Philip Baker: Globalisation has amplified the significance of international tax issues

On a recent rare visit to the island to deliver a keynote speech on taxpayer rights at an event organised by law firm Ioannides Demetriou LLC, Philip Baker, KC, OBE, a barrister at Field Court Tax Chambers and visiting professor at the University of Oxford – a renowned authority in cross-border taxation matters – met with GOLD to discuss the never-ending tug-of-war between states and taxpayers.

Let's kick things off with how globalisation has complicated state efforts to collect taxes and generated problems for the protection of taxpayer rights.

International tax issues aren't novel; they've been present since countries engaged in cross-border trade. Globalisation has amplified their significance, especially considering the wealth distribution across the world today. Tax avoidance and evasion have persisted for ages – 100 years ago, the League of Nations initiated rules on international taxes, focusing on double taxation avoidance and combating tax evasion. Back then, the challenge was pursuing individuals or companies who left a country without settling their taxes. There's been significant growth in cooperation among tax authorities over the years, yet challenges persist. Defining and combating tax avoidance is complex, especially when a multinational capitalises on an attractive tax regime offered by a country, sparking disputes over harmful tax competition among nations.

Cyprus offers such a regime to attract foreign companies, which is necessary to stimulate a relatively small economy.

Well, as you know, the adoption of a global 15% minimum corporate tax for large multinationals via the Organisation for Economic Cooperation and Development (OECD) Pillar Two rules and the EU's Directives is a pivotal development here. Some countries are increasing their tax rates in response.

What's your stance here?

As a barrister, I maintain neutrality. Academically, I find these rules overly intricate and potentially detrimental to some countries as they impose high compliance costs, both for taxpayers and tax authorities, which may not result in substantial tax collection. I think this is a classic example of the OECD identifying the wrong problem and coming up with the wrong solution.

And wrong solutions tend to generate new problems, leading to a cycle of constant adjustments.

Absolutely. Once these processes are set in motion, it's challenging to halt them. This OECD-led international tax process will likely consume the next few decades, ironing out complexities and discovering gaps while potentially neglecting the real issues faced by certain countries. The dominance of the OECD – which is a complete accident of history – in shaping international tax rules primarily benefits its member countries, predominantly influenced by the US. Developing countries are seeking greater involvement and recognition in shaping tax rules because they desperately need tax revenue for essential purposes like running schools and hospitals. Recently, a resolution by the United Nations General Assembly has proposed an active dialogue on international tax through the UN structure. While still at a very early stage, the initiative aims to develop a framework convention, which will then create specific protocols targeting tax evasion – the buzz term is ‘illicit financial flow’. It will also focus on the taxation of service income, where service companies, accounting companies and law firms in the developed world are offering services in developing countries but are not being taxed on their profits in those countries.

I think you can find similar issues between developed and developing countries regarding environmental regulations; carbon-neutrality is better fitted for rich economies.

Yes, I believe that the idea for a framework convention comes from the UN climate structure and it looks as though the UN proposal may be based a little on that – it will be a shame if that’s the case. What's required is a dedicated global tax organisation, something that might have evolved if the UN had persisted with involvement in tax matters in the early ‘50s. After World War II, when the UN was set up, it had a fiscal commission but closed it down in 1954, in what was probably one of the most significant and disastrous decisions internationally. The OECD, which stepped into the gap, was never intended to be a tax organisation, really.

Now, with globalisation taking down barriers to the movement of goods, services, taxable profits and capital, states have tried to curtail tax evasion and avoidance through information exchange. How has that affected taxpayer rights?

There are different forms of information exchange. For decades, countries have exchanged information upon request. However, in the last 15 years, there's been a surge in automatic exchange. It started with the US Foreign Account Tax Compliance Act (FATCA), targeting Americans hiding bank accounts abroad. This spurred similar actions globally, such as the OECD's Common Reporting Standard (CRS), and the EU got on the bandwagon through directives. Interestingly, after 10 years, FATCA has not yielded significant tax revenue, but it has pushed individuals to declare accounts, creating an environment where hiding information becomes tougher. Yet, these systems pose cybersecurity risks. Four years ago, the Bulgarian tax authorities were hacked, and the personal details of five million of the country’s seven million population were posted on the dark web. With the CRS, the OECD has created potentially the biggest target for organised crime and non-benevolent governments. You wonder, what are the safeguards that prevent Russia, China or anyone else from accessing this information? And, of course, you can't get an answer to that, because the OECD doesn't want to tell people what the safeguards are. It's quite interesting that, when this system was put in place, virtually every one of the EU data protection agencies warned that it was not compliant with data protection and that there were huge risks involved, but they went ahead in any event. We've been very lucky that we have not, as far as we're aware, had a huge hack or leak – yet.

