This Week in AML

Tax Fairness and Shell Companies - the EU Weighs In

The European Commission has issued a Communication on Business Taxation for the 21st century. The focus of the communication is to “promote a robust, efficient and fair business tax system” in the EU. This week, Executive Vice President John Byrne, and Creative Director Elliot Berman of the AML RightSource staff discuss the communication and its recognition that increasing the fairness in a tax system requires dealing with the problem of shell companies. John and Elliot explore the importance of transparency and the alignment of the EU effort with those of the current US administration.


Tax Fairness and Shell Companies - The EU Weighs In TRANSCRIPT

Elliot Berman: Hey, John, how are you this week?

John Byrne: Hi Elliot, how are you doing?

Elliot Berman: I'm okay, thanks. I saw this week that the that the European commission adopted a new tax framework essentially for business taxes and it's a multi-year process. But there were some things in there that I think are germane to what you and I talk about almost every week.

Did you happen to see that document?

John Byrne: Yeah, I did. And obviously you and I are not tax experts, but I thought what was interesting about it was the reference to something that is a global challenge. And that's shell companies, the misuse of those entities for a variety of reasons, including tax evasion or money laundering and that sort of thing.

Yeah, there's a lot in the document. It's over 15 pages long. So those that are immersed in the tax world, take a look at that. But what I thought was relevant to talk about this week is they also added that there'll be a new initiative, a legislative initiative, to deal with misuse. And they talk about misuse of shell entities. They talk about a number of things, like I said, including tax evasion or money laundering while they do say there could be valid reasons for those entities - although you and I could debate that, right? - there's a need for further action. And they think that that's going to help the economies of these countries, but also establish a level of fairness. And I think that's really the key here.

They believe that a lot of entities utilize these vehicles so that they don't have to pay their fair share of taxes in all these different jurisdictions. So I thought because SATF has talked a lot about misuse of shell companies, obviously we have in the states, the new eventual beneficial ownership registry, and some of the other things that there's a consistent theme, obviously throughout the globe.

And this just shows the economic impact of trying to address it.

Elliot Berman: Yes. And getting into other parts of the document, they talk about the need for a more international approach to consistency and business taxation. We saw a similar theme in the Biden administration's announcement maybe six weeks ago about their efforts in terms of tax fairness in taxation and concerns about tax avoidance, and the tax gap as both a revenue issue and a fairness issue, the people who pay their taxes versus the people who don't.

And this is an important part of it because with rent, with commerce being so globalized nowadays coming up with a way that organizations aren't able to move around the world to find the places where it's easier to evade taxes will make enforcement easier, and clearly dealing with the beneficial owner issue is another element of that.

John Byrne: Yeah. And consistent with what the Biden ministration talked about and polling data in the states, frankly, they talk about the importance of a fair tax infrastructure. The statement in the EU document is that - a first step for a fair tax system. As you referenced, [it] is greater public transparency on the taxes that are paid by large economic actors.

So I think they're showing the themes are pretty consistent right with the EU and with the states and other jurisdictions. I also note that in the Biden administration plan, they're going to add a number of IRS agents. And we obviously [we] have a nice direct contact with the former IRS, CIA, chief, Don Fort, and all those dedicated men and women that work in that space and how important it's been over the past number of years, because there's been a decrease in agents and that obviously impacts the infrastructure and the ability to investigate financial crime. So the fact that all this is happening at the same time, I think has economic, but also fairness impacts, which, can't be overstated.

Elliot Berman: Oh, I agree. I think there are some studies to indicate that one of the things that does promote tax compliance is the belief that the system is fair. And so it's important for the global system to be fair. And while this doesn't cover the whole globe, if you get the US and the EU, you're on your way to getting a significant part of the of the economic engine.

Now there's certainly many countries - and China would be the obvious one - as a huge economy that we'll need to get on board with things like this. But it’s an interesting trend and it's come up reasonably quickly, I would say.

John Byrne: Right. And the doc and the document is again on the EU commission website communication on business taxation for the 21st century.

And we would point to that for the information people are looking for. And also, I also say as a final point because of our relationship with Don being on our Advisory Board, we've also worked closely with his firm, Castellanos and Fink who are clear experts in the In the tax space.

So for more information, that's certainly a place you can go and we'll continue here at AML RightSource to try to keep you abreast of global and domestic issues that we believe touch the financial crime infrastructure. And this is clearly one.

Elliot Berman: Agreed. And as we've said, the last number of weeks, if you're looking for this podcast or others you can find us on Spotify or SoundCloud or wherever you find your podcasts.

And there's in addition to This Week in AML, we have a number of other series that are running. So we hope you'll take a look at some of our other content. And John, I will be back with you next week. You have a great holiday weekend.

John Byrne: You too take care of yourself. Stay safe.

Elliot Berman: Yep. You too. Bye-bye.