Unilateral measures against offshore tax evasion

Freie Universität Berlin

Otto-Suhr-Institut / Lateinamerikainstitut

Diploma-thesis
Unilateral measures against offshore tax evasion.
The example of the Argentinean corporate supervisory board
(Inspección General de Justicia, IGJ)

Markus Meinzer

Politikwissenschaft (Diplom), 8. Fachsemester
Volkswirtschaftslehre (Zusatzfach)

29.02.2008

Content

List of Abbreviations i-ii
List of Tables and Annexes iii
1 Introduction 1
2 Theoretical background, research subject and methodology 3
2.1 Definitions of key concepts 3
2.1.1 Offshore 4
2.1.2 Tax evasion 4
2.1.3 Offshore tax evasion 5
2.1.4 Offshore financial centre (OFC) and tax haven 5
2.1.5 Offshore (shell) company 7
2.2 Theoretical Background and Relevance 7
2.3 Research Question and Hypotheses 15
2.4 Delimitation 18
2.5 Epistemological background and Methodology 19
2.6 Sources and Formality 21
2.7 Field research: qualitative and quantitative methods 23
3 Corporate Law, Institutions and Policy 25
3.1 Judicial Context: Corporate Law on the federal level 25
3.2 Institutional Framework: Implementation on the provincial level 28
3.3 Offshore Corporate Policy: IGJ-General Resolutions 2003-2005 31
3.3.1 IGJ-RG 7/03 ­ Centrepiece: Real Economic Activity Criteria 34
3.3.2 IGJ-RG 8/03 ­ End to Actos Aislados Provision 37
3.3.3 IGJ-RG 12/2003 ­ Defining and Supporting Adecuación 39
3.3.4 IGJ-RG 22/2004 ­ Exemption of Investment Vehicles 40
3.3.5 IGJ-RG 2/05 ­ Severing of Real Economic Activity Criteria 41
3.3.6 Resolution IGJ-RG 3/05 ­ Identification of Shareholders 46
3.3.7 IGJ-RG 7/05 ­ Integration and Reordering 48
3.4 Summary: Two layers and two criteria interplaying in implementation practice 53

4 Analysis and Test of Hypothesis 1 55

4.1 Qualitative Analysis 55

4.2 QuantitativeAnalysis 58

5 Hypothesis 2: widening the perspective 63

5.1 Offshore tax evasion: framework of analysis 64

5.2 Bottlenecks in the puzzle: Access to foreign currencies 68

5.3 The Argentinean Tax-System: Law and Judiciary 70

5.4 Mechanisms of illicit trans-border capital flows in Argentina 72

5.4.1 Enabling Entities 73

5.4.2 Enabling (accounting and/or tax) Devices 77

5.5 Thoughts on quantitative assessments 82

6 Conclusions 88

References 91

List of Abbreviations

ADR: American Depository Receipt
AFIP: Administración Federal de Ingresos Públicos (= DGI + DGA)
Art.: Article (in law)
BO: Boletín Oficial (official Argentinean legal bulletin)
CABA: Ciudad Autónoma de Buenos Aires
CDI: Clave de Identificación (identification key for non-regular tax payers)
CEDEAR (Certificados de Depósito Argentinos); Argentinean Deposit Certificates
CN: Constitución Nacional
CUIL: Clave Única de Identificación Laboral (Tax Identification Key for Employment Purposes)
CUIT: Clave Única de Identificación Tributaria (Tax Identification Key)
DEC: Decree (mostly issued by PEN)
DGA: Dirección General de Aduanas
DGI: Dirección General de Impuestos
DTT: Double Taxation Treaty
EU STD: European Savings Tax Directive
FATF: Financial Action Task Force
FN: Footnote
FOREX / FX: Foreign Exchange / Foreign Currency
GDP: Gross Domestic Product
IGJ: Inspección General de Justicia
IMF: International Monetary Fund
IOIR: International Operations Information Regime (by AFIP)
IPC: Índice de Precios al Consumidor (Consumer Price Index)
LIG: Ley de Impuestos a las Ganancias (Income Tax Law)
LLC / LC: Limited Liability Company
LO: Ley Orgánica (Organic Law of the IGJ)

LS: Ley de Sociedades (Corporate Law)

