So what did the G8 Summit accomplish on tax transparency?
By Martha Harris MyronWhen the G8 Heads of State Summit meeting in Northern Island convened amid urgent, rampant press releases last week, the OECD world waited to see the results of the three point agenda proposed by Prime Minister David Cameron: advancing trade, ensuring tax compliance and promoting greater transparency.
Later, after it was over, after the hype quieted, and after numerous summaries of the Summit agenda were released via media intermediaries, along with notables having press conferences with their constituents, I must admit that I am no closer to understanding exactly what it was that this much lauded summit hoped to accomplish.
I thought that I, as well as most people interested in this topic, were intelligent informed types, but it has been a challenge to decipher the action plan.
Was the conference all talk and no actions decided; some talk and some action; or little to no talk and an entire action plan formulated?
Our Bermuda press conference afterward shed some light on the position of our country, but it was still unclear in the conclusion of results as to whether we needed more multilateral agreements (hadn’t Bermuda done her due diligence years ago on international compliance directives), whether the leading large jurisdictions simply wanted to reinforce mutual cooperation and friendship (hard to know if the BFF was working currently between Russia and the US), or a precursor to more detailed agreements (to be signed) regarding conducting business on an international basis.
Because that is what this is all about. Free trade and competition.
Perhaps the man on the street does get it as the perception is that the tiny jurisdictions in the group are threatening the livelihood of the OECD giants.
Nothing has changed; business is business. Money goes where it is wanted and can be deployed in the most cost effective manner to generate profits and an optimum return on investment to shareholders. Whether you are a person managing finances in private life or a Multinational Corporation (MNC) with business in numerous locations, you want the best deal that you can get.
An individual shopping for a product, service, or residence is actively looking to negotiate price, shop discounts, or sales to obtain something that they value. It is no different for a multinational corporation.
MNCs analysing their business expansion plans will seek the best trading partner in the best jurisdiction, the most educated workforce for their product or service, the most conducive and stable environment to acquire assets and infrastructure, and the most flexible but rigorous governance, legal and tax regimes.
They will be looking for discounts, incentives, and the most effective tax rate for their business, otherwise they cannot remain competitive with other MNCs who may not be subject to a higher tax regime.
The efficient minimisation of tax obligations must always be considered within the substantial structure of a company’s legitimate business and economic goals and the multiple jurisdictions where they may contemplate new business.
Certain small jurisdictions, who want the multinational corporate business, have always had a flexible highly defined regulatory and tax environment for conducting trade, and are naturally appealing while others aggressively, in some cases, have tailored their infrastructure to provide economic incentives in local tax laws.
This can be thought of as global competitive forces alignment, but the actuality is the process of achieving globally competitive tax rates.
Sometimes referred to as treaty shopping, world wide effective tax rate planning is the process where one jurisdiction’s tax rates may be punishingly high but in legally and regulatory agreed-upon terms to each jurisdictional party in the matter (via treaty or other arrangements) may be averaged against (or transferred to) a low tax or a tax incentive treaty environment that produces an acceptable tax rate for both global trading partners.
Global Efficient Tax rate planning between jurisdictions may involve the review of many criteria: withholding taxes (interest, dividends, and royalties), capital gains tax, corporate tax and effects of tax treaties, permanent establishment / residency rules, business purpose tests and economic substance doctrines, deferment or assignment of income, foreign credits, exemptions, pass-through entities, and disregarded entities, along with the tax treatment of various forms and sources of income.
Just focusing only on three criteria: dividends, capital gains, and corporate taxation among various countries (since space does not allow me to fully discuss how the effective tax rates are achieved), the United States and its very large MNCs are subject to the highest statutory corporate tax rates in the world.
A review of a current list in Wikipedia indicates that approximately 10-15 jurisdictions have no corporate tax, another 30-45 jurisdictions 20 percent or less, and so on up the food chain to more than 35 percent for the United States.
A number of countries do not tax dividends or capital gains at all, including the United States with respect to investment gains, while many others list a dividend tax, but actually provide some or all dividend tax relief under tax credits, exclusions or corporate deductions.
Treaties between countries may actually eliminate that tax completely, depending upon the type of income (active or passive, mobile or immobile, current or deferred) and the tax regime structure of both countries (territorial versus residency based).
There are numerous other legitimate strategies that can be employed legally and tax efficiently by multinational corporations to manage their overall tax rate and achieve international competitive pricing parity.
Politicians, bureaucrats, lobbyists, and the media routinely excoriate the so-called tax havens for hiding tax strategies and participants, using secret accounts, non-disclosure of processes, and not meeting their corporate responsibilities.
In reality, globally efficient tax planning processes are blatantly transparent, particularly in the transfer pricing Advanced Pricing Agreement process.
Both jurisdictions (whomever they may be) Governments’ Revenue Services, who are following the tax legislation established in each country, must agree upon the appropriate transfer prices and the taxes between the two countries in an application process that can take years and require experts in the field to prepare and review.
Everyone involved in both jurisdictions is fully aware of the pricing agreements and the outcome.
There is no secrecy, but there is always the assumption that an efficient tax rate will be arrived at, that the companies will pay all of the tax that they are legally bound to pay, not that a tax will never be paid.
Bermuda has always had a very innovative, democratic, transparent regulatory environment that fits well with the foreign jurisdictional criteria that multinational corporations want.
Bermuda is not a tax haven. Bermuda is the premier international offshore finance centre.
The competitive multinational corporate tax avoidance issue (or planning for efficient global tax rates) as bemoaned by other larger jurisdictions was stated succinctly by former Premier Alex Scott, CBE, “The bottom line is as obvious as the nose on your face, but not something that is said often — Bermuda has not changed its tax laws for 100 years, meaning that we have not tailor-made our tax structures to attract or entice those outside of Bermuda to come here and trade with us. The criticism …. that we are a haven or modern day pirates is just not true.“
Sir John Swan, KBE, further added, “It is up to Britain (or by implication — my words other large jurisdictions) to pursue its tax income, not for Bermuda to do it for them.”
High tax jurisdictions need to become efficient at managing their budgets and tax regimes in order to do business. Otherwise, capital will continue to flow where it is wanted and where tax rates are globally competitive.
Readers, I have posted the Bermuda is NOT a tax haven talking points website at the following address www.marthamyron.com/bermudaeconomytalkingpoints/
Please feel free to send me your talking points that can be added to this database. We all need to unite to proactively protect the reputation of our country.
Caution. The information provided is general in content. References made are deemed to be reliable and current as the time of the submission of this article. The author bears no responsibility for changes, redactments, or any other differences between information provided and final regulations and law in tax matters, residency, or related items.
Sources: Knowledge at Wharton: Corporate Tax Avoidance: Can the System Be Fixed? June 19, 2013
List of worldwide corporate income tax rates: Wikipedia.
Martha Harris Myron CPA PFS CFP (USA) JP is a Bermudian journalist and cross border financial planning specialist President of Pondstraddler Life (tm) Consultancy. She focuses on offshore financial perspectives, particularly the challenges for international citizens living, working and straddling the North Atlantic pond: United States, Canada, United Kingdom, Europe, Bermuda, the premier international finance centre. Email firstname.lastname@example.org. The opinions expressed in this article are those of the author alone, and not The Royal Gazette.