Opinion piece: Tax Haven-regulation in a Sleeping Beauty Slumber

The “tax haven – section” contains the requirements for an extended country-by-country reporting, but is put in a Sleeping Beauty slumber. Photo: Christian_A_Calmeyer_(CC_BY-NC-ND_2.0_Flickr).

Would the Government like to know about mailbox companies and capital in tax havens? If so, they already have the key themselves.

This opinion piece is written by Mona Thowsen, Secretary General in PWYP Norway. It was first published in Klassekampen November 18th, 2017. 

PWYP Norway has been working for ten years to put in place a regulation for an extended country-by-country reporting that will provide transparency about:

  1. In which countries are the mailbox companies registered?
  2. In which countries has capital been built up?

This will put the facts for all countries, including tax havens, on the table.

 

Last year the Ministry of Finance included PWYP Norway's requirements for an extended country-by-country reporting (investment, sales income, production volume and costs) in the regulation for country-by-country reporting pursuant to the Accounting Law, section 3. In the current regulation it is section 4, subsection 3, which determines that such information might also be reported from tax havens. However, the Ministry of Finance made sure to "lock in" this "tax haven - section". The consequence is that the “tax haven – section” contains the requirements for an extended country-by-country reporting, but is put in a Sleeping Beauty slumber in section 4, subsection 2. As a result, the tax haven – section does not function.

The "tax haven – section”, section 4, subsection 3, is now trapped in a tower at the Ministry of Finance. A padlock, called section 4, subsection 2, holds it locked. The purpose of the padlock is to determine on which conditions the extended country-by-country information is to be provided.

 

On the padlock, section 4, subsection 2, it is written: “When there is a duty to provide information about payments to authorities, the report shall contain information about the company’s investments, sales income, production volume and costs, broken down by country in which the company operates”.

Those who want to get the facts from tax havens on the table must awaken the "tax haven – section” from Sleeping Beauty slumber at the Ministry of Finance. But first, they must go through two smokescreens. 

 

The first smokescreen is the phrase: "When there is a duty to provide information about payments to authorities (...) ..." This formulation means that companies are only obliged to provide information in countries where they pay more than 800,000 NOK in taxes. If a company pays less than 800,000 NOK in taxes to a country (within the same fiscal year), then the company does not need to report from that country. Since companies do not pay taxes in tax havens (although it may sound like this), taxes paid in tax havens will be zero or less than 800,000 NOK. However, one can be tempted to believe that it is this materiality limit that is the problem. The materiality limit is not the problem; it is irrelevant for awakening of the “tax - haven section”. 

It is the wording When there is a duty to …” which is the problem. It is because the duty to provide the extended information from each country (the extended information is: investment, sales income, production volume and costs, i.e. section 4, subsection 3 of the “tax haven – section”) is linked to and dependent on reporting of paid tax (materiality limit). Therefore, the inscription on the padlock, section 4, subsection 2, prevents reporting from tax havens.

If information from tax havens is to appear, the political parties must set aside their internal political views and mobilize political will to change the inscription on the padlock in section 4, subsection 2 where it is written "When there is a duty to provide information about payments to authorities..." to: "Regardless of whether there is a duty to provide information about payments to authorities". Only then companies will have to provide information from all countries, including tax havens.

 

The second smokescreen that the Ministry of Finance uses is section 5, subsection 3. According to this section, some "additional information" must be provided, in total nine elements. It is perfectly okay that this "additional information” will be provided, but this information is not relevant for tax havens, and most importantly, it is not in this section that the requirement for extended country-by-country reporting is (as you know by now, it is in the “tax haven – section”, section 4, subsection 3, which is put in a Sleeping Beauty slumber). When the Ministry of Finance receives questions from journalists on why not all countries have to report, the Ministry of Finance gladly refers to this "additional information" in section 5, subsection 3, answering that there is no materiality limit here, this must be reported by all companies. When Bistandsaktuelt (a magazine about aid and development) challenged the Ministry of Finance on loopholes in the regulation that PWYP Norway had pointed out, the Ministry of Finance referred to section 5, subsection 3, and stated that "Companies are required to report regardless of the amount of tax paid". This is correct with regard to section 5, subsection 3, which the Ministry of Finance referred to and reasoned about. This is not correct with regard to the “tax haven –section”, section 4, subsection 3, which is “locked” by section 4, subsection 2. It is this section PWYP Norway is concerned about.

This "additional information" in section 5, subsection 3, cannot replace the “tax haven – section”, section 4, subsection 3, which is "locked" behind the padlock, section 4, subsection 2. Only section 4, subsection 3, can ensure that the relevant information in extended country-by-country reporting (investment, sales income, production volume and costs) is reported from tax havens.

Panama Papers, Lux leaks, Swiss leaks and Paradise Papers show that both commercial companies, dubious organizations and politicians choose to organize themselves through tax havens, use layers of secrecy and financial tools to achieve a number of different goals; control of companies, financial gain from companies, avoidance of taxes and regulations. This is a downward spiral.

Tax and capital flight are crucial for sustainable development, which is conditioned on a number of different factors that are not primarily related to aid in the traditional form, but also includes financial transparency. Financial transparency is necessary for reducing inequality between and within countries, between national and international companies and building peaceful and inclusive societies.

 

If we think it is important to know in which countries mailbox companies are registered and where capital is built, it is necessary to awaken the “tax haven-section”, section 4, subsection 3, from the Sleeping Beauty slumber, so that it can function. Sleeping Beauty slept for 100 years. The “tax haven – section” (section 4, subsection 3) should not be sleeping as long as Sleeping Beauty did.

The parliament should demand the following from the government: "The government must ensure that the regulation of an extended country-by-country reporting functions as intended, by requiring that "where extended information is to be provided, this should be given in accordance with the annual accounts and regardless of the materiality limit, so that the use of third countries and potentially undesirable tax adjustment can be made visible".

Read more: The tax havens are now completely protected. The Ministry of Finance should be asked why.