and Development’s BEPS Action Plan will have a consequential effect on the current global trend towards ‘tax competition’ – the “process by which countries, states or even cities use tax cuts, tax breaks, tax loopholes or tax subsidies to attract investment” (Tax Justice Network, n.d. a). By reducing the amount of profit that can be incorrectly registered in low tax regimes, the profitability of low rates of corporation tax is reduced, significantly reducing the incentive to drive rates of taxation lower and thus reducing ‘tax competition’ – this is often argued to be a good thing, as tax competition is considered to redistribute wealth upwards since governments must make up the shortfall on their corporation tax receipts by cutting back on essential public services or by levying higher taxes on other, less wealthy areas of society (Tax Justice Network, 2013). If tax competition were extinguished, it would go a long way towards eliminating corporate tax evasion entirely, as no countries would see benefits from giving unfair advantages to TNCs. As such, the globally coordinated BEPS Action Plan seems to be a confident and defiant step towards a universally cohesive and impenetrable tax system.

However, Action 12 of the BEPS Action Plan is not a compulsory Action, and countries can opt out of enforcing the mandatory disclosure policies - this leaves room for countries to engage in tax competition, and is potentially harmful for the same reasons outlined above. However, it can be assumed that if a country is signed up to the voluntary BEPS Action Plan, then they will be generally willing to engage with the advice given by the OECD, and as such the mandatory disclosure regime is likely to be deployed effectively and with conviction. This may ultimately prove to simply enable the ‘management’ of corporate tax evasion, as the aggressive tax planning of TNCs is constantly evolving and shifting to exploit new loopholes or set-ups which governments cannot possibly hope to keep pace with. Mandatory disclosure regimes do, however, give jurisdictions the best possible chance to adapt alongside TNCs and block the majority of evasive tax planning.

The positive effects of the mandatory disclosure regimes are undeniable - by forcing firms to reveal their tax planning, aggressive tax strategies can be swiftly shutdown and loss of tax receipts minimised. This allows countries to increase government expenditure and reinvest in supporting their population through improved infrastructure and national services – this also has the added benefit of making a country more attractive to future investment. However, in their report on the BEPS Action Plan, KPMG warns that “the key [to a successful mandatory disclosure regime] will be in carefully targeted implementation to balance harvesting relevant information with avoiding unnecessary disclosures” (KPMG, 2015). As such, countries will have to be precise and cautious with their enforcement of such disclosure regimes to enable compliance and avoid excessive bureaucracy which is generally considered to be a hindrance to investment – it is important to remember the significant role that TNCs play in the global economy, and that actions of international political efforts to reduce tax evasion must not entirely erode the profitability of such operations to the point of non-existence.

Diverted Profits Tax

In the UK, the newly introduced Diverted Profits Tax (hereafter DPT) has attempted to act as a deterrent to firms that are considered to be diverting taxable profits from the UK, and are therefore not ordinarily subject to UK tax. This tax is exceptional in that it is able to transcend international borders and impose a UK tax upon businesses based in other countries. The introduction of this new tax stems largely from the controversy surrounding the behaviour of large TNCs that generate significant profits in the UK, and yet pay little to nothing in way of UK tax. As such, the DPT specifically targets TNCs that engage in licentious tax planning with intention to avoid UK taxes on profits perceived to be generated in the UK. This new tax has been colloquially dubbed the ‘Google tax’, largely due to the timing of the controversy surrounding Google’s tax practices and the perceived focus of the tax upon the actions of technology-centred and web-based firms. However, the DPT does apply to all areas of business in which a firm contravenes UK tax law by diverting profits abroad - as such, it is a far more ubiquitous tax than the term ‘Google tax’ might suggest. The DPT is taxed at a rate of 25% - 5% higher than the standard Corporation tax, at 20% - as it is intended to function as a deterrent or a penal tax, encouraging firms to restructure their current tax arrangements to ensure that all profits generated in the UK are taxed accordingly (Tax Journal, 2015). The intended consequence is that firms would rather simply pay the current Corporation Tax rate of 20% than risk being forced to pay the higher DPT rate of 25% - interestingly, if a firm pursues either option then the UK government is able to increase its tax receipts. It is estimated that the DPT will raise £360 000 000 a year (BBC, 2014) - however, it is important to remember that the central purpose of the new tax is “to encourage behavioural change rather than raise revenue” (Allen & Overy, 2016), and so this will remain the focus of the paper. The DPT looks at two ‘tests’ to determine whether a TNC is to be considered guilty of profit diversion and, analogously, tax evasion. The first of these tests is the ‘avoidance of a UK Permanent Establishment (hereafter PE)’ and, in general terms, applies when a foreign firm is making sales to consumers in the UK whilst there is a related company present in the UK that is performing a service in relation to these sales – under these circumstances HM Revenues & Customs would argue that the UK should receive Corporation Tax revenues on these transactions and so would apply the DPT charge to the foreign company. The second test - the ‘economic substance’ test - examines whether or not it is reasonable to assume that any transactions involving a UK company are designed to secure a tax reduction. The DPT is therefore applied when a UK company or PE makes payments to another company and “the tax reduction resulting from the transaction(s) outweighs any other financial benefit from the transactions; or where the contribution of economic value to the transactions(s) by the other company is less than the tax reduction.” (PwC, 2014). These tests guarantee that the DPT is not applied unfairly, but also ensures that any TNCs which operate schemes that involve the above transgressions suffer appropriate consequences for evading taxation.

