Countries should increase efforts to better deter, detect and disrupt the activities of professionals who enable tax evasion and other financial crimes, according to an OECD report issued on February 25 (“Ending the Shell Game: Cracking down on the Professionals who enable Tax and White Collar Crimes”).
The report explores the different strategies and actions that countries can take against those professional service providers who play a crucial part in the planning and pursuit of criminal activity, referred to in the report as “professional enablers.”
While the types of illegal services provided by professional enablers vary in each jurisdiction, common trends emerge from comparative experience.
• Hiding income or disguising the character and source of profits, for the purpose of tax evasion;
• Obscuring beneficial ownership of assets, often through complex legal structures involving several jurisdictions, with the purpose of avoiding investigative scrutiny;
• Offering advice on evading tax obligations using falsified transactions, documents or filings.
The report notes that the majority of professional service providers are law-abiding, and play an important role in assisting businesses and individuals understand and comply with the law. The aim of the new OECD report is to assist countries in dealing with the small subset that use their specialized skills and knowledge to enable clients to defraud the government and evade their tax obligations.
Possible indicators of the latter professional enablers include:
A company is not found at the declared premises.
Addresses of entities or directors which are not traceable.
Multiple shell companies from the same address.
Multiple companies with directors in common.
Company’s address registered at a P.O. Box address known for illegitimate businesses.
Professionals with a high turnover of business relating to liquidation of small companies.
Professionals that promote tax schemes on the basis of premium or contingent fees, or contractual protection.
Where one individual is attributed as a director multiple times.
Tax intermediaries with poor tax compliance history.
Persons with association to known professional enablers.
Persons with association to known tax evasion structures.
Persons with association to known offshore structures that obscure beneficial ownership.
Several countries cited this as an area where they have specific projects looking into the use of company formation agents or trust and corporate service providers.
Example: The report cites many examples from named countries. There is also one example from an unnamed country in which a tax adviser sets up structures for high net worth individuals such as Ms. X, to help evade paying taxes. The tax adviser advises clients to emigrate from their home country to a foreign jurisdiction, but to deliberately stay shorter than the minimum amount of days required for them to establish tax residency in the foreign jurisdiction. The tax adviser then files an income tax return on Ms. X’s behalf in her home country, with falsified information and documents apparently showing that Ms. X has emigrated. This creates the fiction of Ms. X being a tax nomad who is then not taxed on her worldwide income either in her home country or in the foreign jurisdiction. In reality, Ms. X continues her usual residence in her home country.
Suggested action: The OECD report calls on countries to establish or strengthen national strategies to deal with professional enablers more effectively. Such strategies should:
• Ensure that tax crime investigators are equipped to identify the types of professional enablers operating in their jurisdiction;
• Ensure the law provides investigators and prosecutors with sufficient authority to identify, prosecute and sanction professional enablers, both to deter and penalize;
• Engagement with supervisory, industry and professional bodies, to prevent abusive behavior, incentivize early disclosure and whistle-blowing;
• Ensure relevant authorities proactively maximize the availability of information, intelligence and investigatory powers held by other domestic and international agencies;
• Appoint a lead person and agency in the jurisdiction with responsibility for overseeing the implementation of the professional enablers strategy.
Comments: The author is a tax adviser in the law-abiding majority group. Tax is the price for living or operating in a civilized country. In general, there are two types of tax planning – legal planning and illegal planning that people think is off the radar and cannot be seen. In recent years, tax authorities have got smarter and improved their radar systems. Financial institutions now routinely notify tax authorities of their customer’s details. They also apply anti-money laundering checks to currency transfers. In Israel, identity numbers must be used all the time. Internationally, birth dates serve as a de facto identity number. What is okay is enjoying legislated tax breaks, e.g., for pensions or hi-tech and avoiding double taxation.
The writer is a certified public accountant and tax specialist at Ecommerce.Tax and Harris Horoviz Consulting & Tax Ltd.