Another way to catch tax offenders is the so-called ‘naming-and-shaming’ tactic. Interestingly, it applies to both taxpayers and countries. In 2017, Cyprus was put on such a list by the EU as one of the countries that didn’t do enough to curb international tax evasion and profit shifting.

Indeed, naming-and-shaming varies according to the context. Some countries use it against individual taxpayers; if you haven’t paid your taxes or you are involved in certain tax avoidance schemes, some countries have lists, typically on their websites, of tax defaulters. There was a significant case last year involving Hungary at the European Court of Human Rights, which had a naming-and-shaming system where if you owed about €20,000 for more than six months, you were on the list. What was unusual about this list was that it gave the addresses of the individuals; people could see where a defaulter lived. The European Court of Human Rights ruled that while naming-and- shaming is not a breach of privacy, identifying an individual’s address goes too far. Regarding countries, it ties into the competition for foreign investment, highly skilled professionals, High Net Worth Individuals and the like. You want to stop a race to the bottom where one country offers 12.5% income tax, the country next door offers 10%, and it keeps going down until you are not collecting any tax whatsoever. International principles are adopted to identify countries not adhering to these standards and countries have used peer reviews to highlight compliance gaps. However, sometimes, this pressure results in the removal of safeguards meant to protect taxpayers' rights, like informing individuals about an exchange of information request, which is wrong in my opinion. Why not give a heads up and offer them a chance to challenge it?

Does naming-and-shaming work in practice?

I’ve not seen any scientific research that tests whether it works. The real game-changer here, though, was the introduction of disclosure of tax avoidance schemes (DOTAS), mandating scheme notification to the revenue authority within a specific timeframe. This had a significant impact on the tax avoidance culture in the UK compared to naming-and-shaming.

Interestingly, tax transparency practices seem significant depending on the culture. Scandinavian countries, for example, are more open about taxpayer information compared to the UK.

Absolutely. A former student of mine developed a theory that in countries with a history of invasion or political upheaval, like continental Europe, there's a concern about the enemy within – that the information gathered by the tax authority today could be accessible to an extreme right-wing or left-wing government or to an invader tomorrow. The UK has – fortunately – never been invaded. So, we're concerned with enemies without. Could a non-benevolent government obtain this information from us? And, frankly, one of the key elements of data protection, which is not being properly observed by many countries, is data minimisation and destruction. You should only gather data for a specific purpose and as little data as you require to meet that purpose. When you satisfy that purpose, you destroy it. I think in some countries, tax authorities are thinking that it is brilliant they can gather 10, 15 or 20 years’ history of data. However, that is not consistent with the General Data Protection Regulation.

Switching gears, there is debate as to beneficial ownership registers' public accessibility. Some countries have closed public access due to data protection concerns, while others resisted.

Where do you stand on the matter?

Under anti-money laundering legislation some eight years ago, the European Parliament decided that they should be open to the public but, a year ago, the European Court of Justice ruled that public access to beneficial ownership registers violated data protection rights. Several countries, including France, disagreed and retained public access. The European Commission might take infringement action against these countries for non-compliance. The UK, despite being outside the EU, aligns with EU laws and faces potential non-compliance issues regarding public registers. For me, the European Court got it absolutely right; there's no necessity for unrestricted public access to beneficial ownership registers. Access would always be granted to those with a legitimate interest, such as journalists investigating crime or businesses verifying client status. I don't have to know my neighbour’s involvement in companies. It’s also a Big Brother principle, in the sense that you are constantly under surveillance.

Finally, taxpayers have taken states to the European Court of Human Rights (ECHR), bringing cases under the right to own property, right to privacy and right to fair trial, among others. How successful have they been, though?

Tax cases reaching the ECHR have remained steady at around 30 cases annually in the last 20 years or so, and taxpayers mostly lose because it's their final recourse after exhausting domestic remedies. The Court respects a wide margin of appreciation for states in tax matters. However, there have been recent wins for taxpayers, such as a case from Ukraine where a taxpayer won compensation due to improper fee increases for a gambling licence. But with the EU Charter of Fundamental Rights coming into force, more cases go to the European Court of Justice (ECJ), where taxpayers are slightly more successful.

This interview first appeared in the December edition of GOLD magazine. Click here to view it.