Can Guyana checkmate tax evasion with FATCA? (Conclusion)

Mar 27, 2016 News

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By Kiana Wilburg
Whether we want to accept it now or later, the inescapable truth is that tax evasion affects us all. The effects

of this crime may seem localised, but as nations trade and conduct business with each other, the economic standing of one will in turn affect the other.  That is why some argue that a single country cannot solve the problem on its own.
To confront this dilemma, the United States of America developed the Foreign Account Tax Compliance Act (FATCA) in 2010.
A few weeks ago, I started a discussion on this topic with Chartered Accountant, Shawn Naughton. Today, I bring conclusion to the three-part series on whether Guyana can actually end tax evasion with FATCA.

Kaieteur News (KN): How can Guyana benefit from getting more involved in International tax issues?
Shawn Naughton (SN): I like the question, because it allows me to talk about a few other elementary areas of international tax, in addition to tax information exchange.  I strongly believe that as we work with the USA on FATCA, we will increasingly appreciate the importance of international tax rules and begin, more and more, to embrace the idea of strengthening our own international tax rules. The following should provide some direction in this regard:

USING INFORMATION EXCHANGE TO OUR BENEFIT
It has now been established that the USA is here to recover taxing-up revenue which was being evaded because the relevant information was not being communicated. Guyana too needs our taxing-up revenue to stimulate our economy and help create jobs here.
With reciprocal tax information exchanges, coupled with the effective use of the information received, Guyana too can checkmate tax evasion and avoidance by recovering taxing-up revenue.   As Guyana cannot agree to FATCA with say, Barbados, since FATCA is unique to the USA, Guyana would need to sign alternative reciprocal tax information exchange agreements with Barbados and other major trade partners to recover the much needed tax revenue.
Note that the USA and FATCA is not only here in Guyana, but is everywhere in the world as part of US attempt to recover lost tax revenue.
A useful alternative tax information exchange tool is the Automatic Exchange of Information in Tax Matters (AEOI) agreement. This tool works by the relevant information being exchanged annually without it first being requested.
Unlike FATCA which provides information about the offshore assets which generate income, necessitating further processing before assessments are possible, AEOI agreements provide the exact tax return information submitted offshore. This tool is therefore more direct than FATCA, but because it lacks a penalty regime (provided for under FATCA), it is less effective at getting countries to agree to the measure.  
It should be noted that taxing-up is of no effect if the country where income is earned, imposes a greater tax charge than would the country of residence. As an example, if income of $2,500 earned in Guyana is charged a tax of $900 here and the US taxes on the same income is $800, assuming the relevant taxpayer is a US citizen, USA will effectively not be able to tax-up ($800-$900=Nil tax-up).   Taxing-down (country of residence refunding part of the overseas taxes paid) is not normally allowed. This has implications for the USA and other countries like Guyana seeking to tax-up offshore income as in some cases no more taxes would be payable.
SIMPLE GROUP STRUCTURES INVOLVING TAX HAVENS
I expect Guyana to have a deeper interest in international tax once we get comfortable with the enforcement of FATCA. Appreciating the importance of a company’s residence is a simple benefit, which should be derived from working on FATCA, and can go a far way in reversing tax avoidance attempts. There are many opportunities for tax avoidance where a tax haven is involved in a multinational group of companies.
HYBRID MISMATCHES
International business transactions and structures create many opportunities for taxpayers to avoid paying tax.  This is mainly because of the interaction of the tax laws of different countries (known by the technical name of Tax Arbitrage). Tax havens, as an example, charge low or no tax on some forms of income earned, and may not share taxpayers’ information.
In Delaware USA, a tax haven, information about a Limited Liability Company (LLC) is protected by legislation. Public access to information about LLC’s business structures and its ultimate owners are not made available. The income of LLCs can be considered either as corporate income, or as flow through income which is taxable on the owners of the company and not on the entity itself, under US tax laws. (This is often referred to as a check-the-box option and is the reason the LLCs are considered a hybrid entity.)   The residence of the LLC is relevant for US tax purposes, but if the election of a ‘flow-through’ entity is chosen, the elected residence may be in another country.
