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Tax spillovers

The assessment procedure

Andrew Baker and Richard Murphy

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Contact:

Professor Richard Murphy FCA FAIA (Hon)Professor of Practice in International Political Economy

Director, Tax Research UKRm D503, Department of International Politics

School of Social SciencesCity, University of London

Northampton Square, London EC1V OHBPhone: 0777 552 1797

Email: [email protected]

November 2018

Acknowledgements The project has received funding from the European Union’s Horizon 2020 research and innovation

programme under grant agreement No 727145.

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Tax spillovers

The assessment procedure

1. Introduction

In a recent paper that we have written for Global Policy (Baker and Murphy 2019) we explained a new approach to what we called tax spillovers that we think should be adopted by states, international organisations and others who are keen to assess the strengths and weaknesses within their tax systems. We argued that a tax spillover is the impact one tax measure has on another part of a tax system. Prior to publication of our paper the focus was primarily international; largely related to corporation tax and was focused upon the impact of measures on developing countries. Without in any way dismissing these concerns, we argued that tax spillovers can occur both within a jurisdiction and between jurisdictions; between different taxes; and can be created by administrative disorder and regulatory arrangements. The consequence was that we proposed a qualitative evaluation framework that seeks to assess the relationship between four direct taxes within and between tax jurisdictions to a get broader sense of the risks and vulnerabilities particular regimes generate and face in their entirety.

In our view a state might wish to do this for a number of reasons. Firstly, it might be seeking to raise additional tax revenues without increasing tax rates or extending the tax base. Second, it may be seeking to uphold the rule of law. Third, it may be trying to improve its fiscal management of the economy for which it is responsible. Fourth, it may be seeking to ensure that the incentives and other arrangements to encourage particular behaviours built into the tax system work to best effect. Fifthly, it might be seeking to promote economic and social justice by making sure that everyone pays their share of the taxes owing a state and the burden does not fall inappropriately on those who are law abiding alone. Sixth, it may be worried about the investment it is making in its tax authority and wondering whether those funds are being used to best effect. Last, it may be concerned about its international relations and the way these are impacted by tax competition. Whatever the motivation for concern, it is our suggestion that undertaking a tax spillover appraisal using the methodology that we have proposed will assist the achievement of these objectives, many of which might exist simultaneously in different branches of any government. It is for these reasons that we have developed our methodology.

Developing a methodology is, however, only half of the task that we set ourselves. Our second objective was to show that the methodology we had developed might be useful in practice. To do that we have prepared two additional papers. The first is this paper, which explains how we think that the tax spillover appraisal methodology that we have proposed might be used. Our aim has been to suggest those questions and approaches that an appraiser of the tax system of any

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jurisdiction might wish to bear in mind when approaching such an appraisal. The intention is to be generic and provocative in the sense that any appraisal requires the person undertaking it to be critically aware of the potential weaknesses in the system that they are reviewing.

In addition, we have prepared an example tax spillover appraisal for the United Kingdom in 2018 based on the methodology we have proposed in the hope that this might demonstrate the way in which that methodology might be applied. As a result of the appraisal we have also made recommendations for ways in which the UK tax system might be changed in reaction to the threats and challenges that we identify within it. This is not a peripheral purpose of this exercise, but is instead fundamental to it. The tool we have developed is intended to empower regulators, this being an explicit goal of the Horizon 2020 Combating Financial Fraud and Empowering Regulators (COFFERS) project that has helped fund Richard Murphy’s participation in this work.

We stress that the approach that we use incorporates a mildly normative assumption, the reason for which is explained in the Global Policy paper. This assumption is that a tax system should do no harm. We suggest that this means that neither the tax system as a whole, or any part of it, should do harm either to the tax system of another jurisdiction, or to another part of the tax system of the jurisdiction that is being appraised. We think that this is the minimum and only assumption required to undertake an appraisal and believe it is the only assumption implicit in the appraisal that follows.

2. Our approach to tax spillover assessment

A fully reasoned explanation for the tax spillover appraisal system that we have developed, and for its departure from previously used methods in this area, is explained in our academic paper on this issue. We would stress that we see the framework as complementary to, rather than in competition with quantitative methods for measuring the size of spillovers. We will not repeat that reasoning in detail here. Rather we will explain what is required to consider the appraisal of the UK tax system included in this paper.

The aim of our tax spillover assessment system is to appraise spillovers in two ways. The first is the way in which spillovers exist within the domestic economy i.e. how one tax or administrative issue within the country impacts on another tax or administrative issue within the same country. This is a relatively self-contained process, for perhaps obvious reasons. The second way is to assess international tax spillovers. This process is undertaken in two parts. The first appraises the threat that the tax system of the country being assessed poses to other countries whilst the second assesses the vulnerability of that tax system to a loss of revenue as a consequence of the tax systems of other countries. In all case a score of 5 is indicative of bad spillover performance and the generation of high spillover risks, or significant spillover vulnerabilities. 1 is the best score possible. The higher the score overall, the higher the spillover risks and vulnerabilities.

When considering domestic spillovers the whole appraisal can be recorded in one table. The scoring system both the domestic spillover and international vulnerability grid is as follows

5.The tax base or policy area being considered is heavily undermined by and vulnerable to the area it is being compared with.

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4. The tax base or policy area being considered is to some extent undermined by and vulnerable to the area it is being compared with3. The tax base or policy area being considered is neither undermined nor reinforced by the area it is being compared with and has limited vulnerability2. The tax base or policy area being considered is to some extent reinforced by the area it is being compared, and has little vulnerability1. The tax base or policy area being considered is significantly reinforced by the area it is being compared with and is secure.

Internationally the appraisal makes a fundamental assumption. It assumes that a good tax or tax policy measure within the jurisdiction will cause no harm to another tax either within that same jurisdiction, or elsewhere. Importantly, this means that the appraisal system is not specifically intended to reward those occasions when the tax system of one country is designed to enhance the tax revenues of another country at cost to the country putting the arrangement in place. Instead it is focused upon negative spillover impacts.

The international system does, like the domestic system, appraise tax bases and policy measures on a scale from 1 to 5

With regard to assessment of the aggressiveness of the tax system - which is a measurement of the tax spillover effect the jurisdiction creates for other countries - the following assessment scale is used:

5. The area being considered undermines this element of the tax system in other countries to a considerable extent.4. Some features of the area being considered undermine elements of this aspect of the tax system of other countries to some extent.3. Some features of the area being considered can have detrimental effects on this area of the tax system in other countries, but this is limited.2. The area being considered has limited impact on this element of the tax system in other countries, with few signs of harm.1. The area being considered poses no threats or risks to this element of the tax system in other countries.

3. The approach to domestic tax spillover appraisal

The assessment process reviews four major tax systems and four areas of tax administration and policy. Each has to be appraised in turn. By definition, because spillover effects are being considered, they are appraised for their impact on each other.

With regard to tax systems, only direct taxes have been taken into consideration. This is because indirect taxes, such as domestic sales taxation or value added taxation, are not usually the subject of tax competition: those indirect taxes that are exploited for internationally competitive purposes are usually associated with trade competition rather than tax competition e.g. tariffs and customs duties and are best considered in that context.

Those direct taxes that are appraised here have either been chosen because of their significance in

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the overall taxation revenues of many countries (income tax, social security contributions and, potentially, corporation tax) or because the taxes in question were always intended to be defensive (corporation tax and capital gains tax). Defensive taxes are those that exist, at least in part, to prevent leakage from another tax base. In the case of both corporation tax and capital gains tax the original intention of those introducing these taxes was to defend the income tax base from leakage by the re-categorisation of income sources into these alternative tax bases. Spillover appraisal does, then, consider whether this objective is still being fulfilled.

The four aspects of tax administration that are considered are as follows, with some of the issues that might be considered with regard to each of them being noted:

System appraised Brief description of the issue being considered and the reason for appraising it

Tax politics Are the tax politics of the jurisdiction positive about the importance of tax compliance or do they alternatively embrace a general perception that tax is ‘red-tape’ and a ‘burden’ on people who are forced to pay so that government can spend ‘taxpayers’ money?’

Do the tax politics of the jurisdiction provide support for the payment of tax by, for example, provide sufficient resources to ensure that can happen?

Do the tax politics of the jurisdiction in effective encourage tax abuse by providing tax allowances and reliefs that encourage the non-payment of tax?

Do the tax politics of the jurisdiction see tax, and even government itself, as an impediment to what it considers to be real economic activity in the private sector?

Is tax competition encouraged? Is inequality encouraged by the precision of extensive allowances

and reliefs for those already wealthy that might as a consequence encourage others to evade?

Tax administration Does the design of the tax system make it relatively straightforward for the tax administration to undertake its work?

Alternatively, is the tax regime such that there are so many allowances, reliefs and complications that it is hard for the tax administration to appraise whether a taxpayer is tax compliant, or not?

Is the tax administration adequately resourced? Are those within the tax administration paid adequately to ensure

that those of sufficient calibre to enforce the tax system are recruited?

