Leveraging ownership information to improve taxation
Background
BO has emerged as a concept to describe the party that ultimately benefits from an asset or transaction. The term first emerged in common law countries’ bilateral tax treaties in the 1940s and was incorporated into the Organisation for Economic Co-operation and Development (OECD) Model Double Taxation Convention on Income and Capital in 1977. [13] In recent decades, the term has become central to and popularised by AML policy.
There are commonalities and interdependence between AML and tax crimes, and similar techniques are employed for both. [14] These include the use of legal vehicles for obfuscation of both funds and assets, their source, and the identity of the persons who ultimately benefit from them. Tax crimes in many places are a predicate crime for money laundering. [15] It is therefore not surprising that there has been convergence between tax compliance and AML frameworks, and that BO has become a central concept and fundamental countermeasure in both. [16] The standard-setting body for AML, the Financial Action Task Force (FATF), is hosted by the OECD, the organisation that has developed leading international frameworks for tax transparency and compliance.
There are variations in how BO is defined for both tax and AML policy depending on the context in which it is used. For tax treaty purposes, the concept of BO can refer to the party who has the right to control and enjoy the income, without being legally or contractually required to pass it on to another party, such as parent companies or the persons behind nominees, agents, and trustees. The concept is used to enforce double taxation agreements (DTAs) to eliminate treaty benefits for those who receive income on behalf of another party, and is captured in the OECD model (2019), the UN model (2018), and various regional models, such as the African Tax Administration Forum (ATAF) Model Tax Agreement. In these models, BO is defined in great detail concerning payments such as dividends, interest, and royalties – and, sometimes, fees for technical services. It is used to prevent both deliberate and accidental claiming of undue benefits of tax treaties where these benefits ultimately accrue to a party that is not a tax resident in either jurisdiction in the agreement. [17]
The use of DTAs in aggressive tax planning is also called treaty shopping or tax treaty abuse, which can be used by multinational companies as part of base erosion and profit shifting (BEPS). BEPS seeks to shift profits to lower tax jurisdictions, benefitting the multinationals and low-tax jurisdictions at the expense of the jurisdictions where profits were actually made. BEPS can have a considerable negative economic impact. For example, lower-income economies dependent on revenues from the mining sector can struggle to collect royalties because of aggressive BEPS planning. [18] Various efforts, including the OECD’s BEPS Project and global minimum corporation tax have sought to counter BEPS. [19] The concept of BO is relevant to different aspects of the BEPS Project framework, such as transfer mispricing, further detailed below.
BO is also a commonly used concept in national legislation relating to tax and assets, and has different definitions and a range of uses, including determining whether a company is part of a larger tax group, or which party is liable for taxes relating to an asset. [20]
In AML, while conceptually similar, BO has come to refer exclusively to natural persons and legal vehicles. The FATF defined beneficial owners in 2012 as referring to “the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those [natural] persons who exercise ultimate effective control over a legal person or arrangement”. [21] This has become a leading definition, and is often transposed into domestic legislation as individuals holding over a certain threshold of ownership or voting rights through shares, exercising significant influence or control, or deriving significant economic benefits. This definition was also adopted by the OECD’s Global Forum for Tax Transparency in 2013 and is a leading definition for central registers of BO for legal vehicles.
Relevance of beneficial ownership of legal vehicles to taxation
As defined for the purposes of central registers, BO of legal vehicles is inherently relevant for taxation of both individuals and businesses. Company shares themselves are assets that represent unrealised stocks of potentially taxable wealth. They also result in taxable income, either periodically through the payment of dividends (dividend tax), or upon sale (capital gains tax). BO definitions can also include economic benefit through other means, which may also be taxable (income tax).
Individuals or legal entities may also use legal vehicles to hold taxable assets. These assets include bank accounts, which may receive and hold income from various sources – including employment remuneration (income tax) or business revenue (business tax), or real estate. Income, the transfer of assets (capital gains tax), or the assets themselves (wealth tax) may all be subject to taxation.
Legal arrangements which are used to hold and manage assets, such as trusts, are of particular significance, as they are often subject to different taxation. They constitute a specific set of relationships in BO networks – the networks of relationships between individuals, entities, and assets. Trusts feature in succession planning and inheritance, which is also often taxed (inheritance tax).
Because legal vehicles have the ability to hold and channel income and assets, they can be used to obfuscate the ownership of assets as well as flows and sources of funds. [22] They may also be involved in other aspects of the tax gap, including defrauding the tax system, smuggling, and misinvoicing in trade. [23] Therefore, information about how legal vehicles are owned and controlled is inherently relevant to ensuring tax compliance and collection.
Central registers contain information on the ownership and control interests individuals have in legal vehicles, and therefore help understand the relationships between individuals and legal vehicles and, potentially, their underlying assets. However, it is not the only source of this information, and depending on how the registers are implemented, it may not be comprehensive. For instance, registers may not contain sufficient information to understand BO networks.
Moreover, other company information, such as the names of shareholders and directors, can be equally if not more relevant for certain tax enforcement use cases, and it is commonly held by company registers. This type of information partly constitutes and overlaps with BO information and is in some cases collected as part of BO disclosures, for example, where a shareholder or director is also a reportable beneficial owner, or where information on intermediaries is collected as part of BO declarations. Tax authorities may need to rely on multiple information sources for a complete picture of the ownership and control relationships in a BO network. Therefore, both the use cases and policy considerations discussed below will consider BO information of legal vehicles from central registers along with other relevant information on relationships between individuals, legal vehicles, and assets. [24]
Footnotes
[13] Philip Baker, “The Meaning of ‘Beneficial Ownership’ as Applied to Dividends under the OECD Tax Model Convention”, 88, in Guglielmo Maisto (ed.), Taxation of Intercompany Dividends Under Tax Treaties and EU Law, EC and International Tax Law Series (International Bureau of Fiscal Documentation, 2012), 1050.
[14] For a more detailed exploration, please see: Mathias and Wardzynski, “Leveraging Anti-money Laundering Measures”.
[15] Mathias and Wardzynski, “Leveraging Anti-money Laundering Measures”.
[16] Mathias and Wardzynski, “Leveraging Anti-money Laundering Measures”.
[17] Richard J. Vann, “Beneficial Ownership: What Does History (and Maybe Policy) Tell Us”, Sydney Law School Research Paper 66 no. 12 (2012): 5–6, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2144038.
[18] See, for example, the case of Mongolia: OECD, