Across the world, tax authorities are becoming more aggressive and have sharpened their focus on corporates and multinationals. As a result, tax audits,
investigations and disputes have increased significantly, both at the domestic and cross-border levels. Tax authorities are also now introducing offenses targeted at corporates and partnerships that fail to prevent tax
From September 30, 2017, the UK tax authority HR Revenue & Customs (“HMRC”) will begin to enforce a new corporate criminal offense aimed at corporates that fail to prevent staff, agents and certain service providers from deliberately facilitating tax evasion. This offense under the Criminal Finances Act 2017 targets both UK and off-shore tax evasion by any company or partnership with a link to the UK. The only defense is for corporates to show that they have “reasonable prevention procedures” in place aimed at
preventing the facilitation of tax evasion. Companies or partnerships that breach the new corporate offence may be punished upon conviction by unlimited fines. By taking simple preventative steps, corporates can
minimize the risk of exposure to this new offense.
In addition, tax disputes around the world are expanding beyond the usual tax tribunal and tax court domains with increased tax-related disputes under
development agreements or tax treaties, whether double tax treaties or bilateral investment treaties. This has become necessary in various jurisdictions, for example in various African countries, where corporates rely
increasingly on remedies in development agreements or treaties to defend aggressive and unlawful actions by tax authorities or their governments. As a result, tax in the context of arbitration proceedings has become a significant growth area.
Tax: From Local to Global
The publication of the Panama Papers in 2015 was a watershed moment for tax authorities around the world. Millions of documents were leaked, which detailed the financial and legal affairs of thousands of off-shore entities and revealed a level of tax evasion and fraud that had previously been undetected.
Since that time, and in order to become more effective, tax authorities have enhanced their powers to enable them to prosecute tax evasion and, in addition, to prosecute the facilitation of such tax evasion. Tax authorities are increasingly extending their global reach and cooperation. It has been reported that, over the past five years, the HMRC has nearly doubled its requests for help from foreign governments. The number of inquiries by the HMRC to foreign authorities surged seven per cent (7%) in 2016 alone (Financial Times, UK Tax Evasion Investigations Increasingly Going Global, 5 July 2017). A recent example of cross-border cooperation in tax enforcement occurred in March 2017, when the HMRC announced that it had launched an investigation into an unnamed “global financial institution” for suspected tax evasion and money laundering, in partnership with the tax authorities of the Netherlands, Australia, Germany and France. It has since been revealed that the financial institution in question is Credit Suisse (Financial Times Advisor, Credit Suisse Faces International Tax Probe, 3 April 2017). Such multi-jurisdictional co-operation is likely going to increase significantly.
The New Offense: Failure to Prevent the Facilitation of Tax Evasion
Under UK law, the Crown Prosecution Service (the “CPS”) can prosecute tax evasion (either under statute or under the common law) where a person or company has acted knowingly, dishonestly and has had actual involvement in the non-payment of tax. The CPS may also prosecute the facilitation of tax evasion where a person or company deliberately and dishonestly facilitates (i.e. encourages or assists) tax evasion by another. The HMRC has powers to conduct investigations into these offenses and works closely with the CPS to bring such prosecutions. Adding to these powers, the new statute permits tax authorities to go one step further and target corporates that fail to prevent the facilitation of tax evasion. The new corporate offense criminalizes the failure of a corporate to prevent the facilitation of tax evasion by a person who performs services for, or on behalf of, that corporate when acting in that capacity. This means that any corporation or partnership, not just banks and financial services providers, can be held responsible where a staff member, contractor or other agent facilitates tax evasion either in the UK or overseas in the course of business. This is a drastic development and places a significant burden on corporates to take steps necessary to avoid criminal liability.
What Is It?
The Criminal Finances Act 2017 became law in the United Kingdom on 27 April 2017. The Act creates two new corporate offenses of failing to prevent facilitation of UK and foreign tax evasion. These offenses will become effective as of 30 September 2017. A company or partnership will be held criminally liable for the actions of its employees, agents or other “associated persons” unless it can demonstrate that it had “reasonable prevention procedures” in place. This is a similar mechanism to section 7 of the Bribery Act 2010. There are slightly different requirements for the offenses dealing with UK and foreign tax evasion.
Potential Costs of Non-Compliance
Corporates that fail to comply with the two new corporate offences are at risk of potential investigation costs, and if convicted for breach, potentially unlimited fines. Aside from the risk of reputational damage, a conviction could also make it more difficult for the corporate to operate in certain regulated jurisdictions. It is therefore vital that corporates with links to the UK start putting in place prevention procedures immediately, in order to mitigate these risks (see “What Is the Defense?” below).
