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LOW-TAX JURISDICTIONS IN INTERNATIONAL TAX PLANNING
NATALIA ANDRIANOVA,
Lomonosov Moscow State University (Moscow, Russia)
https://doi.org/10.17589/2309-8678-2021-9-3-137-162
Until recently low-taxjurisdictions have played an important role in the formulation of tax planning schemes by multinational enterprises. However with the onset of global trends towards deoffshorization, existing methods of tax optimization have seen significant changes. As there is currently no one single approach when creating the definition of, or defining a "low-taxjurisdiction,"in this article the definition and the main features of low-tax jurisdictions are proposed and the main stages in the formation and development of low-tax jurisdictions are detailed. On the basis of research carried out on the national legislation of low-taxjurisdictions, the main company types which meet the special legal formulae that can be incorporated into low-taxjurisdictions have been analyzed. In order to highlight similar characteristics and to simplify the analysis of the national legislation of low-taxjurisdictions so that general recommendations covering the nature of measures which can be used to counter illegal tax avoidance, tax evasion, money laundering and other illegal financial machinations, different classifications of low-tax jurisdictions have been analyzed. The unfair and perhaps even illegal use of low-taxjurisdictions often leads to violations of core tax principles which may have an impact on the overall size of budget revenues available to high-tax countries. Therefore, deoffshorization measures are being proposed at the international level. Currently the main global trend has been to increase the transparency of tax information and of financial transactions which are carried out by international exchanges. This is supported by the strengthening and expansion of cooperation between tax authorities which serves to counter the abuse of provisions in international tax treaties on the avoidance of double taxation.
Keywords: offshore jurisdictions; low-tax jurisdictions; deoffshorization; tax planning; tax avoidance; tax evasion; tax information exchange.
Recommended citation: Natalia Andrianova, Low-Tax Jurisdictions in International Tax Planning, 9(3) Russian Law Journal 137-162 (2021).
Table of Contents
Introduction
1. Definition and Main Features of Low-Tax Jurisdictions
2. Main Stages in the History and Emergence of Low-Tax Jurisdictions
3. Types of Legal Entities Incorporated in Low-Tax Jurisdictions
4. Classifications of Low-Tax Jurisdictions
5. Principles of Taxation Violated by the Unfair Use of Low-Tax Jurisdictions
6. Deoffshorization as the New Global Trend Since the Late 1990s Conclusion
Introduction
The phenomenon surrounding the emergence and development of low-tax jurisdictions is largely related to the taxation of business income and the desire of the tax payer to reduce the amount of taxes paid.
The need for finding the right balance between private and public interests in taxation originates from the very essence of taxes. Taxes arose together with the state and were used as the main source of funds for public authorities and state functions'. Thus without a system of taxation the state cannot exist.
it is exclusively a state's authority to establish, introduce and levy taxes. The subjects in the legal relationship in the tax sphere are, on the one hand the state and on the other hand the taxpayer. The state and the taxpayer, as opposite ends of the tax relationship, have absolutely different interests, namely the desire of the taxpayer to reduce tax payments as opposed to the state's fiscal interests.
The state, having fiscal sovereignty throughout its territory, strives to obtain funds from the taxpayers, as the state is financed with these funds. The taxpayer, aware of the unilateral and mandatory nature of the payment of taxs, strives to reduce his or her tax burden using all legal and acceptable ways and means, including the use of low-tax jurisdictions, in the structuring of business activities.
1. Definition and Main Features of Low-Tax Jurisdictions
There is no single approach to the definition of a "low-tax jurisdiction" in law or scientific literature.
A.i. Pogorletskii considers a low-tax jurisdiction to be a state whose level of income taxation is significantly lower than the average level of taxation in the world's leading
' Крохина Ю.А. Налоговое право [lulia A. Krokhina, Tax Law] 14 (2014).
developed economies. Jurisdictions with low taxation according to A.i. Pogorletskii are states whose income tax rates do not exceed 10% and are often even less.2
N.M. Teliuk maintains the supposition that a low-tax jurisdiction is a state providing legal rights and mechanisms to reduce taxes paid from a particular type of income when compared with the original country of the taxpayer's residence.3 D.V. Vinnitskii and A.i. Savitskii equate low-tax jurisdictions with offshore zones.4 However, the relationship between these two terms (low-tax jurisdictions and offshore zones) should be analyzed in more detail.
The English term "offshore" or"off-shore," which means "outside of the territory of a country," is the accepted term for extra-national tax havens. The main characteristic of an"offshore" territory is the presence of stable preferential tax regulations which are expressed in the form of low tax rates or in fact the complete absence of taxation on the profits of organizations registered in the offshore territory. Such tax jurisdictions allow economic entities to optimize taxation levels for multinational businesses.
it should be noted that along with the term "offshore jurisdiction" to refer to this phenomenon, the terms "tax haven," "harmful tax regime," "offshore financial center," "offshore center" are actively used.
The Organization for Economic Co-operation and Development (OECD) in the report "Harmful Tax Competition. The Emerging Global issue" indicated that globalization had led to the fact that the tax policy of one state can have a negative impact on the economies of other states.5 Tax havens and preferential tax regimes lead to tax competition by states.
The key features of the tax haven according to the OECD report are:
1) Lack of taxation or only nominal taxation of profits (always or in certain specific situations), as well as the positioning of the country as a low-tax jurisdiction in which non-residents can avoid taxation;
2) The absence or ineffective exchange of tax information with the tax authorities or governments of other states concerning taxpaying entities and persons taking
3
Устойчивое развитие: общество и экономика: материалы международной научно-практической конференции, посвященной 290-летию Санкт-Петербургского государственного университета, 23-26 апреля 2014 г.: сборник статей [Sustainability: Society and Economics: Materials of the International Scientific and Practical Conference Dedicated to the 290th Anniversary of St. Petersburg State University, 23-26 April2014: Collection of Articles] 256 (2014).
Телюк Н.М. Современные тенденции налогового планирования при осуществлении внешнеэкономической деятельности российских компаний: дис. ... канд. экон. наук [Natalia М. Teliuk, Current Trends of Tax Planning in the Implementation of Foreign Economic Activities of Russian Companies, PhD thesis] 92 (2014).
Винницкий Д.В., Савицкий А.И. Российская правовая система и проблемы структурирования бизнеса и сделок с участием низконалоговых юрисдикций // Закон. 2013. № 4. C. 38-45 [Danil V. Vinnitskii & Andrei I. Savitskii, Russian Legal System and Problems of Structuring Business and Transactions Involving Low-Tax Jurisdictions, 4 Law 38 (2013)].
OECD, Harmful Tax Competition: An Emerging Global Issue (April 1998) (Jun. 4, 2021), available at https://www.oecd-ilibrary.org/taxation/harmful-tax-competition_9789264162945-en.