Is the tax administration led by those who believe that tax compliance is a matter of importance, or is it, instead, dominated by those from the tax professions, other parts of the civil service, or political appointments, who show bias against the positive role that tax can play in society?

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Are all taxpayers required to submit tax returns? Does the tax administration go out of its way to assist the payment

of tax e.g. by providing for deduction of tax at source, the pre-population of tax returns, ease of online tax return submission, the quality of tax communication, etc.?

Does the tax administration have a positive or negative view of taxpayers, and how does this impact upon the tax morale of the jurisdiction?

Does the tax administration appropriately pursue those who do not comply with its requirements?

Is there an appropriate penalty regime? Are the systems of appeal available against the decisions of the tax

administration readily accessible and free to use? Does the tax administration publish regular reports upon its working

that are freely available for those with an interest in the issue to use?

Company and trust administration

Is incorporation easy, making the opt out from the income tax system a readily available thing to do?

Is the corporation tax and trust regime of the jurisdiction actively enforced meaning that an entity that fails to settle tax liabilities owing within either such structure faces the same degree of personal risk as they would face if failing to settle their personal income tax liabilities?

Are the identities of those making use of the company and trust structures provided by the jurisdiction identifiable so that the consequences of their use of such structures can be appraised within the income tax system?

Is that information on identities also readily available to those who wish to know with whom they are trading, meaning that the chance of error reporting from the public is increased?

Are the accounts of the entities making use of the arrangements offered freely available to the public so that the chance of error reporting from the public is increased?

Is the company and trust administration regime of the jurisdiction adequately resourced to undertake its work and enforce the standards laid down in law?

Are those who fail to comply with the regime prosecuted and are the penalties imposed of appropriate scale?

Is data on the operation of these administrations published and freely accessible?

International agreements

Does the income tax system of the jurisdiction fairly and consistently treat those who are both long-term resident and short-term migrant within the jurisdiction?

Does the income tax system of the jurisdiction provide ‘ring fences’ that can be exploited by those not ordinarily resident in the

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jurisdiction, so undermining the credibility of its tax system in the eyes of its local population?

Does the jurisdiction engage in effective information exchange with other jurisdictions, encompassing income tax, corporation tax, capital gains tax and other sources of income to ensure that the local tax base is adequately protected from those seeking to evade their liabilities by attempting to record their income or assets offshore?

Is corporate and trust information readily and usually automatically shared with other tax administrations?

Does the jurisdiction proactively engage with other jurisdictions to cooperate in the collection of tax owing to whichever jurisdiction it may be due?

Does the jurisdiction proactively engage in measures to beat international tax abuse or is it a reluctant participant once a standard is being forced?

It is suggested that the thinking process to undertake the appraisal should be in two stages. The first looks at each tax, policy or administrative issue and considers issues regarding its own design and the strengths or weaknesses. The second then considers these issues in comparison to each other. These issues are considered for each tax in turn.

We suggest that if these appraisals are documented the resulting appraisal might well be a useful review of the tax system of the jurisdiction in its own right. If a number of such views are sought and collated an objective assessment would, that might also usefully reflect a variety of views, might be offered.

a. Income tax

An income tax system charges individual to tax on their earnings in a year from employment; self-employment; royalties; investments including interest, dividends and rents; as well as income from pensions, and (for those fortunate enough to enjoy them) trusts, foundations and other such sources. The income of partnerships is usually taxed as if it is the individual income of the partners and income tax is paid by each of them. Some companies and other structures are taxed as if they are partnerships even though in legal terms they are not. In that case their members pay income tax on their share of the company’s income.

Background questions

Generic question Answer

What is the overall perception of tax rates?

Low rates induce inward flows. High rates may induce outward flows.

What is the rate of progressivity by Highly progressive rates may encourage flows out of the

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percentage bands? tax. Low or no tax may encourage inward flows to the tax.

What is the progressivity by income band?

If higher rates are not due until income is well above national average then progressive tax rates will be more readily accepted as being fair.

Is the tax base comprehensive? A good tax is comprehensive to ensure fairness: no significant income falls out of the tax base.

Are there a significant number of incentives, allowances and reliefs that encourage tax planning?

The more such incentives, allowances and reliefs that there are the greater is the scope for tax planning, and so also tax avoidance.

Is the tax base consistent when comparing the situations of those resident in the short and long term?

A good tax treats people equally before the law. It does not offer incentives to relocate between jurisdictions to secure a tax advantage.

Spillover questions.

Issue being compared with Questions that might be asked when undertaking the comparison

Corporation tax Are there significant differences between income tax and corporation tax rates that encourage flows in either direction?

Does the corporation tax system allow roll up of income at lower tax rates than the income tax system?

Does the corporation tax system have additional incentives, allowances and reliefs for trade when compared to the income tax system? For example, are expenses easier to offset against gross income in a company than they are against an employment?

Is the corporation tax regime of the jurisdiction as well enforced as the income tax regime?

Do the penalties for non-compliance with either tax encourage a person to relocate their income to the other tax base?

Capital gains tax Does the capital gains tax system provide significant opportunities to save tax if a source of income can be shifted into it when compared to the income tax system?

Is there an additional annual allowance or exemption for capital gains that encourages income

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to be shifted into the capital gains tax regime? Does either regime favour one form of family

structure over another? Do the taxes tax superficially similar transactions

differently so encouraging bias against or for one or other?

Are there significant differences between income tax and capital gains tax rates?

Social security Are there aspects of either the income tax or social security systems that encourage income to be recategorised in ways that undermine the overall effectiveness of either tax system. For example, does social security encourage income to be declared as arising from a self-employment or does it encourage earned income to be recategorised as unearned income arising from, for example, dividends from a family owned company, to avoid a social security charge arising?

Does the complexity of having two tax systems on similar sorts of income from work discourage overall tax compliance?

Are there serious disparities in rates between the two taxes that discourage compliance at certain income brackets e.g. with regard to low or high pay?

Do the taxes, in combination, create uneven progressiveness within the tax system creating perverse tax incentives to avoid or evade at certain points within it?

Do the systems determine net income in the same way for all categories of income? For example, can the same expenses be offset in each case? If not, does this have perverse effects on compliance?

Tax politics As noted in the preamble to this section, taking income tax issues into account.

Tax administration As noted in the preamble to this section, taking income tax issues into account.

Company and trust administration As noted in the preamble to this section, taking income tax issues into account.

International agreements As noted in the preamble to this section, taking

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income tax issues into account.

b. Corporation tax

A corporation tax system does in most countries charge companies to tax on their earnings in a year derived from trading; investments including interest and rents (but not always dividends from other companies); royalties and, in some jurisdictions, capital gains. Some companies and structures are exempt from this charge because the members of the company are instead liable to pay the tax due on the income of the company as if it was their own and income tax is paid instead.





Is the tax base likely to provide favour to income arising outside the jurisdiction?

A territorial tax system is unlikely to tax income arising outside the jurisdiction and so is attractive to multinational corporations. It can create bias against companies trading solely in domestic markets and so distort fair competition.

Are non-resident companies permitted?

These companies are registered in a jurisdiction but are not taxable there because their income is deemed to arise ‘elsewhere’ although that other place may be unaware of the fact that trade is taking place in its jurisdiction.

Are there special rates for dividends / royalties / overseas financial income and other financial flows?

Such rates tend to be very attractive to multinational corporations. They may be exploited by those with wealth who can reduce their overall tax rate by investing in assets enjoying such exemptions and so reduce their overall tax rates.

Are there special rates for capital gains taxed within the corporation tax system?

These rates tend to induce inward flows into the tax base both nationally and internationally.

Are there effective transfer pricing rules?

Not all transfer pricing rules are enforced alike: some are more attractive to multinational corporations than others.

Are advance pricing agreements, tax These arrangements are invariably seen as a part of tax

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holidays, special tax rates and other arrangements available to induce foreign direct investment into the jurisdiction?

competition, but can be hidden from view by opacity with in the tax regime. They tend to undermine businesses operating solely in the domestic economy and create unfair competitive environments as a consequence.

Are there effective controlled foreign company rules?

Without such rules it becomes very easy for companies in the jurisdiction to have access to tax havens.

Does the country require the submission of country-by-country reports for all companies of any significant size that operate on a multinational basis?

These reports are designed to indicate the likely existence of profit shifting the taxation purposes. Their presence, or absence, does then indicate the likely attitude of the tax authority towards such issues within the corporation tax regime.


NB: where relevant questions that might be considered here have already been raised in earlier sections they are not repeated.


Income tax As noted above

Capital gains tax Are there arrangements in either tax that encouraged the relocation of transactions from one tax base to the other e.g. is there, for example, an exemption for assets within a company that is not available to an individual, or are there additional allowances and reliefs available to an individual which are not available to a company, for example?

Are the tax rates consistent between the two taxes or do they encourage relocation of transactions from one base to another?

Are the expenses available for offset consistent between the two taxes or do they encourage the relocation of some assets from one tax base to the other?