OECD: Organisation for Economic Co-operation and Development

PEN: Poder Ejecutivo Nacional (Federal Government)

PIT: Personal Income Tax

RNS: Registro Nacional de Sociedades (National Corporate Register)

SAFI: Sociedad Anónima Financiera de Inversión

SEC: Securities and Exchange Commission (US Supervisory Board)

TIEA: Tax Information Exchange Agreement

TNC: Transnational Corporation

WB: World Bank

WTO: World Trade Organization

List of Tables and Annexes

Tables

Table 1: Overview IGJ′s General Resolutions
Table 2: Available Data of the Public Register of Commerce, Buenos Aires (IGJ)
Table 3: Property tax in Argentina (bienes personales): Number of taxpayers and the tax intake; 1997 and 2001-2006

Annexes

Annex 1: Code and List of Interviewees (2 pages)
Annex 2: Additional early structuring questions (1 page)
Annex 3: Guide for directed interviews (Guía para entrevistas; 4 pages)
Annex 4: selected questions for professionals (Cuestionario; 1 page)
Annex 5: Two copies of Entries in the Register of Commerce (bad quality due to bad photographs)
a) Art. 118: Sucursal (branch; 1 page)
b) Art. 123: Participación en sociedades ("Part. Soc.", shares only; 1 page)
Annex 6: Model Form to complete for initial information regime according to IGJ-RG 7/05 (3 pages) (Leonhardt, Dietl, Graf & von der Fecht)
Annex 7: Model Form to complete for annual compliance according to IGJ-RG 12/05 (2 pages) (Leonhardt, Dietl, Graf & von der Fecht)
Annex 8: List of low or no tax juriscidictions as of PEN-DEC 1037/00 (14.11.2000 BO; 4 pages)
Annex 9: Model Form to report foreign exchange operations ′Boleto de Cambio′ (1 page)
Annex 10: Calculation of deadline for compliance with criteria (IGJ-RG 7/05; 2 pages)
Annex 11: Interpretation of IGJ′s understanding of FATF′s recommendations 33 and 34 (3 pages)
Annex 12: Brief summary of technical flaws and omissions in IGJ-RG 2/05 (1 page)
Annex 13: Glossary (Tax Justice Network 2006; 10 pages)

1 Introduction

"For the absentee owner, the purpose is not to `maximize′ profits but to `beat the average′. The ultimate goal of business is not hedonic pleasure, but differential gain. [...] The capitalist seeks higher profit, not in order to buy more goods and services, but in order to assert his or her differential power." Jonathan Nitzan, Differential Accumulation (1998: 173, 174)

"[...] Pride is essentially competitive - is competitive by its very nature - while the other vices are competitive only, so to speak, by accident. Pride gets no pleasure out of having something, only out of having more of it than the next man. We say that people are proud of being rich, or clever, or goodlooking, but they are not. They are proud of being richer, or cleverer, or better-looking than others. If everyone else became equally rich, or clever, or good-looking there would be nothing to be proud about. It is the comparison that makes you proud: the pleasure of being above the rest. [...] Greed may drive men into competition if there is not enough to go round; but the proud man, even when he has got more than he can possibly want, will try to get still more just to assert his power. Nearly all those evils in the world which people put down to greed or selfishness are really far more the result of Pride."

C.S. Lewis, Mere Christianity (2002 : 122-123)

Tax havens and related cross-border tax evasion by wealthy individuals have recently gained widespread public attention in Europe when Germany′s foreign intelligence agency, the Bundesnachrichtendienst (BND), uncovered massive evading practices of around 900 German taxpayers in the alpine principality of Liechtenstein1. Whereas in this recent case foundations2 have been the judicial entities used to conceal the identity of the owners of assets and capital income, similar ends are achievable with other judicial persons in other tax haven jurisdictions. For instance, Jeffrey Owens, the Head of the OECD′s Fiscal Affairs Department, mentioned in an article elaborating on "Offshore Tax Evasion" in June 2007 that nowadays "the creation of offshore financial accounts, shell companies and the like are just a click of a mouse away." (Owens 2007). The potential for abuse of such offshore structures has been highlighted by a great many of international bodies concerned with money-laundering, tax issues and organized crime. The term `shell companies′ refers to mere façades of companies which are used for and whose raison d′être exists in the booking of economic transactions. Simplifying grossly, the process by which a person is creating and using accounts and companies in places she or he might never tread or reside in, can be called offshorization. Such offshorization though is considered detrimental not only for industrialized countries′ tax

^{1 http://www.spiegel.de/international/business/0,1518,535768,00.html; accessed 20.2.2008.
2 Indeed, there is no need to identify the person creating the foundation. See http://taxjustice.blogspot.com/2008/02/press-release-liechtenstein.html; accessed 20.2.2008.}

1

revenues and the capacity to provide for public services thereof, but is found harmful also for developing countries3.