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advantage of the low taxation or the absence of taxation on profits on the territory of the low-tax jurisdictions in question;
3) Lack of transparency in the implementation of legal, administrative and economic mechanisms;
4) Lack of any real activity by the organizations registered in the low-tax jurisdiction, indicating their registration in the country is only for the purposes of tax optimization.6
Harmful preferential tax regimes can also create tax competition for states. The key features of a preferential tax regime according to the OECD report are:
1) Zero or low effective tax rates;
2) Creation of a special tax regime not applicable to residents or citizens of the state (the preferential tax regime may directly or indirectly exclude resident/citizen taxpayers from using its advantages or organizations using the preferential tax regime may be, directly or indirectly, prohibited from operating in the domestic market of the state);
3) Lack of transparency in the application of the preferential tax regime, which is manifested in the selective application of laws and by-laws, and the absence of the possibility of discussing (as a subject of mutual agreements) the provisions of tax laws;
4) Lack of an effective exchange of information regarding taxpayers benefiting from the preferential tax regime.7
As part of its activities, the OECD maintains a list of territories that do not provide information on the financial transactions of organizations in their jurisdiction. in 2009, the OECD published a list of countries divided into three subgroups.
The first subgroup or so-called "white list" included countries that have implemented and applied tax standards. These countries included, for example, Germany, Spain and italy.
The second subgroup of countries, or the so-called "grey list," included states that have committed themselves to adopting international tax information exchange standards but have not yet taken steps to actively apply them. Bermuda, the British Virgin islands and Liechtenstein were included in this group of countries.
The third subgroup of states, or the blacklist, included those countries that have not committed themselves to applying and adopting international standards for cooperation in the tax sphere. Such states included, among others, Costa Rica, Uruguay and the Philippines.
Over the following years, the situation has changed for the better and in 2012 no country was included in the blacklist.
The international Monetary Fund has formulated a definition of an offshore financial center, which refers to a state or jurisdiction that provides financial services to nonresidents in a size not comparable to the size and financing of its own economy.8
6 Harmful Tax Competition, supra note 5, at 22.
7 Id. at 27.
8 Ahmed Zoromé, Concept of Offshore Financial Centers: In Search of an Operational Definition, iMF Working Paper WP/07/87 (2007), at 7 (Jun. 4, 2021), available at https://www.imf.org/external/pubs/ ft/wp/2007/wp0787.pdf.
The international Monetary Fund highlights the main characteristics of offshore financial centers, which are:
') Priority targeting on non-residents;
2) Creation of a favorable regulatory environment, which includes low supervisory requirements and minimum disclosure requirements;
3) Low or zero taxation and anonymity in operations.
The Bank for international Settlements is an international financial institution that carries out economic and monetary research and is one of the core points of cooperation between the world's central banks. This financial institution uses the term offshore centers to describe those states in which the banking sector is focused on transactions mainly with non-residents in foreign currency greater than the size of their own economy.9
The Financial Action Task Force against Money Laundering (FATF) is an intergovernmental organization that develops international standards to counter the laundering of criminal proceeds and financing of terrorism and verifies compliance of national systems to established principles and standards currently applied internationally.
The main document adopted by the FATF contains 40 recommendations, which are in fact a set of organizational and legal measures to create an effective system in each country which counters the legalization of criminal proceeds.
FATF maintains a "black" list of countries and territories that refuse to cooperate (Non-Cooperative Countries and Territories) and are not diligent enough in the fight against money laundering.
in the legislation of the Russian Federation, the term "offshore zones" is set forth in subparagraph 2 of paragraph ' of Article 284 of the Tax Code of the Russian Federation. Offshore zones are states or territories which are included in the list contained in the Order of the Ministry of Finance of the Russian Federation dated '3 November 2007 No. I08n, and which provide preferential taxation and do not disclose information about financial transactions.10 The main problem is that in the Russian Federation at the legislative level, criteria for categorizing jurisdictions as offshore are not established.11
9 Bank for International Settlements, Monetary and Economic Department, Guidelines to the International Banking Statistics (2013), at 59 (Jun. 4, 2021), available at https://papers.ssrn.com/sol3/papers. cfm?abstract_id=1188182.
10 Приказ Минфина России от 13 ноября 2007 г. № 108н «Об утверждении Перечня государств и территорий, предоставляющих льготный налоговый режим налогообложения и (или) не предусматривающих раскрытия и предоставления информации при проведении финансовых операций (офшорные зоны)» // СПС «КонсультантПлюс» [Order of Ministry of Finance of Russia No. 108n of 13 November 2007. On the Approval of the List of States and Territories, Granting Preferential Tax Regime of Taxation and/or Not Providing for Disclosure of Information on Financial Transactions (Offshore Zones), SPS "ConsultantPlus"] (Jun. 4, 2021), available at http://www.consul-tant.ru/document/cons_doc_LAW_73100/.
11 See Андрианова Н.Г. Перечень офшорных зон в российском праве // Юрист. 2020. № 11. C. 49-54 [Natalia G. Andrianova, The List of Offshore Zones in the Russian Law, 11 Lawyer 49 (2020)].
After analyzing the various definitions of the term "offshore jurisdiction" it can be concluded that the main features of an offshore jurisdiction are:
1) A zero or low rate of income taxation;
2) The absence or ineffective exchange of tax information with the tax authorities or governments of other states;
3) Priority targeting on non-residents;
4) The absence of international agreements to avoid double taxation;
5) The simplified registration of companies and the absence or low-level of control over accounting regimes for registered companies by supervisory bodies.
in addition to offshore jurisdictions, the scientific literature also highlights states and territories, which grant preferential tax regimes for certain taxpayers and taxpaying entities. Usually these are states with high or normal levels of income taxation, which are used in international tax planning schemes because of the specific tax regimes in such states:
1) For legal entities engaged in certain activities;
2) For special types of legal entities;
3) For legal entities registered in specially created regions.
The difference between jurisdictions, which grant preferential tax regimes, and offshore jurisdictions are as follows:
1) The corporate tax rate in such jurisdictions is higher than in offshore jurisdictions;
2) Jurisdictions, which grant preferential tax regimes, have an extensive network of international tax agreements to avoid double taxation, which allows entities to minimize taxes on certain types of income;
3) Organizations registered on the fiscal territory of the jurisdictions which grant preferential tax regimes, have the right to conduct activities on the territory of that state, not only outside its territory;
4) Registration of companies is not carried out in a simplified manner but through standardized procedures, jurisdictions which grant preferential tax regimes strictly control the activities of companies registered on their territory;
5) A high level of political and legal stability;
6) Jurisdictions, which grant preferential tax regimes, usually have good reputations.
Jurisdictions, which grant preferential tax regimes, impose stricter requirements for registration and control the activities of companies on the fiscal territory of the state, allowing for the carrying out of activities not only outside the territory, but also on the territory of the state.
it should be noted that, in recent years, international organizations have begun establishing a global exchange of tax information, and promoting openness and transparency in international financial transactions, which has led to the fact that offshore jurisdictions are now beginning to conclude international agreements
containing provisions on the exchange of tax information. Also, offshore jurisdictions are gradually beginning to equalize the rights of non-resident and resident companies, granting the latter the right to carry out activities within the boundaries of the territory of what were strictly offshore jurisdictions.
The concept of "low-tax jurisdiction" is a collective concept and includes the concepts of an offshore jurisdiction and jurisdictions which grant preferential tax regimes. A low-tax jurisdiction is a territory, which provides for the possibility of the registration of legal entities, which, if the legal requirements are met, are provided with a preferential tax regime which differs significantly from the average level of taxation of most states of the world and allows for the optimization of taxation. Special requirements established by national law will depend on the type of jurisdiction (offshore jurisdiction or simply a jurisdiction which grants preferential tax regimes) in which a legal entity is registered.
