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THE UNITED NATIONS World Organization

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Committee: World Trade Organization (WTO) Topic A: Combating Non-Compliance in Tax Havens Written by: Camila Ríos, Santiago Hernandez and Guillermo Maldonado

I. Committee Background

The World Trade Organization (WTO) was established on January 1, 1995 by the Uruguay Round Negotiations. It replaced the General Agreement on Tariffs and Trade (GATT), a multilateral agreement that regulated international trade. The WTO was created to provide nations with a forum to discuss trade regulations and agreements, promote business and peacefully resolve disputes related to economic transactions. As of 2016, the organization has been working on completing negotiations related to the Doha Development Round, an agreement that focuses on increasing trade between developed and developing nations. The organization is based in Geneva, Switzerland. Currently, it is composed of 160 member states and its Director-General is Roberto Azevêdo (WTO, 2017).

II. Topic information

A) History of Topic

“Combating tax non-compliance” is a broad topic that defines any unfavorable activities towards a state’s tax. It can be both legal and illegal, like tax reduction which is a way to legally reduce the amount of paid, or , which is a criminal

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way to avoid paying taxes. According to Investopedia, a “” is defined as “a country that offers foreign individuals and businesses a minimal tax liability with little or no financial information shared with foreign tax authorities” (Singh, Investopedia, 2016). Tax havens have an impact on the countries where they are implemented as they promote a thriving financial sector that individual corporations prefer. Instead of having to pay high tax rates, the rates in these nations range from none to very low. According to historian Ronen Palan, the term “tax havens” was popularized in the 1950s (Palan, History and Policy, 2009).

This issue began during the 18th century in the state of New Jersey in the United States (US). The state was in need of funds and a group of corporate lawyers persuaded the governor Leon Abbet to implement a company-friendly franchise tax on all businesses located in New Jersey. This allowed the state government to collect money from businesses but also offered exclusions and lower rates on other taxes. Basically, businesses in New Jersey paid a yearly tax, but was excluded from others. After this, in the late 1800s, New Jersey and Delaware became the first tax havens in the US. Swiss cantons were also attracted by this idea and became the first areas to implement them in Europe (Palan, History and Policy, 2009). Currently, it is estimated that more than half of the tax havens in the world are located in Hong Kong, Ireland, Lebanon, Liberia, Panama, Singapore and Switzerland (IMF, 2000).

This topic adopts more importance due to all of the possible taxes that could go to health and human services being diverted into financial institutions that participate in tax evasion. According to an article from Time magazine, “the average taxpayer

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would have to pay over $760 US dollars more each year to cover what companies evade in taxes” (Offenheiser, Time, 2016). In addition, governments and global institutions have largely ignored this issue since it is hard to eradicate. Tax havens are a tool, they can be used as a legitimate method to entice companies to a country or be misused as a way to circumvent tax laws. The problem seems to be the “secrecy and non-transparency” of tax havens. When the loopholes in the law are overused, even though legal, the problem causes severe tax loss, placing the onus on the country’s citizens to supply the government with money through taxes. This problem is not unique to one country, but rather a global phenomenon (Whistleblower Justice Network, 2016).

An example of an institution that helped companies and individuals avoid paying taxes was Mossack Fonseca, which was based in Panama. It helped institutions avoid paying millions of dollars in taxes by creating more than 200,000 offshore companies in secrecy. In consequence, this has caused governmental organizations not to invest as much money in public services such as healthcare or education. The United States has been greatly affected by tax havens. It is estimated that due to tax havens, US$ 100 billion have been diverted from US services. In addition, this loss also affects dozens of developing nations that rely on US investment and aid. According to , this demonstrates how offshore companies have stored up to one trillion US dollars in tax havens to avoid paying an estimated tax amount of one billion US dollars per year (Offenheiser, Time, 2016).