Social security Are social security charges applied to all withdrawals of profit from a company paid to its owners in whatever legal form they might be structured? If not, do the available corporate forms within the jurisdiction encourage the relocation of an income stream from income tax to corporation

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tax so that a social security charge, that might otherwise be payable, is avoided? Is this particularly true with regard to those withdrawals of income that are considered to be unearned, rather than earned, income e.g. dividends, when compared to salaries?

Can incorporation be used to disguise what would otherwise be considered an employment and in the process permit a lower, or no, social security contribution to be paid upon the benefit arising from the activity?

Is enforcement of social security obligations (including unlimited personal liability) more effective than enforcement of corporation tax liabilities encouraging the relocation of the recording of an income stream into a corporate entity, and so the shifting of the tax base from what would otherwise be income tax in the corporation tax with the intention of avoiding payment of social security?

Are the social security contributions payable upon withdrawal of income from a company lower than those paid upon receipt of earnings from employment or on the generation of profits within self-employment? Does this encourage the relocation of tax bases?

Tax politics As noted in the preamble to this section, taking corporation tax issues into account.

Tax administration As noted in the preamble to this section, taking corporation tax issues into account.

Company and trust administration As noted in the preamble to this section, taking corporation tax issues into account.

International agreements As noted in the preamble to this section, taking corporation tax issues into account.

c. Capital gains tax

A capital gains tax system charges individuals to tax on the gains that they make on the sale of capital assets that they have owned. However, assets bought and sold in the course of a trade are usually subject to income tax or corporation tax depending upon the entity pursuing that activity.

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What is the overall perception of capital gains tax rates?

Low rates induce inward flows to the tax base. High rates may induce outward flows to other tax bases.

What is the rate of progressivity within the capital gains tax?

Highly progressive rates may encourage flows out of the tax. Low or not tax may encourage inward flows to the tax.

Is the tax base comprehensive? A good tax is comprehensive to ensure fairness: no significant gains should fall outside the tax base.



Does the capital gains tax appear to provide a tax regime that favours those with wealth over those who have to work for a living?

Such an impression can be a key consideration in the politics of taxation.





Corporation tax As noted above

Social security It is rare that there is significant interaction between social security charges and capital gains tax. If there is it is likely that the issue has been considered when comparing the income tax system and the capital gains tax system.

Tax politics As noted in the preamble to this section, taking capital gains tax issues into account.

Tax administration As noted in the preamble to this section, taking capital gains tax issues into account.

Company and trust administration As noted in the preamble to this section, taking

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capital gains tax issues into account.

International agreements As noted in the preamble to this section, taking capital gains tax issues into account.

d. Social security

A social security tax charge that is usually levied in addition to income tax on the earnings that a person makes from employment. In addition, such a charge is often levied on the profits arising from self-employment and on partnership income. Many social security systems also include an additional tax charge payable by an employer based upon the value of the gross cost of the wages and benefits that an employer provides to their employees. This sum does not appear to be paid by the employee but is part of the employer’s total cost of employing a person, nonetheless. Social security charges are rarely levied on investment income or on pensions and in some countries those of pensionable age are exempt from the charge.



High rates bias heavily against labour income and encourage attempts to disguise it

What is the rate of progressivity by percentage bands?

Many social security systems are regressive and open to exploitation in various ways as a result.


Does the charge only apply at specific levels of income or is it open ended?

Is the tax base comprehensive? Does the charge apply equally to all types of income or are some e.g. self-employment, favoured over others e.g. employment?

Is there an equivalent charge on unearned income e.g. an investment income surcharge?

If such charges do not exist the tax rates on unearned income may be very much lower than on earned income encouraging the recategorisation of income.





Capital gains tax As noted above

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Tax politics As noted in the preamble to this section, taking social security issues into account.

Tax administration As noted in the preamble to this section, taking social security issues into account.

Company and trust administration As noted in the preamble to this section, taking social security issues into account.

International agreements As noted in the preamble to this section, taking social security issues into account.

e. Tax politics

The term tax politics is used in this appraisal system to refer to the political environment that a country creates around its tax system and the attitude towards tax compliance that it reveals as a result.

Tax compliance is defined for these purposes as seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes.

Some countries are explicit about the fact that they seek to use tax as a factor in seeking to induce the relocation of economic activity or portfolio investment to their jurisdiction. They create environments in which tax competition is encouraged as a result, with the intention of there being spillover effects.

Other countries seek to have tax systems that are neutral: it is tax compliance and nothing more that they seek.

In between there are many possibilities and in most countries some degree of tax politics can usually be seen. This might be evidenced domestically as well as internationally. For example, bias might be shown towards investment income in a tax system, or towards certain types of company or companies in general, or towards capital gains or wealth. Sometimes self-employed earnings are favoured over earnings from employment. In many jurisdictions the tax system is used to favour some activities over others e.g. incentives to save for retirement might be provided through the tax system. Many of these incentives will either deliberately or inadvertently have impact on the effectiveness of the tax system; which taxes are favoured by tax payers over another; the scale of tax avoidance that might take place as a consequence, and have impact on the resulting overall tax take. It is these consequences that are appraised here.


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Is tax competitiveness a feature of national political debate?

An environment in which tax competitiveness is promoted is likely to be more accommodating of tax avoidance than one that is not.

Is the jurisdiction one that considers itself to be an ‘international finance centre’ (which some consider to be a euphemism for a tax haven) or does it otherwise quite directly use its tax base as an instrument within its economic policy with potential consequences for the domestic economy which might be unable to compete with foreign-owned enterprises as a result?

Just because a jurisdiction considers itself to be an international finance centre does not mean that it is lax with regard to its own tax administration: there is evidence that some places that have such status also have very effective domestic tax systems. However, it is likely that such jurisdictions evidence a bias against charging income and gains derived from capital to tax; offer generously low rates of corporation tax, especially with regard to income generated outside the jurisdiction; and usually exploit these situations to encourage the relocation of profits on an artificial basis to their domain. This is usually interpreted as aggressive tax competition.

Does the jurisdiction commonly adopt policies that can be considered as favourable to income and gains derived from capital sources, or to profits earn from business meaning that these sources of revenue tend to be more lowly taxed than those derived from employment and, possibly, from consumption?

Any jurisdiction is free to set its own tax rates but the wider the disparity in rates on offer within a jurisdiction the greater is the potential for tax abuse to arise. Almost all tax abuse takes place on the boundary between different tax systems, and if domestic tax systems offer widely differing tax rates the incentive to abuse is increased. This tax policy will, then, encourage an environment where tax compliance is likely to be reduced.

Is tax seen as an instrument for delivering social domestic policy?

Many countries are motivated to use the tax system to assist the delivery of their social policy by providing incentives and allowances for certain types of economic activity that they consider to be favourable or to ensure that some people within their community pay less (and on occasion, more) tax to reflect their personal circumstances and needs. The use of the tax system in this way can be beneficial, but if too much complexity is introduced into the system, or too many allowances and reliefs are provided when direct grants and benefits might be better suited to achieving a government goal then the resulting complexity in the tax system can be disadvantageous, and provide opportunities for tax abuse, avoidance, and even evasion, whilst also increasing the risk of errors arising and so increases the cost of tax administration. The balance between what is desirable or not is frequently hard to judge in individual

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cases, but overall excess in either direction is usually fairly easy to identify.

To politicians in the jurisdiction project a ‘pro-tax’ culture and as a consequence both reinforce the obligation of those resident within it to settle their tax liabilities and provide resources to the tax administration to ensure that this takes place?

There is no one test that can evidence the existence of a ‘pro-tax’ culture within a jurisdiction: appraisal will always be a matter of judgement. However, whether or not the tax system appears to be appropriately funded to achieve the objectives that politicians claim they set for it would appear to be a fair basis for assessment.

Are the politicians of the jurisdiction interested in the effectiveness of their tax system? Do they evidence this by, for example, measuring the tax gap within their jurisdiction?

The tax gap is the difference between the amount of money that should be collected by a tax system if it was to be operated in accordance with the interpretation placed upon it by the tax administration of the jurisdiction and the amount of tax that is actually paid during the course of a period. Relatively few countries undertake such an appraisal but without it politicians will rarely have the tool they need to assess whether or not the taxes that they put in place are effective, or otherwise, and whether or not they achieve the goals set for them, or not. The existence of a tax gap measure can, then, be considered some indication of the interest that politicians have in the success or otherwise of the tax administration of their jurisdiction.



Income tax Is the income tax system unduly complicated because of the imposition of too many political objectives upon it creating complexity and opportunities for abuse and arbitrage that undermine the effectiveness of the system, increase the cost of tax authority monitoring and destroy the effective measurement of outcomes?

Is there bias within the income tax system towards certain types of income likely to create resentment, and in the process create a behavioural response in the form of reduced tax compliance? Examples might be excessive allowances only available to those on higher income or favourable treatment of income derived from investments as compared to

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that earned from work? Is there bias within the tax so that some types of

income, e.g. those from self-employment, are favoured over those from employment by reason of additional, or more tolerant, deduction of expenses for offset against income?