Low-tax regimes may be provided not only on the whole territory of the state, but also on a certain territory within the borders of the state. Low-tax jurisdictions significantly reduce the burden of taxation on multinational business due to low or zero income tax rates.
States with zero income tax rates generally introduce an annual fee which gives companies the right to conduct business using the tax jurisdiction of said state without paying income tax.
States with low-income tax rates (such as offshore and related jurisdictions which grant preferential tax regimes) allow companies to use tax agreements made by such states with developed countries to reduce tax payments.
The main signs of low-tax jurisdictions therefore are:
1) A preferential tax regime, providing for a significant reduction in income taxation;
2) Establishing national legal requirements under which a legal entity is entitled to use a preferential tax regime;
3) The use of such jurisdictions by legal entities to optimize tax payments;
4) Targeting activities mainly at non-residents;
5) Trade and bank secrecy provisions that ensure the confidentiality of companies' information (this feature is significantly changing due to international tax information exchange and the rising level of transparency regarding financial transactions).
2. Main Stages in the History of Emergence of Low-Tax Jurisdictions
The main characteristics of offshore jurisdictions gradually appeared in the history of their formation.
The emergence of offshore jurisdictions in the modern sense dates back to the 20th century, but some elements which are characteristic to low-tax jurisdictions
began to emerge at an earlier time. Thus, the first attempts to create territories with preferential tax regimes can be traced to ancient Greece. Beginning with the imposition of taxes on the import and export of goods to Athens, the territories adjacent to Athens became more attractive to merchants, due to the existence of a tax-free regime for goods.12
in the Middle Ages, the prototypes of offshore centers could be attributed to the "fairs" that appeared in the '2th century which provided a preferential tax and duty regime for the import of goods and exemptions of foreign merchants from taxation. Despite the fact that medieval fairs lacked a confidential nature in their business and did not function permanently, the criteria of granting a preferential tax regime to non-residents can be traced quite clearly.13
Later, large trading companies, such as the British East india Company were granted exemption from duties and the customs inspection of ships if the company paid a fixed fee annually.
At the end of the '9th century, the U.S. states of New Jersey and Delaware, which were in the need of capital, decided for the first time to introduce a simplified procedure for registering legal entities on their territories. Under the strict rules for the incorporation of legal entities in Anglo-Saxon countries at that time, simplified registration procedures for legal entities in these American states and relatively low tax rates allowed a large number of persons interested in registering legal entities to do so. Thanks to the creation of favorable legal regulations, the incorporation of companies in the states of New Jersey and Delaware gained the interest of nonresidents and replenished the budgets of these American states.
Thus, at an early stage in the development of offshore jurisdictions, the main reasons for creating a favorable business environment for non-residents was a desire to raise money from foreign sources, as well as the desire to strengthen the economic development of the concerned territory.
The phenomenon of low-tax jurisdictions was greatly influenced by the case law practice of the courts of Great Britain. in this regard, it is important to mention the decision of Egyptian Delta Land and Investment Co. Ltd. v. Todd' The company, registered in the United Kingdom, in '907 decided to amend its memorandum of association, moving the control center to Cairo. in London, the company had a secretary who formally complied with UK law. As the company did not operate in the UK, the company's center of control was also outside the UK, and so the court ruled that the company should not pay taxes in the UK. Since that court decision, it
12 Халдин М.А. Мировой опыт оффшорного бизнеса [Mikhail A. Khaldin, World Experience of Offshore Business] 210 (1995).
13 МатусевичА.П. Международный офшорный бизнес [Alexander P. Matusevich, International Offshore Business] 33(2016).
14 Egyptian Delta Land and Investment Co. Ltd. v. Todd (H.L. 1928) [1929] A.C. 1.
has been possible to set up companies in the UK without paying taxes in accordance with the non-resident principle of the company. This principle was subsequently borrowed by the Bahamas, the Cayman islands and Hong Kong.
Since the 1920s, there has been a tendency to create attractive legal instruments that provide the benefits of a preferential tax regime for non-residents in some countries.
in 1926, Liechtenstein changed corporate law, resulting in the establishing of a new legal entity, the Anstalt, and prohibitions and restrictions on the citizenship of the founders of companies in Liechtenstein were also removed. The legislation provided the possibility of concluding agreements with the tax authorities of Liechtenstein for a period of 30 years on the payment of income tax of the organization.
in 1929, rules on holding companies were established in Luxembourg. This type of company was exempt from corporate income tax, share transfer tax, interest income tax and tax on dividends paid to non-residents.
in 1934, Switzerland amended its banking laws15 to make the banking secrecy provisions stricter. The need for change was understood due to the financial crisis of 1929, which caused the banking crisis in Switzerland. With the bankruptcy of some major Swiss banks Switzerland decided to strengthen legal regulations and the supervision of financial institutions. Under the current conditions, disclosure of information that constitutes bank secrecy has become a criminal act. Bank secrecy includes information about the client's relationship with the bank, information about the bank's financial situation, information about the client's relationship with other banks and information about the client's money flows through their accounts. Bank employees have to maintain secrecy even after their termination from employment. Thus, Switzerland has established one of the most important principles in the operation of low-tax jurisdictions, the principle of confidentiality of information.
The devaluation of the British pound in the 1950s forced the UK government to establish a prohibition on banks' lending to non-UK residents. in 1957, an agreement was reached between the Central Bank of Great Britain and UK banks to temporarily allow UK banks to conduct unregulated transactions in cases where such transactions occurred in foreign currency and between non-UK customers. This agreement created the emergence of the Euromarket. UK banks outside the UK were then not formally considered to be under the jurisdiction of the UK for the purposes of not implementing UK-based controls.
The emergence in the post-war period of new independent states, which were not sufficiently financed to carry out financial activities and their need for money led to the establishment of legal regulations to attract foreign money to national economies.
in the 1960s, the pace of globalization began to increase. During this period transnational corporations began to develop, operating in several states at once,
15 Loi fédéralesur les banques et les caisses d'épargne du 8 novembre 1934, FF 1934 I 171, Art. 47.
and were interested in implementing tax planning for the purpose of reducing taxes paid. Often, the choice of location for a transnational corporation was determined by the specifics of the tax regime provided by the state on its territory, and tax planning itself was based on the use of differences in taxation enshrined in national tax laws. internationalization and globalization have thus accelerated the emergence and development of new low-tax territories. At that time, popular low-tax centers such as the Cayman islands and Singapore were created and developed rapidly.
From the '970s to '990s, there was a period of rapid development in the low-tax industry, which was associated with an increase in income taxation in countries with high tax rates, as well as the introduction of currency restrictions in the financial sector of developed countries.
in the '980s, the law of most low-tax jurisdictions enshrined special corporate instruments for tax-exempt companies and international business bodies.'6 During this period, offshore jurisdictions also became specialized in the types of services they provided.
As a result, there were three main stages in the development of low-tax jurisdictions:
- The early stage prior to '907, during which the main reasons for creating favorable business conditions for non-residents were a desire to raise money from foreign sources, as well as a desire to strengthen the economic development of the territory concerned;
- The stage from '907 to '950. During this period there was a tendency to establish attractive legal mechanisms for non-residents to obtain benefits of preferential taxation;
- The stage from '960 to '990. This was a period of rapid development for the offshore industry, associated with the consolidation of special corporate instruments in the legislation of offshore jurisdictions, as well as the specialization of offshore centers.