For similar reasons and as financial efforts in the framework of the UN-Millennium Development Goals (MDG) are burlesqued by a simultaneous, massive siphoning of mostly undeclared funds out of developing countries, this issue recently gains momentum in the international development debate, too. In a joint press-statement with UN-Secretary General Ban in September 2007 on the occasion of presenting the Stolen Assets Recovery-initiative, World Bank President Zoellick said that "there should be no safe haven for those who steal from the poor" pointing at data which suggest that the cross-border flow of global proceeds from criminal activities, corruption and tax evasion was annually 1-1,6 trillion US$ (Hoge 2007).

Generally and so far though, international developmental efforts clearly find their limitation when it comes to concrete tax cooperation4. While industrialized countries achieve at best meagre results in their combined efforts to counter international tax dodging, this pathway is more difficult to take for developing countries. The `willingness′ on behalf of offshore tax havens to `cooperate′ can be expected to decrease drastically when their negotiating counterparts are no more the US or EU, but let say Ghana or Mercosur. Thus, the question arises if any unilateral action can be successfully taken by developing countries in order to reduce their exposure to the "supply side" (TJN 2007: 32-34, 132) of global corruption as instituted in offshore financial structures. The present thesis seeks to contribute to substantial answers to this question.

Its subject is a set of regulatory measures taken by the Argentinean Corporate Supervisory Board Inspección General de Justicia (IGJ) between 2003 and 2005. One of their alleged aims is to counteract offshore tax evasion through a ban of the aforementioned shell companies, an approach which is deemed to be unique and novel worldwide. The venture of the IGJ rests on the assumption that the bona fide-treatment of the latter′s legal person is crucial for cross-border tax evasion. Designed as an explorative case study, the thesis′ central interrogative is about the normative-judicial scope and the factual impact of IGJ′s policy on offshore tax evasion. Much of the data underlying the answers given henceforth has been collected through a two-months field research in Buenos Aires.

^{3 In order to prevent any misunderstandings as relating to the developmental concept preferred in the following thesis, I refrain explicitly from any blueprint or one-size-fits-all approach to development. Instead, in the following work `development′ should ideally be replaceable always by `adding to policy autonomy and independence′. I assume that the best to be generally done by industrialized countries is to stop interfering negatively on a structural level of political economy. This shall neither preclude exceptional instances nor generally the notion that an international truly cooperative climate is feasible and desirable indeed. In more theoretical terms, the more sophisticated and equilibrated version of the dependency theory as set forth by Cardoso and Faletto (1976) seems to me still a fruitful point of departure.
4 It is almost unthinkable to imagine for instance the Swiss providing a part of their development aid through information exchange assistance in tax matters with the developing world′s tax authorities. It would be misleading though to expect other industrialized countries, which are not offshore centres, to be generally cooperative towards developing countries requesting information exchange. Worse, industrialized countries may actively encourage corruption abroad or at least have done so until recently. German tax law for instance implicitly allowed tax deductions for German companies′ bribes abroad until 1999. In other words, the "expenses" a German company had for the corruption of foreign public officials has been actually subsidized by German taxpayers (TI 1999).}