Are all taxpayers able to access assistance to ensure that they can effectively comply with their obligations on an equal basis, or does the system itself create bias towards some taxpayers e.g. by the provision of client relationship managers for those with considerable wealth, when those on lesser incomes are not given equivalent access to tax advice from the tax authority?

Do the tax politics of the country prevent the creation of a level playing field where all are taxed equally e.g. is there a favourable regime for those not long-term resident in the country compared to those who are?

Do the tax politics of the country support the income tax by the creation of effective corporation tax and capital gains tax systems, or do they undermine this tax because of an inherent political bias towards those who might pay those alternative taxes?

Corporation tax Is the corporation tax system within the jurisdiction appropriately used for the implementation of the economic strategy of its government? Tax policy might, appropriately, form a part of that strategy, but not when the result is an unlevel playing field biased in favour of particular businesses, sizes of enterprise or class of owners.

Do corporation tax rates fairly reflect the ability of differing companies to pay? For example, do smaller copies have a lower rate to reflect their higher cost of capital?

Are the corporation tax obligations of smaller companies sufficient to ensure that tax is paid but not so onerous that they are required to comply with requirements only really appropriate the larger, or multinational companies?

Is the accounting regime of the jurisdiction designed to support the payment of corporation tax by providing the necessary information to assist the

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company to do so? Does the accounting regime of the jurisdiction

ensure that the stakeholders of the company can appraise whether it does appropriately fulfil its corporation tax obligations, or not?

Is there the political will to ensure that the corporation tax regime of the country is appropriately integrated with the income tax system to prevent double taxation and at the same time ensure that double non-taxation is not possible?

Is the corporation tax regime in use comprehensive in the sense that it charges all sources of income to tax, from wherever they arise, or are certain categories exempted for the benefit of certain groups? For example, is income arising from outside the country exempt from this tax, giving a bias to those who trade this way which is open to exploitation, not least with regard to those who solely trade domestically?

Capital gains tax Does the political environment of the jurisdiction create a bias towards those with capital gains, or not?

Do those responsible for the tax system of the jurisdiction appreciate that capital gains tax largely exists to prevent leakage from the income tax system and the two must, therefore, act in tandem to be effective?

Are there incentives or allowances that appear to bias those with considerable gains within the system? For example, is a large company able to enjoy exemptions from gains that small companies cannot? Or, alternatively, are those with gains arising from business activities treated more favourably than those with gains from other sources?

Social security How do the politics of the jurisdiction justify a charge for social security contributions?

Do those politics recognise that such contributions are almost invariably regressive if they only charge income arising from work to such a tax? How is this compensated for in the rest of the tax system?

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Is the Social Security system of the jurisdiction progressive? If not, how is this justified?

Tax administration Is the tax administration of the jurisdiction given the political support that it needs to undertake its work?

Is the domestic tax authority provided with the resources that are required for it to collect all the facts of this reasonably owing?

Is the work of the tax jurisdiction effectively appraised by the collection of tax gap data that is published on a regular basis?

Does the tax administration have a business plan, and is it a transparent about its fulfilment of its tasks?

Is there an appropriate, and affordable, appeals system so that those who do not agree with the taxes imposed upon them have a reasonable prospect of having their complaint heard by a third party who is objective with regard to the issues raised?

Are steps taken to ensure that those on low incomes given appropriate access to assistance to ensure that they can comply with their tax obligations and are provided with the assistance necessary to ensure that they can receive tax refunds if they are owing?

Company and trust administration Is the company and trust administration provided with all the necessary support that it requires from the politicians of the jurisdiction to ensure that they can fulfil their task of appropriately registering all entities that undertake activity within the jurisdiction, wherever they might be incorporated or created, and to place that information on public record if required by law?

Does the jurisdiction support the publication of the accounts of all limited liability entities to ensure that they can be accountable to their stakeholders for the privilege of limited liability that they have been granted, including with regard to taxes owing?

Is there the political will to impose appropriate sanction on those who fail to comply with the requirements of the company and trust administration of the jurisdiction?

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International agreements Does the political will to cooperate on international tax issues really exist? Can it be said to be evidenced by actions or is the compliance only evidenced by the creation of legal structures for cooperation which there is no apparent willingness to use?

Other tax politics of the jurisdiction bias towards tax competition, or not?

As a matter of fact is the jurisdiction willing to cooperate with other countries to ensure that taxes are owed, which is a likely precondition of effective recovery from other jurisdictions?

Is engagement with automatic information exchange tokenistic?

f. Tax administration

No country can collect tax without a tax administration that is appropriately tasked with doing so. This section appraises the efficiency of the tax administration in question to do its task. In this context this includes an assessment of whether it has adequate resources to undertake its tasks; has the appropriate skills it requires; has the legal back up to secure the data that is needed; the necessary support to collect tax owing and tax law and systems in place that means it can sustain challenges against tax payers who would rather avoid and evade their obligations to make payment. This assessment also requires an appraisal of associated government systems that locate potential taxpayers including census data, migration data and taxpayer identification systems both for those in employment and otherwise or those liable to pay tax cannot be traced.


Is the domestic tax authority appropriately funded to undertake the tasks expected of it?

If not, then no law will overcome this deficiency and abuse might be high.

Is the tax administration independent of political influence?

An effective tax administration will be independent and seek to apply the law without discrimination. One that is influenced may be biased towards certain sections of the population e.g. large companies and high net worth individuals.

Is the tax authority appropriately managed?

Is this evidenced by:

Appropriate appointment procedures for those in high authority within the tax administration;

Appropriate and transparent governance structures;

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The publication of business plans and accounts for the tax administration;

Appraisal of the tax authority by the publication of tax gap data;

The existence of appropriate rules to prevent political and third-party interference, corruption and other such threats to objective the imposition of taxes

Is there a fair tax appeals system? The rule of law must be seen to be upheld if the tax system is to be seen without bias.



Income tax Does the tax administration have the resources it needs to administer the law?

Is there evidence that the tax administration appropriately understands the law?

Is the tax administration free of corruption? Does the tax administration work without apparent

bias? Does the tax administration think holistically i.e.

does it within its own work evidence awareness of the risk of spillovers between tax bases? Does it, in other words, appreciate that abuse of one tax is likely to imply abuse of another tax base?

Does the tax authority have the means to identify those likely to be liable to tax e.g. by the automatic supply of data from banks, professional advisers, employers, letting agencies, investment advisers and others who can alert to the existence of legally due tax liabilities whatever the base might be?

Is the tax authority effectively equipped to identify international tax spillover risks?

Does the tax administration provide fair access to the law? Is this evidenced by:

o A comprehensible web site?o The law being published?o Telephone and in person assistance?o Clear written advice?

Is all this provided with the aim of ensuring that tax payers have best chance of being compliant?

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Does the tax authority treat those with and without professional assistance equitably?

Are the appeal options available to taxpayers readily accessible?

Corporation tax As for income taxCapital gains tax As for income taxSocial security As for income taxTax politics As noted with regard to tax politics, aboveCompany and trust administration Do the tax, company and trust administrations work

in cooperation with each other with information automatically exchange between them?

Is data on the beneficial ownership of assets and entitlement to income exchanged between these authorities to minimise spillover risks?

Are the information demands of the company and trust administrations designed to meet the need of tax authorities to avoid the risk of spillover risks arising?

International agreements As noted with regard to tax politics, above.

g. Company and trust administration

Taxes are not just due by companies. They are also due by companies, trusts and other structures that are created by statute law. These are legal rather than natural persons. To ensure that entities of these types that might be liable to tax within a jurisdiction can be identified and traced there has to be a competent company and trust administration system within a jurisdiction. Without checking on which companies exist; determining who owns and controls them and making sure that they account properly it is not possible to check the scope of the tax base that they give rise to. This section appraises the likelihood that these goals can be achieved.

The company and trust administration system of a jurisdiction has to be compared with each other part of the tax system. In doing so the following illustrative questions might be asked to assist appraisal.


Is company regulation seen to be ‘light touch’ in the jurisdiction?

This will encourage both domestic and international tax abuse if it is the case.

Are accounts required on public record for all limited liability entities?

The less information that is required on public record the more likely it is that tax abuse will take place because the chance that incorrect data will be identified is reduced.

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Must the beneficial owners of companies be disclosed on public record?

The more likely it is that this data is disclosed accurately the less likely it is that people will use companies to cheat on their tax obligations.

Is country-by-country reporting required on public record?

Multinational corporations are less likely to tax abuse if the whole scope of their activities is open to public scrutiny.

Are trusts and foundations required to be recorded on a central register?

If trusts can exist without the authorities not knowing there is a much increased chance that they will be used for tax abuse.

Are trust accounts, donors, trustees, accounts and beneficiaries disclosed on public record?

The less information that is required on public record the more likely it is that tax abuse will take place because the chance that it will be identified is reduced.



Income tax Does the company and trust administration provide for such ease of incorporation so that income that would otherwise be subject to income tax is easily diverted into a corporation, either to be taxed as corporate rather than personal income, or to be subject to tax evasion through non-declaration?