3. Types of Legal Entities Incorporated in Low-Tax Jurisdictions
The choice of a type of legal entity has a significant impact on the nature of the legal entity and the applied tax rates, as well as the possibility of using additional tax preferences established by the national legislation of the state in which the legal entity is registered. The types of legal entities vary in the territories of low-tax jurisdictions. Legislation of some low-tax jurisdictions contains special legal forms of companies that do not exist in other states or territories. it is specific legal forms which are of particular interest for research because the tax status of an entity
16 Козлова В.А., Новицкая А.И. Проблемы правового регулирования процессов деофшоризации экономики Российской Федерации [Valeria A. Kozlova & Alexandra I. Novitskaia, Problems of Legal Regulation of the Deoffshorization of the Economy of the Russian Federation] 10 (2018).
significantly depends on its legal form. The use of special legal forms for organizations allows for the optimization of taxation by reducing the overall tax burden, providing additional tax preferences or exempting a company's profits from taxation.
The following is an analysis of the specific legal forms of organizations that can be incorporated on the territories of low-tax jurisdictions.
international business company (IBC). This legal form of company is the most convenient for conducting multinational business.
The main features of this type of legal entity are:
- The company should not operate on the territory of the country of registration;
- The company is exempt from paying income taxes in the country of registration or pays them at reduced rates, in addition, the company in the country of registration is exempt from paying taxes and fees from all transactions carried out by the company within the framework of international business, including transactions with real estate and concerning the shares of the company;
- The company does not have the right to own real estate in the country of registration (sometimes an exception is the right to own office space);
- it is forbidden from carrying out banking and insurance activities without obtaining a special license;
- Securities operations are prohibited in the country of company's registration (outside the country of registration it is possible to carry out activities with securities with the appropriate license in the country in which the company intends to conduct securities activities);
- Prohibited from conducting activities as an investment fund, except if a legally established license is obtained in the country of the company's registration or outside it;
- Has the right to open and have bank accounts in the country of the company's registration;
- Has the right to receive professional advice from lawyers, accountants and other professionals in the country of the company's registration.
National legislation of low-tax jurisdictions may provide for other requirements not listed above for the operation of an international business company. For example, Seychelles law establishes the right of the company to hold board meetings of directors in the Seychelles and the right not to file financial reports or conduct audits of such reports.17
Thus, the main feature of an international business company is the enshrining of this type of company in the laws of countries with an Anglo-Saxon legal system. Control over the registration and activities of an international business company is rather low, as companies of this type may not file financial reports or be required to audit such reports.
17 international Business Companies Act, 2016 (Act 15 of 2016) (Jun. 4, 2021), available at https://www. nexus.ua/images/legislation/Seyshelles_iBC_2016.pdf.
Exempted company. The distinguishing feature of this legal form of the company is the complete exemption of taxation on profits of this type of company. For example, under Bermuda law, exempt companies are not allowed to own real estate in Bermuda, to carry out banking or insurance activities, to manage funds, to engage in collective investment or to appoint a corporate secretary who is an individual resident of Bermuda. The minimum number of shareholders for this type of company is one person, either an individual or a legal entity and the maximum number of shareholders is not limited. information about the company's directors and shareholders is publicly available. it is necessary to hold an annual meeting of shareholders, which can be held in any state, and shareholders can vote through their representatives. The minimum share capital of this type of company in Bermuda is $1. The issue of bearer shares is not allowed. The company must keep records and file financial statements. The audit of financial statements is advisory in nature, and without the consent of all shareholders of the company and the director, audits cannot be carried out.18
This type of company is established in the legislation of countries with an AngloSaxon legal system. Companies are granted a full tax exemption in the country of the company's registration, provided that the activities of such a company will be carried out outside the state of registration of the company. Control over the process of registration and functioning of such companies is at a rather low level, although companies of this type need to file financial statements and audit them, the audit requirement is advisory in nature. The minimum share capital requirements of this type of company are very low.
Non-resident company. A non-resident company is a company that under the tax laws of low-tax jurisdictions is not recognized as a resident of said territory. The management and control of the company is carried out from abroad. in the Cayman islands Companies Law,19 this type of company is referred to as ordinary nonresident company. Companies of this form are not allowed to trade on the territory of the Cayman islands, although the exception is the conclusion of contracts in the Cayman islands, which will be necessary for the company to operate abroad. The legal form of a non-resident company is an alternative to the legal form of an exempt company, such a company can only be used for doing business outside the company's registration area. The minimum number of participants of such a company is 1 person, an individual or a legal entity, the maximum number of participants of such type of the company is not limited. The management of the company should be carried out by the director. The director may be an individual or a legal entity. information about the company's shareholders is publicly available, information about the directors
18 Companies Act 1981 (1981 : 59) (Jun. 4, 2021), available at http://www.bermudalaws.bm/laws/ consolidated%20laws/companies%20act%201981.pdf.
19 Companies Law (2016 revision), Supplement No. 5 published with Extraordinary Gazette No. 69 of 2 September 2016 (Jun. 4, 2021), available at https://pdf4pro.com/view/companies-law-2013-revision-cayman-fiduciary-1ed70e.html.
of the company is not provided. The company must hold an annual shareholder meeting, such a general meeting should be held in the Cayman islands. The law does not establish a minimum amount of share capital for a non-resident company. Companies are prohibited from issuing bearer shares. A registered office in the Cayman islands is legally required. The legislation does not contain a requirement to file financial statements to the state authorities or to conduct audits.
A non-resident company is enshrined in the laws of countries with the AngloSaxon legal system. The law of low-tax jurisdictions establishes a requirement making it impossible to conduct business with residents of such a territory, these types of companies are not subject to taxation under the national law of low-tax jurisdictions. Control over the registration and activities of these types of company is at a rather low level, as the minimum amount of statutory capital is not established, the legislation of low-tax jurisdictions does not contain a requirement to provide annual accounting to the state authorities, and auditing of accounting is not required.
Protected cell company. Each structural cell is not a legal entity and cannot exist separately from a protected cell parent company. This type of company is used in collective investment and asset management. it is divided into 100,000 shares, each worth $1. in order to fully carry out its activities, it is necessary to issue and pay at least 2 shares. The company should have a registered office in the Seychelles, a corporate secretary resident in the Seychelles and a minimum of two directors to manage the company. information about directors and shareholders of this type of company is not public.20
A non-resident company is established under the laws of countries with the Anglo-Saxon legal system. in low-tax jurisdictions, a protected cell company is a legal entity granted the right to allocate and protect assets by dividing them into several structural cells. Protected cell companies are exempt from taxation on all transactions that they make in international business. Control over the registration and activities of this type of company is at a rather low level, the formally established minimum amount of share capital is quite high in practice and payment of all statutory capital is not required. information about the directors and shareholders of this type of company is not public.