2

The structure of the thesis is as follows: The second chapter opens with a brief section of definitions of key terms used thereafter (2.1). Section two (2.2) seeks to clarify the practical relevance of the subject and to establish and engross its links to two theoretical debates. Thereby, the central question and two related hypothesis will be carved out (2.3). In the following section (2.4), the subject is circumscribed. Epistemological and broad methodological issues are addressed in section 2.5, sources and formal issues are presented in 2.6. The field research and interview methodology are subject of section 2.7. The third chapter is dealing mostly in a descriptive way with the legal context of the IGJ-norms (3.1), focuses on institutional and general administrative issues in relation to their implementation (3.2), presents the regulations in question chronologically (3.3) and eventually summarizes the mayor issues relevant for the subsequent analysis (3.4). In the fourth chapter, the measures are subject to analysis with regard to a test of the first hypothesis presented in chapter two. The fifth chapter seeks to do the same for the second hypothesis, although the venture is far more complex and the results are more ambiguous. Some points of departure for further research are addressed. In the sixth chapter, an answer to the central question is provided, the results of the test of both hypotheses are summarized, conclusions are drawn and a more generic outlook is given.

2 Theoretical background, research subject and methodology
2.1 Definitions of key concepts

In order to avoid misunderstanding and ambiguity as well as for easier comprehension, the definition of some frequently used terms is to be given here. They are assembled for the purposes of this thesis only. Some of them still lack a precise, widely shared meaning but are fluid concepts instead. This section does not pretend to give a comprehensive picture of the (theoretical) debates surrounding each term, but will only clarify the minimum in order to proceed. As the reader might not be familiar with financial issues, it is sought to provide explanations in footnotes where appropriate. For easier comprehension and in case that terms remain unclear, a glossary taken from a Tax Justice Network publication (2006) is attached in Annex 13.

3

2.1.1 Offshore

To begin with, the term "offshore" might be confusing since it evokes the imagery of open sea and drilling platforms and thus refers to a real, palpable geographical location. In this sense, this imagery is misleading because offshore for our purposes corresponds to a purely artificial, judicial space instead5 (Palan 2003: 19). This is even more emphasized if its aspect given by International Law is pronounced, which deems the open seas as being beyond the sovereign space of single nation states6. To make long story short, offshore refers here to a space legally created and supported by nation-states which at the same time is freed and explicitly exempt from regulatory and indeed sovereign control. For such a thing to exist, two elements are necessary: Firstly, a state providing laws, whether deliberately or accidentally, which withdraw or reduce effective regulation and/or taxation over international economic activities taking place in or being rooted through its jurisdiction. Secondly, the principle of exclusive sovereignty which is bound to a territory and prescribes that no other state or force is allowed to intervene in affairs taking place on the former′s territory (Palan 1998: 25-28; 2003: 19-20). Thus, the unregulated and/or untaxed realm of the former state is becoming offshore, allowing international economic activity - and therefore activities which affect third states or parties - to take place therein under the protection of the institution of sovereignty.

Offshore may take different forms, of which tax havens are probably the most famous incarnations. Other forms of offshore include the Euromarkets, Flags of Convenience (FOC) and Export Processing Zones7 (EPZ, Palan: 2003: 36-59). To some extent, the laws and regulations assembling the offshore world can seen as being "strictly-for-export" provisions (Alfred Conrad, cited in: Palan 2003: 19-20).

2.1.2 Tax evasion

Tax evasion equals non-compliance with a legal obligation to pay tax. Whether the transgression is criminally prosecuted or is `only′ administratively fined can depend either on quantitative or qualitative criteria8. For instance, in Germany the difference hinges upon whether the evasion has been

^{5 They might be overlapping though with geographically palpable places as is the case with export processing zones (EPZ, Palan 2003: 36ff), see below.
6 Although it would be clearly misleading to consider offshore similar to the open seas as Common Heritage of Mankind (UN-General Assembly 1970) - much to the contrary.
7 A comprehensive introductory book on "The Offshore World" is written by Palan (2003). A more easy-to-follow account is given by BBC-journalist Brittain-Catlin (2005): "Offshore. The Dark Side of the Global Economy". Articles by Picciotto (1999 and 2007) provide a legal perspective. An overview over the Euromarkets is found in Burn 1999.
8 The only general exception not prosecuting tax evasion criminally I am aware of is Switzerland which engineers captiously in its laws that only "tax fraud" is a criminal offence, exempting though the tax form from being an official instrument (or certificate). Thus, the failure to file correctly the annual tax form cannot be fraud, because (tax) fraud necessarily involves the intentional manipulation of a public certificate. Hence, tax evasion is mostly deemed to be an administrative transgression. See Thielemann (2002: 7f) for an explanation of the Swiss specialty.}

4