This issue has been widely discussed around the world, but little has been done to prevent it. The problem is mostly because although tax evasion is illegal, tax havens

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are not, so addressing the problem is difficult. The penalties given to countries using tax havens have been increasing. United States organizations and laws such as the IRS Whistleblower Program, the SEC Whistleblower Program and the False Claims Act have been established to look for institutionalized tax fraud through tax havens (Whistleblower Justice Network, 2016). However, much more needs to be done at a global level. Ecuador's Foreign Minister, Guillaume Long has stated: "It's time for the UN to take a much stronger stance against tax dodging in general, tax havens in particular and in favor of the broad issue of tax justice” (Bronstein, Reuters, 2016).

B) Current Issues

United States: Although the United States has taken action to criminally charge companies and individuals using offshore tax havens, more needs to be done to combat the tax havens located within the country. Inside of the US, several states like Nevada, Delaware and Wyoming have incredibly low tax rates that they could be considered tax havens (O’Connell, Mint Press News, 2016). These states have declined to cooperate with the Organization for Economic Cooperation and Development (OECD) and are against a change in tax rates. Due to this, in 2003, the US government established the Foreign Account Tax Compliance Act (FACTA) with the purpose of forcing tax havens to turnover secret bank information. The act forces any tax haven operating within the US that withholds an account of US$ 50,000 or more to share their information with the government (IRS, 2016).

South Africa: South Africa possesses the third most powerful economy in Africa. Although a lot of research on the matter does not exist, it is estimated that over 30% of

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Africa’s wealth is held in offshore tax havens (Mail & Guardian, 2016). In 2012, due to offshore companies, the Sub-Saharan Africa economy lost US$ 800 billion dollars. South Africa allows companies to pay tax rates from where its headquarters are located or incorporated. The nation has a double tax agreement with Mauritius, one of Africa’s largest tax havens. According to AFK Insider, this agreement “enables companies doing business in the nation but are managed from Mauritius to pay low corporate and rates” (Mutiso, AFK Insider, 2016).

Spain: In January 2015, Spain signed fifteen Treaties (DTTs) with countries labeled as tax havens. This means that companies based in both Spain and a tax haven need to pay taxes to both nations, they are no longer exempt. Since these treaties were signed, Spain has removed the signatories from its tax haven “blacklist” (Clearstream, 2015). In addition, large Spanish companies such as Bolsas y Mercados Españoles (BME) and Mercado Español de Futuros Financieros (MEFF) have increased their use of tax havens by 44% in the last couple of years. As a result, Spain now loses over 60 billion euros each year (Oxfam, 2013).

Singapore: Singapore is considered as a tax haven due to its low tax rates. For example, the for corporations in the nation is 17%, while in other countries in the region such as China, the tax rate for businesses in 25%. In an effort to promote its economy, Singapore offers several tax incentives, creating a “shadow” tax system (Nexia International, 2014). However, unlike other countries labeled as tax havens, Singapore does share information with foreign tax authorities for tax-related investigations. Singapore is also strict in enforcing laws that prevents money laundering. The country’s Monetary Authority regulates financial institutions and the

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Accounting and the Corporate Regulatory Authority (ACRA) ensures that companies can account for their spendings and transactions (Shyan, The Straits Times, 2016).

Malaysia: Not all areas of Malaysia are considered to be a tax haven, however, the small island of Labuan is. Not much information is known about the island due to the fact that it does not keep a public register of trusts and private foundations. Also, companies that invest in banks located on the island are not taxed. Most of the companies that invest in Labuan originate from Hong Kong and Singapore. Labuan is attractive to many businesses based in Muslim nations not only because of its financial benefits, but because it advertises itself as Islamic friendly and Shariah law compliant. Still, Labuan is considered a very small tax haven. According to Free Malaysia Today, the island “accounts for less than 0.1 per cent of the global market for offshore financial services, compared with nearly 4 per cent for Hong Kong, which ranks second on a tax-havens index” (Free Malaysia Today, 2016).

