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Bureau of National Affairs

No. 233
Thursday December 6, 2001 Page G-5
ISSN 1523-567X
Tax, Budget & Accounting

International Taxes

OECD Report Anticipates Rise in Use
Of Corporate Entities for Tax Evasion

Corporate entities are increasingly being used to evade taxes and commit other economic crimes, the Organization for Economic Cooperation and Development concluded in a Nov. 27 report.

The report said secrecy abuses have shifted from individual bank accounts to corporate bank accounts, trusts, and other corporate forms.

Corporate entities that provide the greatest degree of anonymity to their beneficial owners are most frequently misused, OECD said. "The ability to obscure identity is crucial for perpetrators desiring to commit illicit activity through the use of corporate vehicles," according to the report, Behind the Corporate Veil: Using Corporate Entities for Illicit Purposes.

The report examined the misuse of corporate vehicles such as corporations, trusts, foundations, and partnerships in onshore and offshore jurisdictions whose systems provide a favorable environment for financial secrecy. It determined that profit skimming, invoicing, transfer pricing abuses, and diversion of income are increasingly being used by corporations for illicit tax practices.

Although the OECD was unable to quantify the extent of misuse of corporate vehicles for illicit purposes, it said that several surveys have indicated that corporate vehicles are used in criminal activities.

Hiding and Shielding Assets

Corporate vehicles are being used to hide and shield assets from creditors and other claimants such as spouses, heirs, and tax authorities, the report said.

Once assets are secreted abroad, some jurisdictions protect anonymity through strict bank and corporate secrecy laws that prohibit company registrars, financial institutions, lawyers, accountants, and others, under the threat of civil and criminal sanctions, from disclosing any such information to the authorities.

OECD called on governments and other relevant authorities to ensure they are able to obtain information on the beneficial ownership and control of corporate entities and, where appropriate, to share this information with law enforcement authorities domestically and internationally.

It recommended that jurisdictions:

  * require up-front disclosure of beneficial ownership and control information to authorities upon the formation of corporate vehicles;

  * oblige intermediaries involved in the formation and management of corporate vehicles--such as company formation agents, trust companies, lawyers, trustees, and others--to maintain such information; and

  * develop the appropriate law enforcement infrastructure to enable the launching of investigations into beneficial ownership and control when illicit activity is suspected.

Unfavorable Reaction

Asked to comment on the report, Dan Mitchell of the Heritage Foundation told BNA Dec. 4, "And sometimes automobiles are used for bank robberies." Although Mitchell agreed that corporate structures can be used to evade taxation, he questioned the OECD's motives for releasing this report.

"The OECD is not an enforcement body. They are using that rhetoric as a means to impose global taxes," he said.

Mitchell said he favors governments exchanging financial information provided they demonstrate reasonable cause with some threshold of evidence.

He also said he would favor an OECD report that asserted, as a means of maximizing cooperation between nations, that implementation of a global taxation system is not a reason to rupture corporate secrecy.

Text of the OECD report is available at http://www1.oecd.org/publications/e-book/2101131e.pdf.

By Myrna Zelaya-Quesada

Copyright © 2001 by The Bureau of National Affairs, Inc., Washington D.C.

 

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