Linking Beneficial Ownership to Improved Tax Collection in Developing Countries

Prichard, Wilson. “Linking Beneficial Ownership Transparency to Improved Tax Revenue Collection in Developing Countries.” Summary Brief. International Centre for Tax and Development, 2018. http://opendocs.ids.ac.uk/opendocs/handle/123456789/13753

No empirical research on impact of beneficial ownership information on tax collection capacity. Prichard aims to identify “technical and political pre-requisites” of success to inform decisions on whether investing in beneficial ownership information systems is worthwhile.

Surface-level links with tax collection:

• Personal wealth often disguised with shell corporations;
• Linked to automatic exchange of information (AEOI): to be effective AEOI from wealth-holding countries is required; for AEOI to work, BOs must be known.
• Corporate liabilities can be reduced by “round-tripping”, where a transaction takes place between two entities that seem unrelated but are controlled by the same BO. This might involve using a “foreign” firm to take advantage of investment incentives for foreign investors, “selling” a local firm to “foreign” investors to receive tax breaks or simply disguising the fact that transactions are taking place between firms owned by the same BO.

Would low-income countries benefit? They might:

• not be able to access and use new sources of information;
• struggle to justify the cost (financial, personnel) of new systems.

Three key questions:

Is BO information effectively collected and shared?

Quality of information is critical. If information is poor quality, and not verified, then true BOs could remain hidden within the registry.

Research questions
How accurate and complete are BO registers? Do inaccurate and incomplete registers still deter shell companies?

Secrecy jurisdictions remain a danger. Delaware highlighted as a risk, and notes that others could pop up to replace it - the benefits of being a secrecy jurisdiction increase as others reform. Developing countries may struggle to implement disclosure regimes and become de facto non-compliant.

Empirical questions
Are all major jurisdictions compliant? Can the use of non-compliant jurisdictions for tax avoidance be disincentivised? Is there evidence of shell companies being registered for tax avoidance in non-compliant jurisdictions?

Timely sharing with low-income countries is crucial. There is doubt over how many developing countries will meet standards for OECD automatic exchange participation. (Only five African countries signed up to AEOI at the moment.)

Empirical questions
Can low-income countries access BO information from public registries or AEOI? Can countries not participating in AEOI expect to do so, at a reasonable cost?

Are tax adminstrators able and willing to use that information effectively?

Beneficial ownership information shows potential avoidance , tax authorities still need to prove it. Straightforward cases may require investigation and international co-operation. More complex cases (e.g. those revealing transactions between entities sharing beneficial owners) may trigger audits. The success of audits is “tied to the broader enforcement capacity of national tax agencies”.

Empirical questions
Are tax adminsitrations capable of prosecuting and raising revenue when international avoidance strategies are in play? Has such capacity been developed elsewhere, in a cost-effective way?

Will political authorities allow tax administrations to act? Wealthy individuals often shielded from influence by their own power or that of their allies. Kangave, Jalia, Suzan Nakato, Ronald Waiswa, and Patrick Lumala Zzimbe. “Boosting Revenue Collection through Taxing High Net Worth Individuals: The Case of Uganda.” Working Paper. International Centre for Tax and Development, 2016. https://dx.doi.org/10.2139/ssrn.2776590 Access to beneficial ownership information will not create political/institutional change by itslef.

Empirical questions
Do tax adminstrations use existing registers or information from leaks? Where tax adminstrations are not using existing data is this due to political/institutional problems - would BO data change anything?

Monitoring questions
Are tax administrations able to use BO information to spot related party transactions, and then collected unpaid tax? Has wealth stored overseas been found? Have efforts been politically-targetted?

All studies will need to take into account behavioural adjustment, as taxpayers may become more compliant.

If beneficial transparency is not achieving its goals, what are the alternatives?

Targeted advocacy at the point where relationship between beneficial ownership information and tax enforcement breaks down. Public registries have the potential to overcome several constraints: lack of data-sharing; creating pressure from civil society; possible scrutiny of transactions from third-parties may overcome lack of technical capacity.

If reforms directed at the constraints is judged to be unlikely or too costly, then low-income countries could redirect efforts at domestic tax reform aimed at increasing tax take from HNWIs and international companies. The relative benefits of these two approaches have not been researched. Potential areas for pilots/discussion:

1. Taxes on secrecy, i.e., higher rates of taxes on assets/structures where beneficial ownership is unclear. This would push the burden of proving legitimacy onto the asset holder. This sounds like it would require some infrastructure for declaring BO?
2. Expand the use of taxes on assets and corporate revenues. Alternative minimum taxes (AMTs), for example, use a flat tax on revenue for companies declaring taxable revenues below a threshold, especially over a number of years (which can be a sign of tax avoidance). Best, Michael Carlos, Anne Brockmeyer, Henrik Jacobsen Kleven, Johannes Spinnewijn, and Mazhar Waseem. “Production versus Revenue Efficiency with Limited Tax Capacity: Theory and Evidence from Pakistan.” Journal of Political Economy 123, no. 6 (2015): 1311–1355. https://doi.org/10.1086/683849. Property taxes could be targeted at groups similarly at risk of tax avoidance.
3. ‘Effective disengagement’, whereby low-income countries support the calls for openness over beneficial transaparency but direct their resources elsewhere.