Do the identities of all owners, beneficiaries, officers, trustees and other officials of companies and trusts have to fully disclose their identities to company administration authorities so that income tax authorities might be aware that they have a source of income?

Do the company and trust administration verify the data disclosed to them e.g. in accordance with anti-money laundering requirements?

Is the company and trust administration properly resourced so that the information that it supplies can be relied upon to be complete, accurate and a proper basis for taxation?

Is there third-party verification of the information that the company and trust administration holds e.g. has the data that it publishes been verified by automatic information exchange from the jurisdiction’s banks or other financial institutions who have, in the course of their anti-money

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laundering activities been required to check the identity of those who benefit from the entities that are registered and who manage them?

Is the information collected by the company and trust administration published so that those who engage with the entity can check its reasonableness, and if necessary inform a tax authority of their concerns when they believe that their experience contradicts that reported on public record?

Does local accounting regulation require the disclosure of those who control an entity; the remuneration that they receive for this task; and transactions with them, or those they are associated, with as related parties so that the risk of taxation abuse inherent in these transactions can be identified?

Corporation tax As for income tax, plus the following; Does the company and trust administration properly

inform the tax authority of the registration of all new entities, and application for these entities to be dissolved, so that taxation liabilities can be pursued?

Is there a mechanism to check that every single entity recorded by the company and trust administration receives a tax return or otherwise declares to the tax authority to which other location it does submit a tax return, with a copy and evidence of payment, if that has been necessary, attached?

Does the company law of the jurisdiction provide that limited liability is removed from those managers and beneficiaries of entities who wilfully permit the failure to meet their obligations to file tax, accounting and other documentation with the intention of securing a tax advantage, whether by tax evasion or otherwise?

Does the company and trust law of the jurisdiction prevent a company and trust administration from removing an entity from its records before the tax authority has confirmed that all tax liabilities have been settled?

Capital gains tax As for income tax and corporation tax as noted

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above

Social security As for income tax and corporation tax as noted above

Tax politics Do the tax politics of the jurisdiction that encourage incorporation because there is a pro business attitude that such entities with light-touch regulation?

Do the tax politics of the jurisdiction encourage the operation of an effective company and trust administration where those with obligations to file documents are encouraged to do so by appropriate enforcement mechanisms, backed up by law?

Do the tax politics of the jurisdiction encourage a properly functioning company and trust administration through the provision of appropriate funding to ensure that this task can be undertaken?

Do the tax politics of the jurisdiction require that the company and trust administration be accountable for its actions so that failures to enforce the law are highlighted in the political arena with consequent action being required to address deficiencies?

Tax administration Is active cooperation between the company and trust administration and the tax administration required, and is it encouraged by the government that is responsible for both?

Are there mechanisms to ensure that documentation file with one of these authorities is copied to the other, and that the two are consistent?

Is compliance with the requirements of these two administrations encouraged by the design of joint documentation?

Is the company and trust law of the administration designed to facilitate the payment of taxation by requiring the disclosure of appropriate information that any tax administration might require to fulfil its enquiries of an entity without having to undertake expensive and time-consuming audits?

If errors or non-compliance are noted by one of these administrations is the other advised so that action can be taken to remedy the defect, or

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prevent its repetition? Is the failure to pay tax a sufficient reason to bar a

person from holding subsequent office as a manager within a company or trust?

International agreements Is the company and trust administration geared to undertake appropriate automatic information exchange on the management and beneficiaries of the entities that it records?

Is the company and trust administration able to manage the information that it might receive from other jurisdictions on those entities that might be trading in its location of which it is unaware because they are incorporated elsewhere, and does it have sufficient resource to pursue them to ensure that appropriate records for those entities are placed on public record in the jurisdiction where they do actually trade? Is the tax authority advised of the existence of these entities?

Are country-by-country accounting records required for all multinational enterprises so that the impact of their activities in all jurisdictions in which they trade might be identified?

h. International agreements

Tax systems are not just domestic: they are also international. International agreements to regulate tax have been developed since the 1920s, but progress has been rapid this century. The engagement that a country makes with the international tax system has a big impact on its ability to collect tax domestically, and in its honouring its international obligations. This part of the appraisal tests whether that commitment is whole-hearted or reluctant, is comprehensive or not, and whether it is adequately resourced both in terms of staff and data to fulfil what is expected of this cooperation.

The international tax agreements of a jurisdiction have to be compared with each other part of the tax system. In doing so the following illustrative questions might be asked to assist appraisal.


Does the jurisdiction have a historic commitment to international tax cooperation as evidenced by a long history of creating double tax agreements?

Until 2008 many jurisdictions had a very limited number of such agreements, or none at all, and only began the process of entering into such arrangements under pressure from the OECD following the global financial crisis of that year. The history of the jurisdiction on this

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issue is a very clear indication of past attitudes to cooperation.

Has the jurisdiction ever been included in lists of tax havens, many of which took international cooperation into consideration?

Such lists have been published since the 1990s. They have developed and changed over time but are a sure indication of past attitudes towards tax cooperation, many of which will assist to the present.

Does the jurisdiction actively partake in discussions on development in international tax cooperation, or is it a reluctant participant once agreements are reached and pressure is brought to bear upon it?

There is no wholly objective measure yet available on this issue but it does clearly indicate the attitude of a jurisdiction towards international tax co-operation.

Has the jurisdiction been favourably appraised by the IMF and OECD with regard to its international tax co-operation?

These appraisal mechanisms are not certain guides to effective cooperation because they still very largely appraise the existence of systems to facilitate cooperation, rather than a jurisdiction’s practice in actually exchanging information. This is now changing with more recent reviews. All such reviews will provide an indication of the attitude of the jurisdiction towards cooperation.

Does the jurisdiction partake in automatic information exchange?

If this is the case those using it will be known to their domestic tax authority and so will be less inclined to use it for abuse.

Does the jurisdiction participate in the OECD's agreement on administrative assistance between tax authorities?

This agreement is relatively new. However, by looking at the relative time when the jurisdiction joined the scheme does provide a good indication as to the degree of cooperation it is offering to this arrangement.

Does the jurisdiction require that multinational corporations submit country-by-country reports as part of their corporation tax filing?

Engagement on this issue is now seen as key to tackling international tax abuse by multinational corporations.



Income tax Is there effective cooperation with states to which mobile sources of income are likely to be transferred?

Does that effective cooperation extend to automatic

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information exchange? Does automatic information exchange appear to

work in practice? Is there evidence that data received as a result of

international cooperation is used to pursue those who have shifted income to alternative tax bases in other countries?

Does the tax authority publish data on these issues to deter those tempted to avoid or evade their obligations?

Is the tax base defined comprehensively so that worldwide income is always included?

Corporation tax As for income tax, plus:

Is country-by-country reporting used to identify tax spillovers from the state?

Is beneficial ownership data automatically collected for all domestic companies and trusts to reduce the risk that they are used for international tax spillovers into the jurisdiction?

Is automatic information exchange undertaken with domestic banks to ensure that those companies and trusts that are actually undertaking economic activity can be identified so that effective information exchange with other countries can take place?

Is the information exchange with other states reciprocated in kind with data that reflects the quality of that supplied?

Capital gains tax As for income taxSocial security As for income taxTax politics As noted with regard to tax politicsTax administration As noted with regard to tax administrationCompany and trust administration As noted with regard to company and trust

administration.

4. International spillovers

The essence of international tax spillovers is similar to domestic tax spillovers, expect that instead of the threat of spillover arising domestically it does, instead, arise as a consequence of the actions of another tax authority or jurisdiction.

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The marks that can be awarded with regard to the appraisal of international spillover risk do, as noted above, come in two parts. One appraises the risk to the jurisdiction from other tax authorities and countries whilst the second appraises the risk that could jurisdiction creates for those tax authorities located in other countries. The basis of marking has already been noted. Two marks are always awarded, and there are two marking templates but they are best considered simultaneously.

The same four taxes and the same four policy issues are appraised with regard to international spillovers as are appraised domestically, and for the same reasons. It is, then, the case that many of the questions to be asked when undertaking international appraisals will be similar to those in the domestic appraisal. There are, however, some differences, and to save continual cross referral the issues arising in the domestic appraisal are repeated in what follows, along with those additional questions specifically appropriate in an international environment. The latter are identified in italics.

When appraising internationally it is important to recall that an aspect of the tax system can be appraised against the same aspect of the tax system in another jurisdiction. This differentiates international appraisals from those undertaken for a domestic tax authority.

a. Income tax

An income tax system charges individuals to tax on their earnings in a year from employment; self-employment; royalties; investments including interest, dividends and rents; as well as income from pensions, and (for those fortunate enough to enjoy them) trusts, foundations and other such sources. The income of partnerships is usually taxed as if it is the individual income of the partners and income tax is paid by each of them. Some companies and other structures are taxed as if they are partnerships even though in legal terms they are not. In that case their members pay income tax on their share of the company’s income.


