Charities have become the latest victims of abuse by tax fraudsters and money launderers. Can they be better protected?

In February 2009, Singapore and Hong Kong, China, undertook to bring tax transparency up to international standards and relax bank secrecy laws for tax purposes. Hot on the heels of these announcements were others from the Cayman Islands, Jersey, Andorra and Liechtenstein, and more recently we have seen Austria, Belgium, Luxembourg and Switzerland signing up to the OECD standard on exchange of information.

In 2008 a US senate subcommittee issued a report alleging that banks located in tax havens cost US taxpayers some $100 billion a year in lost revenue. That is a considerable leakage, especially in light of US laws, institutions and other mechanisms to help control tax evasion.

Though OECD work on making international tax fairer began over 50 years ago, it was not until 1998 and a report on harmful tax competition that the OECD stepped up its work against tax evasion, tax havens and abuse.

Record fall in GDP; Economy; Gender learning; Other news; Soundbites; Plus ça change...

The financial crisis might not have been caused by taxation, but it nonetheless raises concerns about evasion, compliance and transparency in financial markets. The OECD Observer asked South Africa's minister of finance, Pravin Gordhan, who chairs the OECD's Forum on Tax Administration, to explain.

"The right to privacy will remain a cornerstone of our legal system"

The economic crisis has hit the entire world economy, with governments stepping in to rescue financial systems and kick-start economic growth. This adds up to a triumph for government fiscal policy, though fiscal policy must be used audaciously.

Can the OECD Model Tax Convention, which is 50 years old this year, continue to fulfill its role of helping to make international taxation fairer and more manageable? Probably yes, though there are challenges.

Denmark is confirmed as the OECD’s highest-tax country, followed by Sweden, while Mexico and Turkey remain the lowest-taxing countries, the latest 2008 edition of Revenue Statistics says. Denmark’s tax-to-GDP ratio stood at 48.9% in 2007, while Turkey’s was at 23.7% of GDP.

In half a century the OECD Model Tax Convention has established itself as a model for international business. Here is how.

The OECD’s campaign against harmful tax competition garnered a higher profile at the start of 2008 with disclosures concerning widespread tax evasion by Germans and others through Liechtenstein. The revelations drew wide media attention in Germany and beyond, and have prompted fresh resolve in many OECD countries to fight tax evasion via offshore havens. In fact, investigations have been launched in over a dozen countries since then, including Australia, Canada, France, Germany, Italy, New Zealand, Spain, Sweden, the UK and the US.

Real estate is an important strategic sector in most economies–just think of the links to construction or the importance of property in the investment portfolios of pension funds. But it is also vulnerable to abuse for money laundering and tax fraud.

How do your taxes and social benefits differ from your peers in other countries and what is the effect on your income? How much income do unemployed people get in different countries? The new OECD online taxbenefit calculator may have the answer. Our experts have taken all those complex legal rules about who is entitled to what benefit and who should pay how much tax in different countries and put them into a simple tax-benefit calculator so that you can decide yourself which comparisons you would like to make.

Corporate tax is falling, both as a share of GDP and in the global tax take. Yet, just like other economic players, businesses rely on public investments too. To avoid a crisis, companies should assume a higher share of the overall tax burden.

Imagine a tax return no longer than a postcard. This at least is what proponents of a “flat tax” system predict.

Minimum wages are hotly debated as ways of improving equity and boosting the wages of lower skilled workers. All OECD countries apply some kind of wage floor. Do they achieve their goals?

Death and taxation may be certain, but what about the tax level? The answer to that depends more on social status and where you work.

Can taxation help governments achieve environmental goals with respect to energy use and emissions? Yes, with conditions.

Globalisation brings costs and benefits, even for the tax professional. The move towards a borderless world has opened up new opportunities for taxpayers to minimise their overall tax liabilities. Much of this tax planning is legitimate. Good tax planning is driven by the reality of businesses having to operate with increasingly complex laws, particularly affecting international activities, while at the same time wanting to legally minimise their costs, including tax costs.

Fiscal responsibility is no longer a taboo in Latin America. Just look at Mexico. Once a country with burgeoning budget deficits, it is now a stable global economic player. But this OECD member is not the only example. New governments have been elected in Brazil and Chile, each promising fiscal rectitude.