Evaluation of Diverted Profits Tax

The UK’s Diverted Profits Tax has been criticised for taking sovereign actions to counteract corporate tax evasion whilst participating in the OECD’s BEPS Action Plan. It has been suggested that such unilateral action brings into question the UK’s commitment to the programme, and erodes international cooperation by legitimising self-concerning legislation external to the BEPS Action Plan (Lexology.com, 2015). However, significantly,  in publications addressing the Diverted Profits Tax, the UK Government has reassured critics that the new DPT “is consistent with the aims of the OECD Base Erosion and Profit Shifting project” (HM Revenues & Customs, 2015). Unfortunately, questions remain as to exactly how the DPT and the Actions recommended by the BEPS Action Plan will align to form a comprehensive and cohesive solution to corporate tax evasion. Additionally, the DPT has faced criticisms over the deployment of the ‘tests’ which judge whether a TNC is liable to pay the new tax or not – in a 2014 analysis of the DPT, PwC expresses concerns over the complexity of the application of the tests and the subjective nature of some information involved in the tests, decrying the fact that “in practice it could be very hard to assess the position and to be confident as to whether or not the test is passed or failed.” (PwC, 2014). This could create uncertainty and leaves room for TNCs to appeal against the application of the tax. Ultimately, the international reach of the DPT, in combination with its penal nature, creates a tax that encourages TNCs to carefully manage their tax affairs in such a manner to not incur a liability under the new tax. It is interesting that the new tax is not formulated to generate tax revenue, but to encourage compliance with existing legislation, as this indicates an ideological focus upon the inherent criminality of tax evasion – as expressed by the OECD: “it is an issue of fairness: when taxpayers (including ordinary individuals) see multinational corporations legally avoiding income tax, it undermines voluntary compliance by all taxpayers” (OECD, 2015). As a result, the perception of tax evasion as an option or possibility for TNCs is being eroded, resulting in the gradual elimination of corporate tax evasion as a whole.

European Commission Task Force

The European Commission, in 2013, established a dedicated task force to tackle “public allegations of favourable tax treatment of certain companies (in particular in the form of tax rulings) voiced in the media and in national Parliaments” (Ec.europa.eu, 2017). This task force, headed by Margrethe Vestager, is dedicated to the investigation of unfair tax practices in member states of the EU. Whilst the European Union allows individual member countries to set and control their own corporation tax rates, they are forbidden from given unfair competitive advantages to firms that operate in their territory (The Guardian, 2016b). Therefore, the European Commission task force consider “sweetheart deals” between countries and corporations to be a violation of EU regulations, and exercise their considerable powers to curb the profitability of such schemes. The most prominent example of the task force’s work is found in the recent demands placed upon Apple – the European Commission is demanding that Apple pay €13bn to the Irish government in recompense for the tax that it has avoided since 2003 (Europa.eu, 2016). However, Irish corporate tax experts estimate that the actual figure would be closer to €19bn due to the “compounding interest from delayed payment” (The Guardian, 2016c). It is not yet clear whether Apple will actually have to pay the €13-19bn yet, as Apple has lodged an appeal against the claims. If this case is won by the European Commission, it will send a strong warning to other TNCs who evade tax in Europe that such behaviour will not be tolerated, and will in fact be met with the full weight of the European Commission. The European Commission has been concretely successful in preventing future exploitation of Ireland’s tax loopholes, as the Irish finance director has pledged to close the loopholes enabling the ‘Double Irish with a Dutch Sandwich’ (as outlined above) by changing Irish “residency rules to require all companies registered in Ireland to also be tax resident”. The European Commission is confronting tax evasion, and unfair tax advantages, across the entirety of the EU with several open formal investigations scrutinising Luxemburg’s alleged state aid given to TNCs such as McDonald’s and Amazon (Ec.europa.eu, 2017).