A Delaware LLC can hold investments all over the world and may be able to avoid taxing-up on these investments. Note that as mentioned above, an entity which changes from being a ‘flow-through’ to being a separate entity under the laws of different countries is technically known as a ‘Hybrid Entity’.
TRANSFER PRICING ISSUES AND TAX HAVENS
Let’s consider the following hypothetical transfer pricing case:
Kiana, a Guyanese resident taxpayer, owns two companies, Kiana Guyana Inc (KG) and Kiana Delaware Inc (KD).  KG retails fuel in Guyana which it purchases from KD.  KD purchases all fuel it sells to KG, from the Middle East (ME).
If Kiana knows that the US would not seek to tax the operating income of KD, since there is no business activities in Delaware, prices might be set to artificially maximize profits in KD while KD might not report these profits to the IRS. ME might be shipping fuel directly to KG while significant profits are taken by KD for doing nothing other than moving a few papers.
KD might well be represented by an office in Delaware which is never opened (facilitated by companies like CT Corporation, which takes care of the ongoing legal responsibilities of hundreds of thousands of companies (285,000 companies) in a small building in Wilmington, Delaware.
Taking the pricing advantage might be attempted because of the lack of transfer pricing rules in Guyana. Note that transfer pricing rules argue that profits should follow “significant profit-driven activities”. If there is no significant profit-driving activity being carried out by KD, pricing between KD and KG should reflect that.
If there is no activity at the Delaware office it is likely that the management of KD is being done where Kiana resides; namely Guyana, making KD a Guyanese resident company so subject to tax here. Checkmate!!
This may also apply to the hybrid mismatch if the LLC is not management in Delaware.
PROVIDING FOR THE UNIQUE INTERACTIONS OF TAX LAWS
A greater appreciation of the way the tax laws of the USA interact with our tax laws should result from our involvement with FATCA enforcement. This is significant since, unlike most other countries, the USA retains taxing-up rights based on the taxpayer’s citizenship.
Our tax laws would therefore need to have provisions for dealing with the unique interaction between our tax laws and those of the USA, in attempting to achieve equality of tax treatment across countries.
TREATY LAW AND TAXATION
The conditions agreed between Guyana and the USA, as it relates to FATCA or any other agreement, are applicable between these two countries only. As an example, Barbados or other countries should not benefit from the FATCA agreement between Guyana and the USA. This is very important and is worth mentioning, though it may seem obvious.
As an example, let’s assume that Guyana and Barbados are the only signatories to such an agreement and there is a group of companies involving Guyana and Jamaica. The group could decide to form a third company, this time in Barbados, which will deal directly with Guyana.   The company may be without substance; only being used for the purpose of benefiting under the treaty. If the benefits of the treaty are to flow to Jamaica, through Barbados, without being intercepted, then the group would have succeeded in avoiding tax.
International tax rules address this potential problem by tightly defining the beneficiaries of a treaty to exclude indirect benefits to non-treaty countries.

KN: Shawn, this is a lot of useful information.  Is there anything else you would like to say about international tax as we wrap-up this interview/discussion?    
SN: Of course. With increased globalization, all countries in the world need to improve their International tax rules and enforcement mechanisms in order to make sure that all taxpayers pay their fair share of the tax needed by the government to provide services to its citizens.
International tax is a very specialized area of tax law. It is no longer sufficient to be an accountant, attorney or economist (used often as experts to discuss economic substance, especially in cases like the hypothetical example involving Delaware) without advanced international tax training, if we are to work efficiently and effectively in taxation.
This will become, by far, more obvious once the oil and gas industry comes on stream.   Upstream oil and gas is a very specialized area of international tax, and Guyana will need its best tax minds to protect our tax revenue once this industry comes on stream.
Let us rise to the occasion. Let us embrace international tax rules. I thank you for letting me share my views.

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Pix – fatca

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