Generic question Answer

What is the overall perception of tax rates when compared to other countries?


Are the tax rates chosen to induce the relocation of internationally mobile tax bases?

This issue can be appraised either from policy statements, local politics or from the application of favourable rates only to those tax bases that are likely to be mobile.


Highly progressive rates may encourage flows out of the tax. Low or no tax may encourage inward flows to the tax.


If higher rates are not due until income is well above national average then progressive tax rates will be more

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readily accepted as being fair.

Is the progressivity of tax rates influenced by international tax competition so that it differs with regard to tax bases that are more or less likely to be internationally mobile?

Lower, or flat tax rates, are sometimes offered on internationally mobile tax bases. The reasons for this need to be considered.

Is the tax base comprehensive? A good tax is comprehensive to ensure fairness: no significant income falls out of the tax base. The inclusion, or exclusion, of sources of income arising outside the country within the tax base needs to be carefully considered.



Is the tax base consistent when comparing the situations of those resident in the short and long term?

A good tax treats people equally before the law. It does not offer incentives to relocate between jurisdictions to secure a tax advantage. The creation of incentives for those migrating into a jurisdiction needs to be considered for its tax spillover implications, as does the threat of migration to locations where such incentives are offered. Special arrangements, such as the sale of passports, the recognition of residence on unusual bases, and so on, have also to be taken into account.



Income tax Does the income tax system deliberately seek to offer low tax rates that might induce the relocation of income from elsewhere?

Alternatively, is the jurisdiction vulnerable because of the tax rates that it has chosen to use to attack from other locations?

Does the tax system have appropriate laws in place to ensure that worldwide income of resident people is subject to income tax in the jurisdiction where ever it might be received in the world?

Do the information exchange systems that the tax authority has assist the discovery of the relocation of income that should be subject to tax to other

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jurisdictions? Are there effective anti-avoidance arrangements in

place to tackle issues relating to the artificial transfer of income, profits or other sources liable to income tax to locations outside the jurisdiction?

Does the country’s legal system enforce these anti-avoidance rules?

Alternatively, does the jurisdiction have arrangements to exempt worldwide income, or the income of some people, from income tax, creating a partial tax base particularly with regard to income arising outside the jurisdiction?

Is this partial tax base designed to encourage the relocation of income to the jurisdiction?

Corporation tax Are there significant differences between income tax and corporation tax rates inside and outside the jurisdiction that encourage flows in either direction?

Alternatively, are the corporation tax rates in use chosen to encourage the artificial relocation of income streams to the country, even though they should be subject to income taxes elsewhere?

Do the information exchange systems that the tax authority has assist the discovery of the relocation of income that should be subject to tax to other jurisdictions?

Are there effective anti-avoidance arrangements in place to tackle issues relating to the artificial transfer of income, profits or other sources liable to income tax to locations outside the jurisdiction where they might claim to be subject to corporation tax regimes?

Does the country’s legal system enforce these anti-avoidance rules?

Alternatively, does the jurisdiction have arrangements to exempt worldwide income, or the income of some people, from corporation tax, creating a partial tax base particularly with regard to income arising outside the jurisdiction that might induce the relocation of the income tax base of other countries to the corporate tax base of the jurisdiction being considered?

Is this partial tax base actually designed to encourage the relocation of income to the

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jurisdiction?

Capital gains tax As for corporation tax except considering capital gains tax issues.

Is the jurisdiction vulnerable because of the tax rates that it has chosen to use to attack from other locations?

Does the tax system have appropriate laws in place to ensure that worldwide capital gains of resident people is subject to income tax in the jurisdiction where ever it might be received in the world?

Social security Can social security charges be avoided by apparently relocating the place from which a person is paid to another jurisdiction? If so, does that result in a shift of the income tax base?

Is this policy deliberately created by the jurisdiction to encourage this relocation?

Tax politics As noted in the preamble to this section, taking income tax issues into account.

Tax administration As noted in the preamble to this section, taking income tax issues into account.

Company and trust administration As noted in the preamble to this section, taking income tax issues into account.

International agreements As noted in the preamble to this section, taking income tax issues into account.

b. Corporation tax

A corporation tax system does in most countries charge companies to tax on their earnings in a year derived from trading; investments including interest and rents (but not always dividends from other companies); royalties and, in some jurisdictions, capital gains. Some companies and structures are exempt from this charge because the members of the company are instead liable to pay the tax due on the income of the company as if it was their own and income tax is paid instead.




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Is the tax base likely to provide favour to income arising outside the jurisdiction?

A territorial tax system is unlikely to tax income arising outside the jurisdiction and so is attractive to multinational corporations. It can create bias against companies trading solely in domestic markets and so distort fair competition.

Are non-resident companies permitted?

These companies are registered in a jurisdiction but are not taxable there because their income is deemed to arise ‘elsewhere’ although that other place may be unaware of the fact that trade is taking place in its jurisdiction.

Are there special rates for dividends / royalties / overseas financial income and other financial flows?

Such rates tend to be very attractive to multinational corporations. They may be exploited by those with wealth who can reduce their overall tax rate by investing in assets enjoying such exemptions and so reduce their overall tax rates.

Are there special rates for capital gains taxed within the corporation tax system?

These rates tend to induce inward flows into the tax base both nationally and internationally.

Are there effective transfer pricing rules?

Not all transfer pricing rules are enforced alike: some are more attractive to multinational corporations than others.

Are advance pricing agreements, tax holidays, special tax rates and other arrangements available to induce foreign direct investment into the jurisdiction?

These arrangements are invariably seen as a part of tax competition, but can be hidden from view by opacity with in the tax regime. They tend to undermine businesses operating solely in the domestic economy and create unfair competitive environments as a consequence.

Are there effective controlled foreign company rules?

Without such rules it becomes very easy for companies in the jurisdiction to have access to tax havens.

Does the country require the submission of country-by-country reports for all companies of any significant size that operate on a multinational basis?

These reports are designed to indicate the likely existence of profit shifting the taxation purposes. Their presence, or absence, does then indicate the likely attitude of the tax authority towards such issues within the corporation tax regime.


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Income tax As above

Corporation tax Does the jurisdiction have a robust definition of its corporation tax base on a worldwide basis that ensures that the opportunity for base arbitrage is limited so that the prospect of income arising to a tax resident company being subject to tax is maximised?

Alternatively, does the jurisdiction have a very narrow, or even absent, definition of income subject corporation tax meaning that its scope is very limited, or clearly restricted to domestic income of domestically owned companies so that income arising outside the jurisdiction order companies owned by persons not resident within it fall outside the scope of corporation tax?

If the jurisdiction is seeking to protect its corporation tax base does it have the appropriate rules of the types noted in the background questions, above, to do so?

Does the jurisdiction actively cooperate in automatic information exchange with regard to corporation tax?

Does the jurisdiction collect the information that is required to assist other countries to collect the tax owing to them or do they, alternatively, ignore any source of income arising to a company incorporated in it which is not subject to local taxation, with the corollary that the data in question is not available to exchange with the country where a tax liability might arise?

Capital gains tax In addition to the background questions noted above, considered within the context of capital gains, does the jurisdiction offer a capital gains tax regime for companies that either induces the relocation of profits on an international basis into its corporate tax base, or out of it?

In particular, are certain types of income and gain associated with mobile capital exempted from tax

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within the jurisdiction, so that it is particularly attractive for the recording of capital gains in corporate structures, and leaves the tax systems of other jurisdictions are vulnerable in this regard?

Social security Does the social security system of the jurisdiction apply to all withdrawals of profit from a company paid to its owners in whatever legal form they might be structured? If not, do the available corporate forms within the jurisdiction encourage the relocation of an income stream from another jurisdiction into the corporation tax base of the jurisdiction so that a social security charge, that might otherwise be payable, is avoided? Is this particularly true with regard to those withdrawals of income that are considered to be unearned, rather than earned, income e.g. dividends, when compared to salaries?

Can incorporation in the jurisdiction be used to disguise what would otherwise be considered an employment and in the process permit a lower, or no, social security contribution to be paid upon the benefit arising from the activity in another place?

Alternatively, is the corporation tax base of the jurisdiction under threat from the base in another location because it offers means of avoiding social security contributions not available within the jurisdiction being considered?

Tax politics As noted in the preamble to this section, taking corporation tax issues into account.

Does the jurisdiction deliberately use corporation tax as a mechanism for exploitation in tax competition?

Is the jurisdiction threatened by those countries that do use corporation tax as a mechanism for tax competition.

Does the jurisdiction offer tax exemptions, holidays, reliefs, advance pricing agreements, participation exemptions, and other such arrangements as mechanisms to induce the relocation of income streams and asset ownership with the specific political support of its government or political

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establishment?

Tax administration Is the tax administration able to identify the movement of income streams and assets recorded within corporate tax bases outside the jurisdiction?

Are there adequate resources available to identify those in the jurisdiction owning or controlling corporate entities outside it and which might be shifting assets and income streams out of its jurisdiction as a result?