Who Can Be Convicted?
- The “relevant body” for the UK tax offense is a body corporate or partnership, wherever incorporated.
- The “relevant body” for the foreign tax offense is either:
- incorporated under UK law;
- carrying on a business or part of a business in the UK; or
- outside the UK but its “associated person” is located in the UK at the time they commit the criminal act of facilitating foreign tax evasion.
Each offense can be broken down into three stages which must be met for the offense to apply:
- Stage 1 (tax evasion): a taxpayer (either an individual or company) criminally evades tax under existing law. This must be deliberate but there does not need to be a conviction.
- Stage 2 (facilitation): an “associated person” of the relevant body criminally facilitates this tax evasion by the tax payer when acting in that capacity. This also must be deliberate.
- An “associated person” is defined very broadly as a person who is an employee, agent or other person who performs services for or on behalf of the relevant body.
- The associated person must be acting in their capacity as an employee/ agent/ person performing services for or on behalf of the relevant body, when they commit the crime of facilitating tax evasion.
- Stage 3 (failure to prevent facilitation): the relevant body fails to prevent the associated person from committing the criminal facilitation. If the offenses in Stages 1 and 2 are committed, then the relevant body will have committed the new corporate offense unless it can make out the defense.
The legal assessment of the above three stages involves looking at different laws, depending on whether one is assessing the UK tax offense or the foreign tax offense.
What Is the Defense?
The relevant body has a defense where it can show that, at the time the facilitation of tax evasion was committed, it has reasonable prevention procedures in place (or it is unreasonable to expect such procedures).
The term “prevention procedures” refers to (i) formal policies adopted by the relevant body to prevent the criminal facilitation of tax evasion by its representatives, and (ii) practical steps taken to implement these policies, enforcement of compliance and monitoring of effectiveness.
The HMRC has issued draft guidance on the new corporate offense, which sets out the following six guiding principles for implementing reasonable prevention procedures:
- Risk assessment
- Proportionality of risk-based prevention procedures
- Top-level commitment
- Due diligence
- Communication (including training)
- Monitoring and review
Corporates are not expected to undertake burdensome procedures to eradicate all risk. Procedures should be bespoke to that corporate and proportionate to the risk the corporate is facing. In practice, the reasonableness of a corporate’s procedures will depend on, amongst other things, the level of control and supervision that it can exercise over its representatives, the nature, scale and complexity of its activities, and the resources available to it.
Recent Trends That Narrow Privilege Complicate Matters
Due to recent case law in the UK, corporates should be particularly alert to how they are producing and retaining documents during the risk assessment and monitoring procedures listed above. The HMRC has wide powers that it can exercise in order to build the case for prosecution, including the power to compel production of documents or to seize them with a judicially-issued warrant. The HMRC's power to demand or seize documents does not extend to documents that are protected under legal professional privilege (as governed by UK law) (see, eg, Police and Criminal Evidence Act 1984, section 10). However, two recent landmark cases in the UK – The RBS Rights Issue Litigation  EWHC 3161 (Ch) and SFO v ENRC  EWHC 1017 (QB) – evidence a trend toward narrowing the scope of that privilege. In The RBS Rights Issue Litigation, the Court held that notes of interviews will only be protected where legal advice is incorporated within those notes. In SFO v ENRC, the Court held that documents made in contemplation of legal proceedings will only be privileged where the corporate’s internal investigations have uncovered evidence of the suspected offense. These and similar decisions could arguably be interpreted to permit the HMRC to access documents generated during an internal investigation phase (e.g. the risk assessment phase above), in which case corporates would need to think carefully about the manner in which they conduct and document risk assessments.
What Should Corporates Do?
Given that enforcement of the new corporate offense is due to begin imminently, corporates should immediately be taking the following steps as a minimum:
- Adopt tax policy (or amend existing tax policy to include new corporate offense) and ensure top level endorsement by way of a board resolution;
- Appoint a “contact person” who will be responsible for monitoring compliance with the new offense going forward;
- Update document retention procedures and policies;
- Identify risk areas (including internal and external risks) as part of an initial risk assessment, including review of KYC (KnowYour Client) requirements and due diligence procedures;
- Corporates should also:
- Review risk areas identified during the initial assessment results and consider mitigation measures;
- Start rolling out training on the new corporate offense, and the related offenses of tax evasion and facilitation of tax evasion; and
- Ensure ongoing monitoring of high risk areas and ensure implementation of mitigation measures.
