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WTO TA.Pages ISRMUN 2017 Ave. Real San Agustín No. 4 CP. 66260 Garza García, N.L México. + (52) (81) 8625 1500 [email protected] THE UNITED NATIONS World Trade Organization ! ISRMUN 2017 Ave. Real San Agustín No. 4 CP. 66260 Garza García, N.L México. + (52) (81) 8625 1500 [email protected] Committee: World Trade Organization (WTO) Topic A: Combating Tax 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 taxes paid, or tax evasion, which is a criminal ! ISRMUN 2017 Ave. Real San Agustín No. 4 CP. 66260 Garza García, N.L México. + (52) (81) 8625 1500 [email protected] way to avoid paying taxes. According to Investopedia, a “tax haven” 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 ! ISRMUN 2017 Ave. Real San Agustín No. 4 CP. 66260 Garza García, N.L México. + (52) (81) 8625 1500 [email protected] 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 Oxfam, 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 ! ISRMUN 2017 Ave. Real San Agustín No. 4 CP. 66260 Garza García, N.L México. + (52) (81) 8625 1500 [email protected] 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 ! ISRMUN 2017 Ave. Real San Agustín No. 4 CP. 66260 Garza García, N.L México. + (52) (81) 8625 1500 [email protected] 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 dividend tax rates” (Mutiso, AFK Insider, 2016). Spain: In January 2015, Spain signed fifteen Double Taxation 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 tax rate 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 ! ISRMUN 2017 Ave. Real San Agustín No. 4 CP. 66260 Garza García, N.L México. + (52) (81) 8625 1500 [email protected] 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.
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