Domiciliary company. This type of company conducts economic activity mainly abroad, and the mandatory requirement for this type of company is receiving income only from foreign sources. The company must be managed from abroad and only have employees abroad. in the jurisdiction of the company's registration it must have a registered office. For example in Switzerland, Swiss law states that a domiciliary company registered in the country is entitled to receive no more than 5% of its total income from domestic sources. The rest of the company's profits must be obtained
20 Protected Cell Companies Act, 2003 (Act 4 of 2003) (Jun. 4, 2021), available at https://seylii.org/sc/ legislation/act/2003/4.
from foreign sources. in practice domiciliary companies are mainly used to reduce corporate income taxation and taxes on capital gains. in Switzerland, at the federal level, domiciliary companies are not granted special tax breaks, but at the cantonal level, the profits of cantonal companies are taxed at reduced rates. The cantonal authorities set the corporate income tax rate for domiciliary companies at 3-3.5%, which is 15% less than the usual corporate tax rate for all other types of companies.21
This type of company is established within the framework of laws in countries with a "continental legal system." Such companies are mainly formed to reduce corporate income taxation and capital gains taxes by groups of companies. Domiciliary companies must carry out almost all of their economic activities abroad within the mandatory requirement of receiving income only from foreign sources. The tax preferences for this type of company is chiefly one of a reduction in tax on profits.
Service company. This legal form of company entity is also represented in Switzerland. The service company is a public company that assists a single international group of companies on various issues and sees profits only from this group of companies and not from any third parties.
Service companies are established under the legislation of countries with a continental legal system. The service company is thus a member of an international group of companies, providing them with technical, administrative, marketing or other assistance. The tax preference for this type of company provides a reduction on payment of income tax.
One type of limited liability company is the limited duration company (LDC), also known as a limited life company (LLC). A feature of this legal form of entity is the limited period that it is allowed to carry out its activities. Such a company operates until the expiration date specified in the articles of association, or before a certain event which must also be specified and contained in the articles of association when it is established. However the total duration such a company may be allowed to exist cannot exceed 30 years. The minimum number of members of a company with a limited term of operation is two members. At the end of the company's life or in the event of the coming about of the event specified in the company's articles of association when it was created, the company is automatically considered liquidated. in conjunction with the terms in the founding articles of association the liquidation of the company is also subject to the voluntary agreement of the company's members to carry out the liquidation. Finally a company of this type may be liquidated before the expiration of its operations on the basis of a voluntary decision made by the company's members to liquidate the company ahead of schedule.
Due to the distinctive characteristics of this type of company the company's name should reflect the limited life-span of the company, in practice the letters
21 Loi fédérale complétant le Code civil Suisse (Livre cinquième: Droit des obligations) du 30 mars 1911, FF 1905 II 1, 1909 III 747, 1911 I 695.
LDC are added after the company's name in order to make this clear. The articles of association generally state that the transfer of a stake by any member of the company to another person must be accompanied by the unanimous approval of all members of the company to transfer that stake to the individual. Management of the company is carried out directly by members of such a company with rights in direct proportion to their share in the overall share capital. Members of the company also have the right to delegate the management of the company to a board of directors.
An unusual type of limited liability company is a company without share capital. Companies of this type are generally non-commercial and are used for charitable or other socially significant purposes. The liability of the company's members for the company's debts is limited to the amount predetermined in the articles of association. Often this amount is 1 euro. Members of the company cannot transfer their share to others. A member of such a company has the right to give up his stake in the company and to leave the company. The company's articles of association generally prohibit the distribution of the company's profits.
The legislation of low-tax jurisdictions provides an opportunity to create companies of various legal forms. A feature of low-tax jurisdictions is the consolidation of specific legal forms of companies whose activities are allowed only outside the country of the company's registration for the absence of competition of such companies with residents of the territory. The law of low-tax jurisdictions provides companies with specific legal forms with broad tax preferences up to the complete exemption from taxation in low-tax jurisdictions.
The types of legal forms in which companies can operate depend on the law applicable within the boundaries of low-tax jurisdiction. Thus, the legislation of low-tax jurisdictions, within which the Anglo-Saxon system of law applies, contains more diverse legal forms of companies, which are granted preferential taxation regime when conducting their international business. The degree of control over the registration and activities of companies on the territories of the island states, where the Anglo-Saxon system of law operates, is quite low, as the legislation of such states establishes either very low requirements for the minimum amount of statutory capital or such requirements are not established at all. Legislation generally does not require the need to provide annual accounting to government agencies, and audits of company accounting are also not required. The legislation of low-tax jurisdictions, within which the continental system of law applies, contains a more limited list of legal forms under which companies may be established. The types of companies in jurisdictions with a continental system of law are aimed at their membership in an international group of companies. Tax preferences of this type of companies are more limited and consist in taxing the profits of such companies at reduced rates in the country of company registration.
4. Classifications of Low-Tax Jurisdictions
There are about '00 different low-tax jurisdictions in the world. The national legislation of each low-tax jurisdiction is unique, as they enshrine the rules of registration and activities of organizations on the territory of a low-tax jurisdiction in different manners and list of legal forms of companies that can be registered on the territory of the jurisdiction as well as the procedure for granting tax preferences to organizations. The degree of state control over the registration and activities of companies in low-tax jurisdictions is also significantly different.
The classification of low-tax jurisdictions is necessary to highlight similar characteristics, to simplify the analysis of their national legislation and to make general recommendations on the nature of measures to be used to counter tax evasion and money laundering by organizations registered in such low-tax jurisdictions. The type of low-tax jurisdiction will depend on the list of legal forms of companies that can be registered on its territory, the types of tax preferences they employ and the specifics of the preferential tax regime provided by the low-tax jurisdiction. in addition, the degree of state control over the activities of companies registered in their territories differs significantly in different types of low-tax jurisdictions, which in turn may have an impact on the credibility of documentation from an organization registered in a low-tax jurisdiction, and will necessarily increase the level of control over the activities of such a company by its counterparties or public authorities. The type of low-tax jurisdiction will determine the approach to countering tax evasion and money laundering and the list of measures necessary to do so.
There is no single approach in the scientific literature to classify low-tax jurisdictions. This is because each classification criterion covers a separate part of the operation of low-tax jurisdictions. For the purposes of this study, classifications are based on
') Applicable law, as such classification largely determines the list of legal forms of organizations that can be registered in a low-tax jurisdiction;
2) The level of taxation in a low-tax jurisdiction, as such classification allows for the discovery of what tax rates on income tax are applied in the jurisdiction and what impact they have on the choice of the jurisdiction by the company registering;
3) Provided tax benefits, as this classification allows the discovery of which categories of taxpayers are entitled to claim tax benefits in a low-tax jurisdiction;
4) Level of state control over the registration and activities of companies in low-tax jurisdictions, as this classification has an impact on the degree of reliability of the company's documents received in the low-tax jurisdiction;
5) The degree of confidentiality of the company's directors and shareholders, which reveals the level of transparency and openness of a low-tax jurisdiction and the general desire of such jurisdiction to interact with other states; and
6) Specialization of low-tax jurisdictions in certain types of business activities, which will allow for the identification of the types of business activities in which the company receives special tax preferences.
it should be noted that due to the dynamic development of low-tax jurisdictions under certain criteria, it is not possible to establish a jurisdiction in a particular group, as international regulation of low-tax jurisdictions is significantly changing, which leads to changes in the national law of low-tax jurisdictions and changes the position of that jurisdiction in classifications. Let's analyze each of these classifications in detail.