Angola: In 2013, a report issued by Corruption Watch UK exposed a debt repayment deal between Angola and Russia that resulted in the laundering of millions of dollars through various tax havens. According to the report, instead of paying off its US$ 5 billion debt, Angola’s government wired money to various Russia officials through banks located in Switzerland, Luxembourg, Cyprus, the Netherlands, the British Virgin Islands and the Isle of Man, all of which are recognized tax havens. Angolan officials have also used tax havens to skim money from public funds. President José Eduardo dos Santos is reported to have taken US$ 36.25 million and other officials between US$ 3.35 million and US$ 13.25 million. This has been very detrimental to public works and

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services in Angola and has caused significant damage to the country’s reputation around the world (Gotev, Euractiv, 2013).

Liberia: Liberia is considered a tax haven by the European Union, but not by the United States or France (Mutiso, AFK Insider, 2016). The country has one of the most secretive financial systems in the world. According to the 's , Liberia has a secrecy score of 83 out of 100. It is also one of the few countries to not pass the first phase of the Organisation for Economic Co- operation and Development's (OECD) Global Forum for Tax and Transparency peer review process. This forum evaluates each country’s tax and banking standards. Also, it is very easy to setup a company based in Liberia. Within a few hours, anyone online can register a company and in turn avoid paying taxes in their home nation. The anonymity offered by Liberia makes it easy for individuals to hide money and evade law enforcement agencies (Turner, The African Report, 2016).

Zimbabwe: Zimbabwe’s economy has greatly suffered due to tax havens. Millions of people visit the country each year for tourism purposes. However, much of the money earned from tourism is deposited in offshore accounts in countries such as Panama, which is a recognized tax haven. This money does not go back into the Zimbabwean economy and was is taxed since it is not correctly registered with the government. As a result, the individuals that operate tourist attractions benefit from the nation’s wildlife and natural resources without giving back to the local population. While the government has recognized that this is a problem, it has not passed any laws or reforms to combat this issue (Fitzgibbon, ICIJ, 2016).

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C) UN Action

In October 2016, Alfred de Zayas, a United Nations advisor on human rights, recommended that the organization’s Secretary-General, António Guterres, should organize a special conference on and evasion. In a report on the human cost of tax evasion through tax havens, De Zayas said: “Trillions of dollars necessary for combating extreme poverty and addressing climate change are being kept offshore, thus escaping just taxation and effectively stealing hundreds of billions of dollars each year from the public treasuries” (OHCHR, 2016). Moreover, the United Nations has been a firm supporter of the Group of Twenty’s (G-20) pledge made in 2009 to combat tax havens and to end “bank secrecy.” The G20 has so far supported the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes and the development of the Standard for Automatic Exchange of Financial Account Information. However, these have not had much of an impact on combating this issue. In addition, during the twenty-eighth session of the Human Rights Council, an independent expert, Juan Pablo Bohoslavsky, submitted a report on illegal bank transfers and tax havens. In the report he stated that: “Financial institutions that facilitate tax evasion and transnational corporations that employ aggressive tax planning strategies must recognize that their actions may have negative human rights impacts.” He further wrote that these institutions and countries have a responsibility to respect human rights and to be honest about investors and money transactions (Global Tax Justice, 2014).

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III. Conclusion

Combating tax non-compliance through tax havens is a serious topic that must be addressed by the United Nations and its member states. Tax havens have enabled individuals and companies to avoid paying taxes in their home nations. This has resulted in governments losing millions of dollars that could have been dedicated to social services. This practice has been very harmful to developing nations which rely heavily on taxes to pay for basic services such as education and clean drinking water. The UN must take action and help nations solve this problem. It is not just world economies that are affected by tax avoidance through tax havens. According to a special advisor to the UN, tax non-compliance has led to massive violations of human rights and countries that are complicit in the use of tax havens need to be held responsible for their actions.

IV. Essential Questions

1. How has your delegation been affected by tax havens? 2. Has your country taken any actions to prevent tax evasion? If so, have they been successful? 3. Is your country involved in any campaigns or organizations working on reducing access to tax havens? 4. What has the United Nations done to reduce tax evasion through the use of tax havens? 5. Is your country considered a tax haven? If so, what is your nation's position on the issue?

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6. Is aggressive tax planning illegal in your country? If so, what benefits has the ban had? 7. What solutions would be in order to eliminate tax evasion worldwide? 8. Is your country working with other delegations to minimize this problem? If so, how?