Evaluation of the European Commission Task Force

The European Commission’s tenacious investigations into the relationships between member countries and certain TNCs have given rise to both praise and concern. It is important to note that the main aim of the Commission is simply to eliminate unfair tax deals that member countries have with TNCs rather than to eliminate corporate tax evasion as a whole. However, whilst pursuing this objective it is to be expected that instances of corporate tax evasion are also eliminated. The unyielding approach of the Commission, and in particular the resilient attitude of Commissioner Margrethe Vestager, has shown the world of corporate tax planning that TNCs are not above the law and must face the consequences of breaching European policy. This stance makes a refreshing change from the world of tax competition whereby sovereign nations make countless concessions to desperately encourage a little investment from global corporations. Instead, the European Commission is defiantly proving that international political bodies cannot, and will not, tolerate such wanton and socially irresponsible behaviour from TNCs. If the task force’s landmark case against Apple’s tax liabilities in Ireland is successful, then this will stand as a bold statement and a pertinent warning against such actions. It is somewhat surprising then, that Ireland is refusing to accept the money that the European Commission is hoping to extract from Apple – accusing the European authority of overreaching their influence and competence, and trampling upon Ireland’s sovereign right to dictate their own national tax affairs (The Guardian, 2016c). It can be assumed that Ireland is refusing the tax money due, at least in part, to their need to maintain an image of being a low-tax jurisdiction. Having the lowest corporation tax rate in the European Union has lon g been the core selling point of Ireland’s sales pitches to attract foreign investment hoping to access the European market. This is reflected in the fact that Ireland has closed the tax loophole that enabled the ‘Double Irish with a Dutch Sandwich’ after significant pressure from the European Commission, and yet has given corporations currently engaged in such schemes until 2020 to find a new tax arrangement (Telegraph.co.uk, 2014). As a result, there is likely to be little change in the attitudes of TNCs engaged in tax evasion. This raises an interesting issue – as long as countries are determined to engage in tax competition, progress towards the elimination of corporate tax evasion is severely inhibited. Therefore, the European Commission’s attempts to curtail “sweetheart deals” between member countries and TNCs can be seen as an important step towards the eradication of corporate tax evasion.

Conclusions Drawn from the Evidence Presented

In conclusion, the potential for a global effort (perhaps even more comprehensively global than the OECD’s BEPS) to succeed in eliminating corporate tax evasion seems likely. If corporation tax rates were established at a globally agreed rate, and with international agreements and legislation preventing profit shifting or transfer mispricing, it appears entirely possible that TNCs could be held accurately accountable for paying the taxes that they are due to. However, the approaches of select countries who aim to attract investment by means of low corporation tax rates completely undermine the coordinated efforts of other, more socially responsible countries. Whilst such attitudes persist, it seems impossible for such benevolent efforts to create lasting change to the landscape of corporate taxation. As a result, it is currently only possible to ‘manage’ corporate tax evasion where it can be detected and prevented. In countries not properly equipped to tackle such evasion, which are generally found in the developing world, TNCs often exploit weak or corrupt governments to increase their profit margins with complete disregard for the people whom they deprive of vital resources. Efforts such as the OECD’s BEPS are a step in the right direction towards combating this abuse, and provide hope yet for complete elimination. Ultimately, a fundamental shift in the mentality of governments abetting corporate tax evasion is required to enable wider efforts to eradicate such evasion to succeed. Rather than seeing their tax systems as behest to the capricious will of TNCs, governments must value the integrity of their policies and have respect for their citizens. Only then will it be possible to truly eliminate corporate tax evasion - with the current global stage, it appears that only management of corporate tax evasion is possible.

March 2018

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