The first classification of low-tax jurisdictions is based on the law applicable within the boundaries of such jurisdictions. Depending on this criterion, can be distinguished as:
1) Low-tax jurisdictions, the legislation of which is based on Anglo-Saxon law -Cyprus, the British Virgin islands, the Cayman islands;
2) Low-tax jurisdictions, whose legislation is based on continental law -Switzerland, the Netherlands, Luxembourg; and
3) Low-tax jurisdictions whose legislation is based on American law - Panama.
it is worth noting that, along with the allocation of jurisdictions whose legislation
is based on Anglo-Saxon and continental law, this classification separates jurisdictions whose laws are based on American law. There is a huge difference between AngloSaxon and American law. Thus, the main source of American law is the written constitution with the systemization of American laws being carried out by their codification. Judicial precedent plays an important role in American law, but has less application in the courts than in the Anglo-Saxon system of law. However, low-tax jurisdictions, whose legislation is based on Anglo-Saxon law, are the most popular in international business, as it is Anglo-Saxon law that allows the use of a larger list of legal forms of companies and, in particular, the establishment of a trust, through which it is possible to transfer property to the trustee for management in the interests of a third party - the beneficiary.
On the basis of this classification, it can be concluded that there are a variety of legal forms of companies that can be registered in low-tax jurisdictions, as well as the asset protection mechanisms provided for by each legal system.
Of course, it is also necessary to classify low-tax jurisdictions by their level of taxation. Depending on this criterion the following can be identified:
1) Jurisdictions with income taxation of no more than 10 percent, which include territories within which the taxation of the profits of legal entities registered on the territory is absent or is at extremely low rates - the Bahamas, the British Virgin islands, the Seychelles;
2) Jurisdictions that provide preferential tax regime for certain activities, with a standard high or normal level of income taxation - Switzerland, Liechtenstein, Luxembourg, the Netherlands.
The general level of taxation of profits of organizations in the jurisdiction shows how jurisdictions position themselves on the international arena, as excessively low rates of taxation of profits of companies can indicate the intentions of the jurisdiction to attract more money to their territory, encouraging other states to participate in unfair tax competition.
in the way tax breaks are granted, low-tax jurisdictions can be divided into
') Jurisdictions granting full tax exemption.
2) Jurisdictions that provide tax benefits only to non-residents.
3) Jurisdictions granting a complete exemption from taxation of certain activities or organizations established in a certain legal form.
4) Jurisdictions that provide reduced taxation for certain types of business.
5) Jurisdictions using the principle of territorial taxation where tax residents and non-residents pay income tax on the income that was obtained from a source in the state.
This classification focuses on the analysis of those categories of taxpayers who are granted tax breaks on the territory of a low-tax jurisdiction. The classification of low-tax jurisdictions for particular groups is based on the current tax legislation which enshrines tax benefits and legal entities to which they are granted.
Depending on the level of government control over the registration and activities of companies, low-tax jurisdictions are divided into:
') Jurisdictions that strictly monitor compliance with the requirements and rules of registration and activities of legal entities established in the national legislation.
2) Jurisdictions that do not strictly monitor the compliance of legal entities with rules of the registration and activities of companies on the territory of the jurisdiction. The rules established in the national legislation of these states on registration and activities of legal entities are mainly formal, filing financial statements is a right, and not a duty of legal entities.
This classification allows for the assessment of the degree of reliability of documents and information received from the company in a low-tax jurisdiction. if on the territory of a low-tax jurisdiction the process of monitoring the activities of companies is at a low level, there is the risk of offenses and even crimes being committed by such legal entities and therefore interaction with organizations registered in low-control territories, implies the need for increased attention on the part of counterparties of a such company or state authorities.
Depending on the degree of confidentiality of the data on the directors and shareholders of companies registered in low-tax jurisdictions, the following can be identified:
') Jurisdictions which collect information about directors and shareholders of legal entities and the data from these registers are publicly available;
2) Jurisdictions which collect information about directors and shareholders of legal entities but the data from these registers is inaccessible (closed); and
3) Jurisdictions whose legislation does not establish the requirement to collect information about directors and shareholders of legal entities.
This classification demonstrates the degree of openness of low-tax jurisdiction and the transparency of operations in such low-tax jurisdictions. The absence of publicly available registers of company directors and shareholders may indicate that there is no desire for the low-tax jurisdiction to cooperate with other states. The openness and accessibility of the register of directors and shareholders also determines the level of trust of counterparties and banks to legal entities registered on the territory of a low-tax jurisdiction.
E.V. Lukina proposes dividing low-tax jurisdictions by degrees of reliability:
1) High reliability jurisdictions;
2) Jurisdictions of medium reliability; and
3) Low reliability jurisdictions.22
This classification relates to the level of political and economic stability in a low-tax jurisdiction, as well as to the level of trust of counterparties in companies registered in a particular jurisdiction.
i.B. Sokolov proposes classifying low-tax jurisdictions on the basis of their specialization in certain types of business activities. However this criterion does not clearly divide low-tax jurisdictions into groups as the same low-tax jurisdiction may specialize in several activities. Such jurisdictions have been placed in several classification groups. As part of this classification, i.B. Sokolov separates:
1) Financial jurisdictions - British Virgin islands, Bahamas, Cayman islands, Panama, Luxembourg, Liechtenstein, Switzerland and Monaco;
2) Banking jurisdictions - British Virgin islands, Cyprus, Cayman islands, Luxembourg and Western Samoa;
3) insurance jurisdictions - isle of Man, Guernsey, Bahamas, Bermuda, Cayman islands and Cyprus;
4) Holding centers - Cyprus, Switzerland, Netherlands, Luxembourg and Liechtenstein;
5) Ship-owning jurisdictions - Bahamas, Panama, Netherlands and Vanuatu;
6) Trade and procurement, trade and intermediary jurisdictions - Gibraltar, Hong Kong, Seychelles and isle of Man;
7) investment centers - Hong Kong, Cayman islands, Cyprus, Netherlands, Luxembourg and isle of Man; and
8) Real estate-oriented jurisdictions - the isle of Man, Guernsey and Gibraltar.23
The criterion of specialization in certain types of business activities becomes less
important over time, as most low-tax jurisdictions become multifunctional. However,
Лукина Е.В. Оптимизация налогообложения [E.V. Lukina, Tax Optimization] 166 (2014).
Соколов И.Б. Состояние и перспективы государственного регулирования оффшорного бизнеса в регионах России: дис. ... канд. экон. наук [Igor B. Sokolov, State and Prospects of State Regulation of Offshore Business in Regions of Russia, PhD thesis] 48 (2000)
22
there are still low-tax jurisdictions specializing in certain activities and providing the most favorable tax regimes to companies that operate in certain business areas.
Some authors, for example, A.P. Matusevich24 propose using several criteria at once in the classification of low-tax jurisdictions - the first such criterion is the geographical principle of the location of low-tax jurisdictions with the second criterion being different in the two classifications proposed by the author. The first classification, along with the geographical criterion, proposes to distinguish low-tax jurisdictions by level of economic development (whether a low-tax jurisdiction is a developed or developing country). The second classification, along with the geographical criterion, proposes to distinguish low-tax jurisdictions by the cost of their services.