Who owes what, how and where? Understanding the international array of tax treaties can be a headache for businesses everywhere, not to mention tax authorities. There are 2,500 such treaties in force around the world, covering everything from income tax to pension plan liabilities. No one, be they companies or governments or individuals, likes to be short-changed, which makes global tax such a sensitive issue.

Tax rules which were fashioned in a more closed economic environment can discourage international activity. They can create conflict between countries as to the appropriate tax treatment of an international business and between taxpayers and governments.

Letter to the editor: A shade over two years ago, you wrote in this magazine (Taxation in a global environment, OECD Observer No.230 January 2002) that the time was ripe for a new social compact between governments and citizens. You wrote that the former would provide services in an efficient and cost-effective manner, while the latter would pay their taxes. Aggressive tax planning “would be considered socially unacceptable”.

Is it time for a food tax? Such a levy on high-calorie products, like sweet drinks, fast food and cakes, could be part of a solution to the obesity problem.

Tax revenues fell slightly across much of the OECD area for the second year in a row, the latest edition of the OECD Revenue Statistics shows. Tax revenues (including revenues from compulsory social security contributions) as a percentage of GDP declined in 16 of the 27 OECD countries which reported data, with EU countries showing most of the drop.

The taxman is taking a smaller bite out of pay cheques in many OECD countries, but married couples with children are still often given substantially bigger breaks than their single or childless counterparts, the latest issue of Taxing Wages found. The OECD report compares what workers are paid with what actually ends up in their pockets, taking into account personal income tax, employee social security contributions and any family-related cash benefits from the government.

Social security contributions accounted for about a quarter of tax revenue in OECD countries in 2000, unchanged from the 1995 level, but wide differences remain between countries because of differing definitions and practices, the latest edition of Revenue Statistics shows.

Just how much is the underground economy worth? And if “underground” items are by definition undeclared, whether sales of smuggled cigarettes or payment for casual work, how can governments hope to measure it? This is important, because policymakers rely on national accounts and GDP figures to take decisions, and if the figures are inaccurate the policy responses are likely to be off-centre too.

Investment is partly about taking risks, though not just any risk. In fact, transparent systems where the judicial framework is efficient and corruption is low tend to receive more investment.

Whether it be a tax on plastic bags or an increased levy on petrol for cars, consumer spending that damages the environment can be discouraged by taxing the goods and services on offer to raise the price. Such taxes have proved effective in OECD countries, but there are fears that higher costs to producers will reduce international competitiveness and have a possible regressive impact on domestic income distribution because poorer households will pay a higher proportion of their income than rich ones.

When Denmark pushed up a tax on very toxic nickel-cadmium rechargeable batteries, cynics might have quipped that it was just an attempt to raise more tax revenue. In fact, quite the opposite has occurred: a fall in revenue from the tax has been reported. The reason is that consumers finally switched to other less toxic alternatives, causing sales to drop. While this shows that taxes can help the environment, successful environmentally-related taxes can actually erode their own tax base.

The Isle of Man, a self-governing island community at the centre of the British Isles, has led the way in showing how an offshore jurisdiction can embrace new international standards on taxation issues while protecting the interests of its economy and people. Allan Bell, the island’s treasury minister, explains that, far from the negative ‘tax haven’ stereotype, the Isle of Man is a prime example of an enterprising and internationally responsible small country with a positive role to play in the global economy

The following jurisdictions, which have not yet made commitments to transparency and effective exchange of information, were identified on April 18 by the OECD's Committee on Fiscal Affairs as uncooperative tax havens.

Not long ago, transfer pricing was a subject for tax administrators and one or two other specialists. But recently, politicians, economists and businesspeople, as well as NGOs, have been waking up to the importance of who pays tax on what in international business transactions between different arms of the same corporation. Globalisation is one reason for this interest, the rise of the multinational corporation is another. Once you take on board the fact that more than 60% of world trade takes place within multinational enterprises, the importance of transfer pricing becomes clear.

“What goes up must come down” may not be among the most sophisticated theories of economics, but the dot.com boom of 1996-2000 – and its subsequent crash – is a reminder that certainty in business remains a chimera. The hype is over. How many PowerPoint presentations did we sit through being told that an Internet year was equivalent to four months? Well, when it came to the downturn those presentations were proved right, as the speed of the crash showed. But while large numbers of over-hyped dot.coms have gone to the great recycle bin in the sky, the technology remains.