Does the tax administration collect sufficient data on all the corporate entities that it incorporates to identify if and, as importantly, they might have corporation tax liabilities arising?

Is the corporation tax regime of the jurisdiction dependent upon the receipt of data from jurisdictions who do not collect or share it?

Company and trust administration Is the administration of tax in the jurisdiction threatened by the failure of other tax authorities to collect the necessary data to ensure that corporation tax can be appropriately assessed on profits arising in the jurisdiction being appraised?

International agreements As noted in the preamble to this section, taking corporation tax issues into account.

c. Capital gains tax

A capital gains tax system charges individuals to tax on the gains that they make on the sale of capital assets that they have owned. However, assets bought and sold in the course of a trade are usually subject to income tax or corporation tax depending upon the entity pursuing that activity.


What is the overall perception of capital gains tax rates?

Low rates induce inward flows to the tax base. High rates may induce outward flows to other tax bases.

What is the rate of progressivity within the capital gains tax?

Highly progressive rates may encourage flows out of the tax. Low or not tax may encourage inward flows to the tax.

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Is the tax base comprehensive? A good tax is comprehensive to ensure fairness: no significant gains should fall outside the tax base.



Does the capital gains tax appear to provide a tax regime that favours those with wealth over those who have to work for a living?

Such an impression can be a key consideration in the politics of taxation.




Income tax As previously noted, above

Corporation tax As previously noted, above

Capital gains Do the capital gains regimes of other countries (whether charged on individuals, corporate entities or trusts and similar structures) offer significantly lower rates of tax than the jurisdiction does, encouraging the relocation of mobile capital to those jurisdictions? Note, this can be a particular issue with regard to the ownership and control of assets recorded as owned through limited liability structures incorporated in jurisdictions that do not charge the owners of those entities to capital gains on their sale if they in turn are not resident there, but also applies in other situations.

Is the capital gains tax system threatened by the failure of other jurisdictions to collect data for information exchange because they think it has not tax value to them?

Social security It is rare that there is significant interaction between social security charges and capital gains tax. If there is it is likely that the issue has been considered when comparing the income tax system

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and the capital gains tax system.

Tax politics As noted in the preamble to this section, taking capital gains tax issues into account.

Is the capital gains tax base of the jurisdiction threatened by those places that, for their own purposes or for the purpose of tax competition decide that capital gains should not be taxed?

Tax administration As noted in the preamble to this section, taking capital gains tax issues into account.

Is the chance of assessing capital gains restricted by the failure to collect appropriate data for assessing capital gains for automatic information exchange purposes?

Company and trust administration As noted in the preamble to this section, taking capital gains tax issues into account.

Do the company and trust administrations of other jurisdictions adequately identify and exchange data on the ownership of assets so that those registered as owned in entities registered in other countries can be adequately identified and taxed?

International agreements As noted in the preamble to this section, taking capital gains tax issues into account.

Do these arrangements adequately take concerns with regard to capital gains into account?

d. Social security

A social security tax charge that is usually levied in addition to income tax on the earnings that a person makes from employment. In addition, such a charge is often levied on the profits arising from self-employment and on partnership income. Many social security systems also include an additional tax charge payable by an employer based upon the value of the gross cost of the wages and benefits that an employer provides to their employees. This sum does not appear to be paid by the employee but is part of the employer’s total cost of employing a person, nonetheless. Social security charges are rarely levied on investment income or on pensions and in some countries those of pensionable age are exempt from the charge.

It should be noted that there are relatively limited international concerns with regard to social security as this charge usually relates to the payment of wages. Most international abuse of social security relocates the relocation of employment contracts into entities in other jurisdictions so that

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lower income tax or social security contributions are paid. This is an issue of concern in some jurisdictions, but it is not widespread.



High rates bias heavily against labour income and encourage attempts to disguise it


Many social security systems are regressive and open to exploitation in various ways as a result.


Does the charge only apply at specific levels of income or is it open ended?

Is the tax base comprehensive? Does the charge apply equally to all types of income or are some e.g. self-employment, favoured over others e.g. employment?

Is there an equivalent charge on unearned income e.g. an investment income surcharge?

If such charges do not exist the tax rates on unearned income may be very much lower than on earned income encouraging the recategorisation of income.



Income tax As previously noted, above

Corporation tax As previously noted, above

Capital gains tax As previously noted, above

Social security Does the absence of a social security contribution charge, or a relaxed regime as to the income to which it might be charged, encourage the relocation of employment income to avoid a social security charge in the jurisdiction being appraised?

Is this a deliberate policy on the part of those jurisdictions not imposing such charges intended to achieve this result?

Tax politics As noted in the preamble to this section, taking social security issues into account.

Tax administration As noted in the preamble to this section, taking

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social security issues into account.

Company and trust administration As noted in the preamble to this section, taking social security issues into account.

International agreements As noted in the preamble to this section, taking social security issues into account.

e. Tax politics

The term tax politics is used in this appraisal system to refer to the political environment that a country creates around its tax system and the attitude towards tax compliance that it reveals as a result.

Tax compliance is defined for these purposes as seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes.

Some countries are explicit about the fact that they seek to use tax as a factor in seeking to induce the relocation of economic activity or portfolio investment to their jurisdiction. They create environments in which tax competition is encouraged as a result, with the intention of there being spillover effects.

Other countries seek to have tax systems that are neutral: it is tax compliance and nothing more that they seek.

In between there are many possibilities and in most countries some degree of tax politics can usually be seen. This might be evidenced domestically as well as internationally. For example, bias might be shown towards investment income in a tax system, or towards companies, or capital gains or wealth. Sometimes self-employed earnings are favoured over earnings from employment. In many jurisdictions the tax system is used to favour some activities over others e.g. incentives to save for retirement might be provided through the tax system. Many of these incentives will either deliberately or inadvertently have impact on the effectiveness of the tax system; which taxes are favoured by tax payers over another; the scale of tax avoidance that might take place as a consequence, and have impact on the resulting overall tax take. It is these consequences that are appraised here.


Is tax competitiveness a feature of national political debate?

An environment in which tax competitiveness is promoted is likely to be more accommodating of tax avoidance than one that is not.

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Is the jurisdiction one that considers itself to be an ‘international finance centre’ (which might generally be considered to be a euphemism for a tax haven) or does it otherwise quite directly use its tax base as an instrument within its economic policy with potential consequences for the domestic economy which might be unable to compete with foreign-owned enterprises as a result?

Just because a jurisdiction considers itself to be an international finance centre does not mean that it is lax with regard to its own tax administration: there is evidence that some places that have such status also have effective domestic tax systems. However, it is likely that such jurisdictions evidence a bias against charging income and gains derived from capital to tax; offer generously low rates of corporation tax, especially with regard to income generated outside the jurisdiction; and usually exploit these situations to encourage the relocation of profits on an artificial basis to their domain. This is usually interpreted as aggressive tax competition.

Does the jurisdiction commonly adopt policies that can be considered as favourable to income and gains derived from capital sources, or to profits earn from business meaning that these sources of revenue tend to be more lowly taxed than those derived from employment and, possibly, from consumption?

Any jurisdiction is, of course, free to set its own tax rates but the wider the disparity in rates on offer within a jurisdiction the greater is the potential for tax abuse to arise. Almost all tax abuse takes place on the boundary between different tax systems, and if domestic tax systems offer widely differing tax rates the incentive to abuse is increased. This tax policy will, then, encourage an environment where tax compliance is likely to be reduced.

Is tax seen as an instrument for delivering social domestic policy?

Many countries are motivated to use the tax system to assist the delivery of their social policy by providing incentives and allowances for certain types of economic activity that they consider to be favourable or to ensure that some people within their community pay less (and on occasion, more) tax to reflect their personal circumstances and needs. The use of the tax system in this way can be beneficial, but if too much complexity is introduced into the system, or too many allowances and reliefs are provided when direct grants and benefits might be better suited to achieving a government goal then the resulting complexity in the tax system can be disadvantageous, and provide opportunities for tax abuse, avoidance, and even evasion, whilst also increasing the risk of errors arising and so increases the cost of tax administration. The balance between what is desirable or not is frequently hard to judge in individual cases, but overall excess in either direction is usually fairly easy to identify.

To politicians in the jurisdiction project There is no one test for the existence of a ‘pro-tax’

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a ‘pro-tax’ culture and as a consequence both reinforce the obligation of those resident within it to settle their tax liabilities and provide resources to the tax administration to ensure that this takes place?

culture within the jurisdiction: appraisal will always be a matter of judgement. However, whether or not the tax system appears to be appropriately funded to achieve the objectives that politicians claim they set for it would appear to be a fair basis for assessment.

Are the politicians of the jurisdiction interested in the effectiveness of their tax system? Do they evidence this by measuring the tax gap within their jurisdiction?