The content of the steps listed above will depend on each company’s individual circumstances. If your company has a connection to the UK, and you have not already implemented policies and procedures with respect to this new corporate offense, we would recommend seeking legal advice immediately.
Tax Update: Tax Crackdown in Africa
In parallel with the UK and continental Europe’s recent moves to increase pressure on tax offenders, we have seen a similar crackdown on multinationals by African tax authorities. The approach by African tax authorities, however, has been much broader and arguably less predictable than the approach in the UK and continental Europe.
Raising “Tax Assessments”
Under most local rules in Africa, tax authorities can raise “tax assessments” against an entity, including multinational corporations. Such tax assessments can be raised for withholding tax, corporation tax, income tax, VAT and/or stamp duty on local transactions or, in the case of disposals, the seller’s capital gains tax. Even where the tax assessment has been objected to by a taxpayer, the taxpayer must pay the tax (in whole or in part) pending an appeal against the assessment. This gives the tax authorities a substantial cash flow advantage. In general, any objections to the advance tax payment are dealt with by the local tax authorities at their discretion. Such objections must be made within strict time limits and if the payment is not made on time, penalties and interest can be imposed.
Who Is Being Targeted?
Multinationals with local operations in Africa are the main target, particularly where operations are conducted through separate local operating entities. These measures should be of specific concern to multinationals with the following profiles: those involved in mining, energy and infrastructure (particularly where the multinational has significant local cash flows); those which distribute dividends regularly; those with substantial profits; and those which enter into transactions in the local jurisdiction from time to time.
Tax authorities in Africa have relied on various grounds to raise tax assessments. Tax authorities will be looking for a link to the local jurisdiction, and we have seen cases where such assessments have been based on an incorrect or flawed understanding of the multinational’s operations or of the local tax legislation. It is therefore advisable to seek legal advice where your corporation has had a tax assessment raised against it, or where a risk of such a tax assessment exists due to the corporation fitting one of the profiles described above.
Update in Nigeria—the Voluntary Assets and Income Declaration Scheme
In accordance with the general trend in tax crackdowns, Nigeria has recently implemented its Voluntary Assets and Income Declaration Scheme (“VAIDS”) in July 2017 (see PwC, Voluntary Assets and Income Declaration Scheme (VAIDS) Has Been Launched, 29 June 2017). The scheme encourages voluntary disclosure of previously undisclosed assets and income, and offers a limited waiver as an incentive for those who come forward. While the VAIDS applies to all individuals resident in, and all companies operating in, Nigeria, the key targets are multinationals and high net worth individuals.
Any taxpayers who fail to embrace the voluntary scheme will be investigated and, if sufficient evidence of tax evasion is found, may be prosecuted.
Similar to the UK tax authority’s increase in cooperation with overseas jurisdictions, with this new scheme, Nigeria aims to collaborate with foreign governments in order to clamp down on perceived tax evasion by multinationals (see PwC, Voluntary Assets and Income Declaration Scheme (VAIDS), March 2017).
Tax Update: Arbitration
Tax arbitration is becoming increasingly important in the international sphere and corporates should give serious consideration to adopting arbitration as a method of resolving tax disputes.
On June 7, 2017, sixty-nine (69) countries signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the “BEPS Multilateral Convention”), which adds new anti-base erosion and profit shifting provisions to tax treaties internationally. As part of the BEPS Multilateral Convention, countries could opt-in to providing mandatory binding arbitration for its bilateral tax agreements (see Part VI). Only twenty-five (25) territories committed to this measure, including Australia, Belgium, Canada, France, Germany, Singapore, Switzerland and the United Kingdom.
The International Chamber of Commerce (“ICC”) has urged more countries to adopt mandatory binding arbitration, particularly to better resolve double tax disputes. In light of the clear trend, discussed above, of increased activity by tax authorities around the world, the ICC has emphasized the need for countries to adhere to more robust dispute resolution mechanisms with mandatory agreements “to mitigate anticipated international tax disputes in the coming years” (Tax-News, Countries Urged to Sign up to Mandatory Binding Arbitration, 19 June 2017).
While disputes under tax treaties are between sovereigns, such disputes typically arise at the request of an affected party (most frequently corporates). Adopting arbitration, as opposed to bilateral consultations for example, promotes certainty and could potentially create more space for the affected party to contribute to the resolution of the question affecting it.