Whenever development financing is discussed these days, it is hard to avoid mention of the Tobin tax. Generally, the question people ask is whether it would be feasible, even desirable, to put a tax on global capital flows to finance development. The issue also came up for discussion at the UN Financing for Development Conference, in Monterrey (Mexico) in March 2002, when heads of state and the major international institutions met to discuss ways of reducing global poverty.

For some people, any tax may be a disincentive to work, but as a rule, the main tax disincentive comes from what is known as the “tax wedge” on labour. This is the difference between what employers pay out in wages and social security charges and what employees take home after tax, social security deductions and cash benefits have been taken into account. So, if your wage packet says 12 000, but your employer pays 16 000 to hire you, then the wedge is 4 000, or 25% of your cost to your employer. The size of this wedge varies, but there are signs that they are being reduced.

Regardless of the overall level of taxation and public spending, public social expenditures constitute over half of all public spending in most OECD countries. But while media reports often suggest great gaps between one country’s public social expenditure relative to its GDP and another’s, a closer look at how tax and benefit systems interact reveals that the differences between countries are narrower than they seem.

Tax burdens may soon start to ease in OECD countries. Certainly the political pendulum of the last two decades has been in favour of reducing taxes in proportion to the size of the economy. But while recent evidence may point downwards for some countries at least, since 1965 there has been a persistent and largely unbroken upward trend in the ratio of tax to GDP across most of the OECD area. Moreover, the OECD average rose further in 1999 and, according to provisional figures, in 2000.

Tax systems, and particularly international taxation arrangements, can struggle to keep pace with globalisation and market liberalisation. Most of today’s tax arrangements were developed in an era when tax authorities could rely upon exchange controls, highly regulated capital markets and technological constraints to protect them from the negative fiscal effects of global activities. These barriers to cross-border activities protected tax authorities from the full implications of the interaction between national tax systems. While corporations globalised, tax authorities remained constrained by national frontiers.

Guernsey and Jersey have made commitments to improve the transparency of their tax and regulatory systems and establish effective exchange of information for tax matters with OECD countries by 31 December 2005. The OECD looks forward to working with Guernsey and Jersey and encourages other jurisdictions to come forward with similar commitments.

How can a multinational company offer stock or share options to its employees when the rules governing those options are different in the various countries where it operates? And how will they be taxed?

Taxing times

The OECD’s effort to eliminate harmful tax practices is directed at “tax cheats” and is not intended to push countries into specific levels of tax, Secretary General Donald Johnston said. “There seem to be widespread misunderstandings as to what the project is all about,” Johnston said in a letter to US Congressman Sam Johnson. “It has nothing to do with insisting that a jurisdiction use a particular tax structure or rate… What the project is aimed at is preventing non-compliance with the tax laws.”

Workers in the Netherlands pay the highest social contributions among OECD countries, with 29.1% of the salary of a single worker and 26% of that of a couple with two children and one wage-earner in the family.

One way of keeping pollution down is to price it. Governments can establish a direct link between environmental degradation and those who cause it by imposing environmentally-related, or green, taxes, whether it be on fossil fuels to discourage their use or a landfill tax on waste disposal.

Personal income tax is the single largest source of revenue in OECD countries, accounting for 30% of total tex revenue in 1998, ahead of social security at 28%. But while the US government still receives 41% of its tax revenue in personal income tax, almost double social security at 24%, in Europe and Japan social security accounts for the lion’s share, at 32% and 38% respectively.

Greek property taxes are among the lowest in the OECD at just 1.3% of GDP, but are so complex that real estate owners are liable to pay up to 14 different taxes and levies related to their property, says the latest OECD survey of the Greek economy. Moreover, while property tax accounts for only 0.14% of total tax revenue, collecting it represents 1.1% of total tax administration costs.

OBSERVER: Why is taxing e-commerce such a controversial issue?

Focusing on “headline” rates of tax can easily generate misleading conclusions about how much marginal income tax people pay and about the effect taxes can have on earner behaviour. In the second of their two-part series on income taxes, Flid de Kam and Chiara Bronchi explain why.

When comparing different tax systems, most people tend to look at top rates of personal income taxes imposed by central government. However, concentrating on these ‘headline’ rates can be misleading. In the first of a two part series, Flip de Kam and Chiara Bronchi explain why.