The first classification is based on two criteria: geographical, as the location of low-tax jurisdictions is taken into account and the level of economic development of the analyzed territory. For example, in the Middle East economic and geographical area among developed countries izrael stands out and among the developing countries - Bahrain, Cyprus and Jordan. in addition to the above the Asia-Pacific and Afro-indo-American economic and geographical areas are also analyzed.
The second classification is based on two criteria: geographical, as the location of low-tax jurisdictions is taken into account and the cost of the services they provide. Low-tax jurisdictions are divided into respectable, expensive, younger and cheaper ones. in the European economic and geographical area in the group of respectable jurisdictions Austria, Belgium, Liechtenstein, Luxembourg and Malta are included, and in the younger and cheaper group Hungary and Montenegro. in the U.S. economic and geographical region the first group of expensive and respectable jurisdictions includes the Bahamas, the USA States of Delaware and Nevada are included, in the younger and cheaper group Anguilla, Barbados, Bermuda, the British Virgin islands, the Cayman islands and Panama. in the Middle East economic and geographical area in the first group of respectable countries israel and Jordan, in the second group Bahrain and Cyprus. in addition to the above ranges, the Asia-Pacific and Afro-indo-American economic and geographical areas are also analyzed.
The author concludes that in most cases expensive and respectable low-tax jurisdictions belong to the group of developed countries while developing countries attract investments by reducing the cost of the services provided on their territory. it should be noted that, in the era of rapid changes in the world, the above-mentioned jurisdictions may change their position in the classification, for example, from developing to developed countries or by changing the cost of registration and level of provided services on their territory.
Another classification of low-tax jurisdictions was developed by the Financial Stability Forum. This classification is based on the quality of business control and the
24 Matusevich 2016, at 59.
level of cooperation of low-tax jurisdictions. The first group included cooperating states that generally meet international standards. The second group included states that have established mechanisms of cooperation and control, but in which the implementation of these measures is worse than those established by international standards. The third group included states that had a low level of control, did not cooperate with observers and did not seek to approach the level of cooperation and control established by international standards.25
Thus, the classification of low-tax jurisdictions is necessary to highlight similar characteristics of low-tax jurisdictions, to simplify the analysis of their national legislation and to make general recommendations on the nature of measures to be used to counter tax evasion and money laundering. The type of low-tax jurisdiction will depend on the list legal forms of companies that can register on its territory, the types of tax preferences and the specifics of the preferential tax regime provided by such low-tax jurisdictions. in different types of low-tax jurisdictions, the degree of state control over the activities of companies registered in their territory differs significantly, which in turn can have an impact on the reliability of documentation from the organization in a low-tax jurisdiction and will certainly lead to increased levels of control over the activities of such a company by its counterparties or government authorities. The type of low-tax jurisdiction will determine the approach to countering tax evasion and money laundering and the list of measures necessary to do it. The scientific literature does not contain a single criterion for classification of low-tax jurisdictions.
5. Principles of Taxation Violated by the Unfair Use of Low-Tax Jurisdictions
The main principles of taxation which may be violated by the unfair use of low-tax jurisdictions include
1) The principle of universality and equality in taxation;
2) The principle of fair taxation;
3) The principle of proportionality of taxation;
4) The principle of tax neutrality.
The principle of universality and equality of taxation is that every member of society is obliged to participate in the creation of centralized financial funds of a public nature. Thus setting differentiated rates of taxes and fees, tax benefits depending on the form of ownership, nationality of individuals or place of origin of capital are not allowed.
The principle of fair taxation means that taxation is universal and that it is equally distributed between individuals and entities commensurate with their income. Both
25 Financial Stability Forum, Report of the Working Group on Offshore Financial Centres, 5 April 2000 (Jun. 4, 2021), available at https://www.fsb.org/wp-content/uploads/r_0004b.pdf.
legal entities and individuals must make a material contribution in financing the needs of the state in connection with the income they receive on the territory and with the support of the state.
The principle of proportionality of taxation means that everyone participates in the formation of centralized monetary funds in accordance with the objects of taxation, the tax base and its size. According to the general rule, the larger the tax base, the more taxes should be paid by the taxpayer.
Tax neutrality which means that taxation should be neutral and fair, regardless of the type of business activity. Business decisions should be motivated by economic rather than tax considerations. Businesses in similar situations carrying out similar transactions and should be subject to similar levels of taxation.
6. Deoffshorization as the New Global Trend Since the Late 1990s
Since the late '990s there has been a period of active opposition to low-tax jurisdictions. This is due to the international community's awareness of the dangers of unfair tax competition generated by the functioning of low-tax jurisdictions. The essence of unfair tax competition is that it affects the tax revenues used to finance the budgets of states and may result in non-receipt of tax revenue shares which can subsequently lead to significant changes in the structure and amount of budget expenditures leading to a possible decrease in public sector financing of the state form which taxable entities have left. The decrease in tax revenues directly affects the budgets of states and leads to the need for reductions in expenditures in order to maintain a balanced budget.
The economic crisis of 2008 made the importance of the implementation of deoffshorization measures an almost urgent issue. The OECD and the G20 countries thus began working on the development of an economic regulatory project to counter the negative effects brought about by the functioning of low-tax jurisdictions.26 These actions have become necessary because of taxpayer's actions aimed at minimizing taxation which has led to the reduction in the amount of money coming into the state budgets. The Action Plan to combat tax base erosion and profit-shifting has already appeared27 with the main measures, problem areas and new steps that must be taken foreseen by the plan to include
') Tax challenges arising from digitalization;
2) Neutralizing the effects of hybrid mismatch arrangements;
3) Strengthening of rules for controlling foreign companies;
4) Limitation on interest deductions;
5) Countering harmful tax practices;
26 OECD, Action Plan on Base Erosion and Profit Shifting (2013) (Jun. 4, 2021), available at https://www. oecd.org/ctp/BEPSActionPlan.pdf.
27 Id.
6) Prevention of tax treaty abuse;
7) Preventing artificial avoidance of permanent establishment status;
8) Rules controlling transfer pricing;
9) Data analysis on economic and fiscal effects of tax avoidance;
10) Mandatory disclosure rules;
11) Country-by-country reporting;
12) Mutual agreement procedures;
13) Formulation of multilateral instruments.
The above-mentioned measures are preventive and are aimed at dealing with the international problem of tax base erosion. Countries in their national legislation would implement such measures alongside supportive and stimulating measures.
Action number 5 of the abovementioned plan emphasizes the need to establish transparency in the activities of states which can be achieved through the mandatory exchange of information on certain categories of decisions taken by the competent authorities of the states involved. Under the decision it is proposed that any clarification, information letters or agreements adopted by the tax authority of the state in respect to a particular taxpayer or a group of taxpayers concerning their tax regime be mandatorily shared as a requirement for an application by said taxpayer(s) in a third country to be considered. The OECD report proposes the exchange of six categories of decisions: a decision on preferential tax treatment; pricing agreements for tax purposes or other cross-border transfer pricing decisions; cross-border solutions to reduce taxable income; decisions about permanent establishments and decisions concerning interdependent persons.
