27th August 2021
Led by the European Union and the US, this month saw the first-ever global tax plan backed by the leading countries in the world. While this is the first step towards a global tax system there is still a long way to go. But, if it does get rolled out, a global minimum corporation tax rate would be set, stopping large multinational corporations such as Apple from actively avoiding paying tax. This plan has taken years to get to this point and could lead to historic global tax reform.
There have been well-publicised instances of large multinationals and wealthy individuals dodging tax and exploiting global loopholes. It is not yet clear if these global tax reform plans would end all tax avoidance. This is particularly difficult if smaller nations, such as poorer European countries, don’t sign up ultimately creating tax-havens.
Recently we’ve seen a trend in tighter penalties for tax avoidance and these plans follow this. And with estimates suggesting that global corporate tax evasion equals around $420 billion a year worldwide, nations have to work together to clamp down on loopholes that allow large multinationals to shift money around the globe to avoid paying corporation tax.
With many recruiters working internationally, tax compliance remains a key priority in this climate, and international placement of contractors brings the challenge of different laws and regulations that continually change.
The renewed interest in tax avoidance comes as political and economic interests are undermined through financial crimes, such as tax-related offences. An OECD report in 2015 highlighted the need for countries to work together to create an international tax system rather than working separately. And while the world waits with bated breath to see if global tax reform is on the cards tax evasion continues and black markets thrive.
Latvia and Estonia at the centre of financial misconduct
Historically Latvia and Estonia have been a favourite for Russian businesses looking to hide murky dealings. From 2007 and over the subsequent 9 years Danske Bank branch in Estonia was used to launder billions of Euros. This scandal made the history books as Europe’s largest money-laundering scheme and rocked the banking industry.
In 2014 the Latvian banking system was associated with a scheme in Moldova which nearly took down their banking system. This was followed by an accusation of bribery for Latvia’s Central Bank Chairman in 2019. That year also saw the uncovering of the port town of Riga as a hub for illicit goods and money laundering by the same Chairman. It was later reported by US media that police pressured witnesses into accusations against him.
The situation appears to be overwhelming the Latvian legal system with inexperienced judges hearing case after case of complicated financial litigation cases worth millions of dollars.
Vija Kalnina, a judge at Latvia’s Court of Economic Affairs said “We are looking at very complex criminal and civil cases, they require a lot of time and a lot of resources and insight.” She went on to say that for anti-money laundering cases, resources are extremely limited.
Despite not being involved in any major scandals, the head of the Financial Investigation Agency of Latvia was found to be instructing judges to “disregard evidence and witnesses” to speed up trials.
Ukraine has a similar story. Unlike Latvia it isn’t a member of the EU, though have expressed its desire to join. Ukraine, as with Latvia, suffers from corrupt officials and private-sector bribery schemes. In a survey by the American Chamber of Commerce in March 2021, the top three reasons businesses didn’t want to invest in the Ukraine were the lack of rule of law (66%), corruption (54%) and lack of any reform agenda (45%).
The same can be seen in smaller countries such as Moldova and Serbia which continue to suffer from corruption and face a long road to restoring faith in their systems and infrastructure.
Corruption in the Baltics
The global tax plan is seeking to prevent large multinationals from taking advantage of loopholes but what it fails to address is networks of corruption and money laundering. Money laundering networks are smaller, tighter and benefit a smaller number of individuals than corporations benefitting from avoiding corporation tax.
That’s not to say it’s less important. Anti-money laundering needs a task force with compliance experts and lawyers to untangle the industry, just like what has happened with tax avoidance.
Wael Saikaly, head of anti-money laundering (AMY) regulations at CreditBank SAL said “The anti-money laundering profession has become more complex and demanding. Regulations and requirements are changing dynamically, threats are always on the rise, funds are moving faster, and tracing them is growing to be more difficult.”
Global tax reform
In the long run, corrupt nations are less competitive globally and their unpredictability makes investment less likely. The new Baltic EU members are struggling with corruption and money laundering, more so than more established EU members. Though Sweden, Austria and Germany have also suffered from recent cases. “Europe and market reforms are not only about trade and benefits.” said Igor Munteanu, a former ambassador for Moldova in the USA and currently an MP “They are mainly about reforming the lingering and abusive legacies of the old system…and winning victories for the rule of law and human dignity.”
The next step is to see whether these countries allow European powers to support the traditional view of an impartial court providing justice, or whether old Soviet relationships and influences continue to control the courts.
With global authorities increasingly taking steps and putting pressure on other countries and jurisdictions to clamp down on tax fraud and avoidance, recruiters placing contractors internationally need to ensure they have the right compliance partner or risk fines, criminal charges or even jail time.
Speak to the team today if you need help with your situation.