The tax gap is the difference between the amount of money that should be collected by a tax system if it was to be operated in accordance with the interpretation placed upon it by the tax administration of the jurisdiction and the amount of tax that is actually paid during the course of a period. Relatively few countries undertake such an appraisal but without it politicians will rarely have the tool they need to assess whether or not the taxes that they put in place are effective, or otherwise, and whether or not they achieve the goals set for them, or not. The existence of a tax gap measure can, then, be considered some indication of the interest that politicians have in the success or otherwise of the tax administration of their jurisdiction.



Income tax As per background questions

Corporation tax As per background questions

Capital gains tax As per background questions

Social security As per background questions

Tax politics As per background questions Is tax competition a significant feature in the politics

of the jurisdiction? Is the jurisdiction seen as a tax threat by other

countries? Is the jurisdiction perceived as being at risk from the

tax regime of other countries?

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Do international appraisals of the jurisdiction suggest that it is a source of international tax competition or a victim of it?

Tax administration As per background questions

Company and trust administration As per background questions. Is the company and trust administration provided

with all the necessary support that it requires from the politicians of the jurisdiction to ensure that they can fulfil their task of appropriately registering all entities that undertake activity within the jurisdiction, wherever they might be incorporated or created, and to place that information on public record if required by law?

Does the jurisdiction support the publication of the accounts of all limited liability entities to ensure that they can be accountable to their stakeholders for the privilege of limited liability that they have been granted, including with regard to taxes owing?

Is there the political will to impose appropriate sanction on those who fail to comply with the requirements of the company and trust administration of the jurisdiction?

International agreements Does the political will to cooperate on international tax issues really exist? Can it be said to be evidenced by actions or is the compliance only evidenced by the creation of legal structures for cooperation which there is no apparent willingness to use?

Other tax politics of the jurisdiction bias towards tax competition, or not?

As a matter of fact is the jurisdiction willing to cooperate with other countries to ensure that taxes are owed, which is a likely precondition of effective recovery from other jurisdictions?

Is engagement with automatic information exchange tokenistic?

f. Tax administration

No country can collect tax without a tax administration that is appropriately tasked with doing so.

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This section appraises the efficiency of the tax administration in question to do its task. In this context this includes an assessment of whether it ha adequate resources to undertake its tasks; has the appropriate skills it requires; has the legal back up to secure the data that is needed; the necessary support to collect tax owing and tax law and systems in place that means it can sustain challenges against tax payers who would rather avoid and evade their obligations to make payment. This assessment also requires an appraisal of associated government systems that locate potential taxpayers including census data, migration data and taxpayer identification systems both for those in employment and otherwise or those liable to pay tax cannot be traced.


Is the domestic tax authority appropriately funded to undertake the tasks expected of it?

If not, then no law will overcome this deficiency and abuse might be high.

Is the tax administration independent of political influence?

An effective tax administration will be independent and seek to apply the law without discrimination. One that is influenced may be biased towards certain sections of the population e.g. large companies and high net worth individuals.

Is the tax authority appropriately managed to ensure international tax cooperation?

Is this evidenced by:

Appropriate appointment procedures for those in high authority within the tax administration?

Appropriate and transparent governance structures?

Appraisal of the tax authority by the publication of data on cooperation?

The existence of appropriate rules to prevent political and third-party interference, corruption and other such threats to objective the imposition of taxes



Income tax As noted above in the income tax section

Corporation tax As noted above in the corporation tax section

Capital gains tax As noted above in the capital gains section

Social security As noted above in the social security section

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Tax politics As noted with regard to tax politics, above

Tax administration Is there adequate commitment, training and resource provided to ensure that effective cooperation can take place with other tax administrations?

Is that cooperation reciprocated by all administrations from which it is required to ensure that the tax base can be protected from spillovers?

Is that cooperation evidenced by use of data provided to and from the jurisdiction?

Company and trust administration As noted below with regard to this issue.

International agreements As noted below with regard to this issue

g. Company and trust administration

Taxes are not just due by companies. They are also due by companies, trusts and other structures that are created by statute law. These are legal rather than natural persons. To ensure that entities of these types that might be liable to tax within a jurisdiction can be identified and traced there has to be a competent company and trust administration system within a jurisdiction. Without checking on which companies exist; determining who owns and controls them and making sure that they account properly it is not possible to check the scope of the tax base that they give rise to. This section appraises the likelihood that these goals can be achieved.

The company and trust administration system of a jurisdiction has to be compared with each other part of the tax system. In doing so the following illustrative questions might be asked to assist appraisal.


Is company regulation seen to be ‘light touch’ in the jurisdiction?

This will encourage both domestic and international tax abuse if it is the case.

Are accounts required on public record for all limited liability entities?

The less information that is required on public record the more likely it is that tax abuse will take place because the chance that incorrect data will be identified is reduced.

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Must the beneficial owners of companies be disclosed on public record?

The more likely it is that this data is disclosed accurately the less likely it is that people will use companies to cheat on their tax obligations.

Is country-by-country reporting required on public record?

Multinational corporations are less likely to tax abuse if the whole scope of their activities is open to public scrutiny.

Are trusts and foundations required to be recorded on a central register?

If trusts can exist without the authorities not knowing there is a much increased chance that they will be used for tax abuse.

Are trust accounts, donors, trustees, accounts and beneficiaries disclosed on public record?

The less information that is required on public record the more likely it is that tax abuse will take place because the chance that it will be identified is reduced.





Capital gains tax As noted above

Social security As noted above

Tax politics As noted above

Tax administration As noted above

Company and trust administration Is the company and trust administration regime of the jurisdiction able to cooperate internationally?

Is it resourced to cooperate internationally? Does it actually cooperate internationally? Does the company and trust administration collect

the data other tax administrations require to meet their needs as well as those of the domestic tax administration?

International agreements As noted below

h. International agreements

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Tax systems are not just domestic: they are also international. International agreements to regulate tax have been developed since the 1920s, but progress has been rapid this century. The engagement that a country makes with the international tax system has a big impact on its ability to collect tax domestically, and in its honouring its international obligations. This part of the appraisal tests whether that commitment is whole-hearted or reluctant, is comprehensive or not, and whether it is adequately resourced both in terms of staff and data to fulfil what is expected of this cooperation.

The international tax agreements of a jurisdiction have to be compared with each other part of the tax system. In doing so the following illustrative questions might be asked to assist appraisal.


Does the jurisdiction have a historic commitment to international tax cooperation as evidenced by a long history of creating double tax agreements?

Until 2008 many jurisdictions have a very limited number of such agreements, or none at all, and only began the process of entering into such arrangements under pressure from the OECD following the global financial crisis of that year. The history of a jurisdiction on this issue is a very clear indication of past attitudes to cooperation.

Has the jurisdiction ever been included in lists of tax havens, many of which took international cooperation into consideration?

Such lists have been published since the 1990s. They have developed and changed over time but are a sure indication of past attitudes towards tax cooperation, many of which will assist to the present.

Does the jurisdiction actively partake in discussions on development in international tax cooperation, or is it a reluctant participate once agreements are reached and pressure is brought to bear upon it?

There is no single measure on this issue but it does clearly indicate the attitude of a jurisdiction towards international tax co-operation.

Has the jurisdiction been favourably appraised by the IMF and OECD with regard to its international tax co-operation?

These appraisal mechanisms are not certain guides to effective cooperation because they still mainly measure the existence of systems to facilitate cooperation, rather than actual practice in exchanging information. This is now changing with more recent reviews. All such reviews will provide an indication of the attitude of the jurisdiction towards cooperation.

Does the jurisdiction partake in automatic information exchange?

If this is the case those using it will be known to their domestic tax authority and so will be less inclined to use it for abuse.

Does the jurisdiction participate in the OECD's agreement on administrative

This agreement is relatively new. However, by looking at the relative time when the jurisdiction joined the

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assistance between tax authorities? scheme does provide a good indication as to the degree of cooperation it is offering to this arrangement.

Does the jurisdiction require that multinational corporations submit country-by-country reports as part of their corporation tax filing?

Engagement on this issue is now seen as key to tackling international tax abuse by multinational corporations.



Income tax Is there effective cooperation with states to which mobile sources of income are likely to be transferred?

Does that effective cooperation extend to automatic information exchange?

Does automatic information exchange appear to work in practice?

Is there evidence that data received as a result of international cooperation is used to pursue those who have shifted income to alternative tax bases in other countries?

Does the tax authority publish data on these issues to deter those tempted to avoid or evade their obligations?

Is the tax base defined comprehensively so that worldwide income is always included?

Corporation tax As for income tax, plus:

Is country-by-country reporting used to identify tax spillovers from the state?

Is beneficial ownership data automatically collected for all domestic companies and trusts to reduce the risk that they are used for international tax spillovers into the jurisdiction?

Is automatic information exchange undertaken with domestic banks to ensure that those companies and trusts that are actually undertaking economic activity can be identified so that effective information exchange with other countries can take place?

Is the information exchange with other states reciprocated in kind with data that reflects the

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quality of that supplied?Capital gains tax As for income tax

Social security As for income tax

Tax politics As noted with regard to tax politics

Tax administration As noted with regard to tax administration

Company and trust administration As noted with regard to company and trust administration.

International agreements As per background questions

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