V. Resources

"A Cautionary Tale: The true cost of austerity and inequality in Europe." Oxfam. Oxfam, Sept. 2013. Web. 08 Jan. 2017. .

"Are Tax Havens Inherently Bad?" Whistleblower Justice Network. Whistleblower Justice Network, 2016. Web. 29 Nov. 2016. .

Bronstein, Hugh. "Ecuador Tells U.N. 'Political Battle' Needed to Combat Tax Havens." Reuters. Thomson Reuters, 23 Sept. 2016. Web. 29 Nov. 2016. .

"Convene world conference on abolition of tax havens, human rights expert urges the GA and next UN Secretary-General." United Nations Human Rights Office of the High Commissioner (OHCHR). United Nations, 13 Oct. 2016. Web. 08 Jan. 2017. .

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Fitzgibbon, Will. "Out of Africa, Into Tax Havens." The International Consortium of Investigative Journalists (ICIJ). The International Consortium of Investigative Journalists, 25 Jul. 2016. Web. 08 Jan. 2017. .

"Foreign Account Tax Compliance Act." Internal (IRS). Internal Revenue Service, 13 Sept. 2016. Web. 08 Jan. 2017. .

Gotev, Georgi. "Corrupt Angola debt deal exposes EU tax havens." Euractiv Network. Euractiv Network, 14 Apr. 2013. Web. 08 Jan. 2017. .

“Labuan wants to be tax haven.” Free Malaysia Today. MToday News Sdn. Bhd, 03 Jun. 2016. Web. 08 Jan. 2017. .

Mutiso, Lillian. "6 African Nations You Didn’t Know Were Tax Havens." AFK Insider. AFK Insider, 26 May 2016. Web. 12 Jan. 2017. .

O’Connell, Kit. "Forget Panama: Why Corporations And The Rich Love US Tax Havens." MintPress New. MintPress New, 25 Apr. 2016. Web. 08 Jan. 2017. .

Offenheiser, Ray. "Tax Havens Rob American Taxpayers." Time. Time Inc., 14 Apr. 2016. Web. 29 Nov. 2016. .

ISRMUN 2017 Ave. Real San Agustín No. 4 CP. 66260 Garza García, N.L México. + (52) (81) 8625 1500 [email protected]

"Offshore Financial Centers." International Monetary Fund (IMF). International Monetary Fund (IMF), 23 Jun. 2000. Web. 08 Jan. 2017. .

Palan, Ronen. "History of Tax Havens." History & Policy. History & Policy, 01 Oct. 2009. Web. 29 Nov. 2016. .

"Promotion of a democratic and equitable international order." Global Tax Justice. Global Tax Justice, 2016. Web. 08 Jan. 2017. .

"'Richest 1% own more than the rest of us'." Mail & Guardian. M&G Media Ltd, 18 Jan. 2016. Web. 08 Jan. 2017. .

Shyan, Lee Su. "Tax Havens and Where Singapore Stands." The Straits Times. Singapore Press Holdings Ltd., 18 May 2016. Web. 17 Jan. 2017. .

"Singapore: Tax Haven or Just Misunderstood?" Nexia International. Nexia International Limited, Oct. 2014. Web. 17 Jan. 2017. .

ISRMUN 2017 Ave. Real San Agustín No. 4 CP. 66260 Garza García, N.L México. + (52) (81) 8625 1500 [email protected]

Singh, Manoj. "Taking a Look at Tax Havens." Investopedia. Investopedia, LLC., 04 Apr. 2016. Web. 08 Jan. 2017. .

"Spain: Updated list of tax havens." Clearstream. Clearstream, 17 February 2015. Web. 12 Jan. 2017. .

Turner, George. "Liberia: Africa's unknown tax haven with much to lose." The Africa Report. The Africa Report, 18 Apr. 2016. Web. 08 Jan. 2017. .

"What is the WTO?" World Trade Organization (WTO). United Nations, 2017. Web. 08 Jan. 2017. .