The emphasis on the real economic activity is made to prevent the artificial movement of profits from the states where such profits are generated to states providing preferential tax regimes. To ensure the real economic activity is conducted on the territories of low-tax jurisdictions the concept of an"Economic Substance" was introduced and developed."Economic substance" is a set of requirements which shows the actual presence of the company on the territory of the low-tax jurisdiction.
These requirements, among others, include
1) An office on the territory of a low-tax jurisdiction;
2) Local staff with established salaries paid every month;
3) A local mobile or landline phone number;
4) A Bank account in a local bank;
5) Decision-making by an executive and/or supervisory bodies present on the territory of the low-tax jurisdiction;
6) Storage of significant documentation in the company's in-country office.
The exchange of tax information is the main mechanism for international
transparency enhancement. The exchange of information may take place in one of the following regimes:
1) On request - in this case, the state interested in obtaining information sends a request to the competent authorities of the other state to provide information;
2) in automatic mode - all information on a particular type of income and taxpayers is systematically sent to other state; and
3) initiative - as a result of an investigation, when one state receives information that would be of interest to other state, this information is sent to the state concerned.
in order to develop cooperation within the BEPS plan and for the automatic information exchange between states, the Model Agreement on Cooperation between the Competent Authorities (CAA - Competent Authority Agreement) and the Standard for the Exchange of Tax information (CRS - Common Reporting Standard) were adopted.28
The Model Agreement on Cooperation between the Competent Authorities serves as the main agreement for the exchange of information. This document contains definitions, types of information that are exchanged, time of exchange, rules about confidentiality and a list of information that cannot be exchanged. in addition, the CAA describes how the competent authorities of the states work together to implement the provisions specified in the agreement.
The Common Reporting Standard is an annex to the Model Agreement on Cooperation between the Competent Authorities, which establishes requirements for procedures in order to identify and exchange information about certain accounts.
Financial institutions involved in the exchange of information include not only banks, but also depository organizations, investment companies and specialized insurance companies.
Another global measure is the Multilateral Convention to implement Tax Treaty Related Measures to prevent BEPS.29 The main purpose of the multilateral instrument is to counter the abuse of international double taxation agreements, in situations where profits are artificially moved between states in such a way that in each of them the entity in question is partially or completely exempt from taxation. Bilateral double taxation agreements still continue to operate, but multilateral instrument changes only specified provisions of such agreements. The MLi implements minimum standards to counter treaty abuse and to improve dispute resolution.
Conclusion
Currently legal entities have the opportunity to conduct multinational business on the territory of several countries while at the same time each state has an interest in taxing organizations operating on its own fiscal territory. Due to such entities attempting to reduce their tax burden tax competition between states has emerged, expressed
28 OECD, Standard for Automatic Exchange of Financial Account Information in Tax Matters (2014) (Jun. 4, 2021), available at https://www.oecd-ilibrary.org/docserver/9789264267992-en.pdf?expires=16321 39891&id=id&accname=guest&checksum=F31D09AAF7490A24873BB090DD978F6A.
29 Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (2018), available at https://www.oecd.org/tax/treaties/multilateral-convention-to-implement-tax-treaty-related-measures-to-prevent-beps.htm.
in the establishment in national legislation of tax preferences for certain categories of taxpayers in order to attract them onto the fiscal territory of the state. A low-tax jurisdiction is a territory, which provides for the possibility of the incorporation of legal entities, which if the requirements are legally met, are provided with a preferential tax regime which differs significantly from the average level of taxation of most states of the world and allows for the optimization of taxation for the entity.
The main features of low-tax jurisdictions are: a preferential tax regime which provides for a significant reduction in income taxation, the incorporation into national legislation of requirements to conduct activities outside the jurisdiction, the use of such jurisdictions by legal entities to optimize tax payments and the targeting of tax preferences mainly at non-resident actors.
in order to simplify the analysis of the national legislation of low-tax jurisdictions and to make general recommendations on the nature of measures to be used to counter tax evasion and money laundering, a clear classification of low-tax jurisdictions is needed. The type of low-tax jurisdiction will depend on the official list of legal forms of entities that can register on its territory, the types of tax preferences present and the specifics of the preferential tax regime provided for by said low-tax jurisdiction.
The legislation of low-tax jurisdictions is formulated to provide opportunities for the registration of companies possessing various legal forms. A feature of low-tax jurisdictions is the consolidation of the specific legal forms of companies whose activities are allowed only outside the low-tax jurisdiction in which the company is registered and which is used to ensure the absence of competition by such companies with resident entities of the territory. The national laws of low-tax jurisdictions provide companies of specific legal forms with broad tax preferences up to the complete exemption from taxation in the said jurisdiction. The types of legal forms of companies which can operate on the territory of the low-tax jurisdiction depend on the laws applicable within the boundaries of such a jurisdiction. Thus, the legislation of low-tax jurisdictions, within which the Anglo-Saxon system of law applies, allows for the existence of more diverse legal forms of companies which are granted preferential tax regime. The degree of control over the registration and activities of companies on the territories of the island states, where the Anglo-Saxon system of law operates, is quite low as the legislation of such states establishes either very low requirements for the minimum amount of statutory capital, or such requirements are not established at all. Legislation generally does not require the need to provide annual accounting to governmental bodies and audits of company accounting are also not required. The legislation of low-tax jurisdictions, within which the continental system of law applies, contains a more limited list of legal forms in which companies can be registered. The legal forms of companies in jurisdictions with a continental system of law are aimed at allowing for the conducting of business by an international group of companies as such groupings usually assist in the conducting of activities. Tax preferences for these types of companies are more
limited and consist mainly of providing for the reduction of rates of taxation on profits made by companies registered in the country.
international organizations are concerned about unfair tax competition, which is evident in the artificial movement of tax liable entities' profits from higher-tax jurisdictions to low-tax jurisdictions. This avoidance of tax responsibility is obviously detrimental to jurisdictions with higher tax rates. Currently one of the most comprehensive frameworks proposing systemic changes to international and national tax systems is the BEPS Action Plan, aimed at combating the erosion of tax bases and the movement of profits to avoid taxation and which is being developed jointly by the OECD and the G20. This document proposes qualitative changes in international and national tax legislation that unify the taxation of cross-border transactions, exclude the non-taxation of certain financial movements, as well as prevents the transfer of profits from the jurisdiction where the real economic activity of the taxpaying entity is carried out. The international exchange of information for tax purposes throughout the whole of the global community is a priority area within international cooperation. Now with the accession to the agreement on the automatic exchange of tax information, states are reaching a qualitatively new level of interaction, in which the annual exchange of necessary information is possible. The multilateral instrument is also aimed at countering the abuse of international double taxation agreements and improving dispute resolution procedures.
References
Матусевич А.П. Международный офшорный бизнес [Matusevich A.P. International Offshore Business] (2016).
Халдин М.А. Мировой опыт оффшорного бизнеса [Khaldin M.A. World Experience of Offshore Business] (1995).
Information about the author
Natalia Andrianova (Moscow, Russia) - PhD Student, Department of Legal Disciplines, High School of State Audit (Faculty), Lomonosov Moscow State University (1, Bldg. 13-14 Leninskiye Gory, Moscow, 119991, Russia; e-mail: natalia.g.andrianova@ gmail.com).
