Malicious companies have been exposed that ran ‘as a service’ tax avoidance schemes


The Finnish tax administrationThe recent vetting action revealed that many actors are exploiting malicious activity to allow investors to evade Finnish taxes. We estimate that the systematic tax evasion of these companies resulted in a tax gap of €80 million for Finland from 2018 to 2021 each year, as taxes were not withheld at source.

– Regimes have had structures that suggest standardized and organized planning: new conduit companies are only created for tax avoidance purposes.

Finnish and foreign citizens were among the founders of the relay companies. We have a number of pending audit cases that will likely result in additional fees to be collected from authors, says Katja PussilaRisk Manager at the tax administration.

Transactions have been uncovered where some 700 million units of company shares are believed to have changed hands multiple times between investors in back-and-forth trades. The agreements obviously have no other purpose than the evasion of taxes at source.

Our increased ability to analyze large volumes of data has contributed to recent successes in tax audit work. We received information from many different sources, as well as authorities in other countries, and compared the records.

Schemes to avoid withholding taxes and cum/ex and cum/cum transactions have also caused significant tax losses in European countries. However, our close cooperation with other countries and the exchange of tax information played an important role in the success of the tax audit, explains Katja Pussila.

For example, in Germany and Denmark, scammers have submitted claims related to trading in securities and shares, benefiting investors and companies around the world. In reality, dividend-paying stocks had only one beneficial owner. The shares had been temporarily sold to several parties to increase the number of dividend recipients.

– During the audit effort, we have also identified conduit companies registered in Finland that were established solely for the purpose of avoiding foreign tax in another country. Our role in the cooperation is to transmit the relevant facts to the tax authorities of the country concerned, notes Katja Pussila.

Several audits are ongoing within the Finnish tax administration, so new cases may surface in the near future.

The tax administration’s next control effort concerns withholding tax refunds

According to the current tax rules, if the dividend payer has withheld too much tax at source, the beneficiary has the right to claim the refund from the Finnish tax authorities. Because it is necessary to prevent the spread of tax evasion, the Finnish tax administration now monitors all transactions related to withholding tax refunds.

– The risk of increased fraudulent reimbursement activity with reimbursements is particularly relevant now that it is increasingly difficult to obtain unfounded tax advantages through the procedure of exemption at source of dividend payments, continues Katja Pussila.

A new tool ensuring better control is the OECD initiative known as TRACE – Treaty Relief and Compliance Enhancement – for taxation at source, implemented since 2021. With the TRACE model, the administration fiscal has better access to information regarding the shareholding of companies under nominee registration, chains of custody and the identity of dividend recipients. The revised reporting rules also require the authorized intermediary to be liable to pay tax in situations where no tax has been withheld at source or where insufficient tax has been withheld due to the negligence of the authorized intermediary. Because it is now easier for the tax administration to obtain information, it is also easier to concentrate control efforts.

Facts: Conduct of tax avoidance companies in Finland

  • In general, the dividend payer must withhold tax at source before sending the dividend payment to a beneficiary resident in a foreign country. However, fraudsters set up a company that can receive dividends exempt from this withholding tax. This is possible thanks to a treaty between Finland and the country of the company. The newly created company has no business other than the escape scheme based on the temporary holding of company shares during the distribution of dividends. Tax treaties exempting the receipt of dividends exist between Finland and countries such as the United Kingdom, Ireland, France and the United Arab Emirates.
  • The temporary beneficiary cannot use the dividend money itself. Instead, it should send most of the amount to the other party in the transaction. As a general rule, after the distribution of the dividends, the shares of the company which had enabled the temporary beneficiary to receive the dividends are returned to their original owner. Gains from tax evasion are then shared among scheme participants.
  • This is usually based on an agreement the tax evaders have made beforehand. As a result, each of the fraudsters was informed of the amount of evasion gain they would receive. The amount is not affected by the evolution of the stock market. The plan is created without any intention to hold the shares of the company any longer. Many schemas contain various derivative contracts. This eliminates the risks that may arise from changing stock quotes in the market. Derivatives are also used to distribute unfair profits to participants. We have observed many variations of the evasion system.
  • Shareholdings in registered form are involved in the schemes. After the registration of a candidate, the identity of the holder becomes secret. As a result, the official shareholder register only shows the name of the account operator or custodian, not the name of the person or company that actually owns the shares.

Example — withholding tax evasion schemes

The results of better control are visible: growth in tax revenue from withholding taxes

Although the cases are still under investigation, enforcement efforts are already having an impact on tax revenue.

– There is a downward trend in this type of avoidance schemes. Our conclusion is that the authors have noticed that the Finnish authorities are taking action, says Katja Pussila.

Source: Finnish Tax Administration

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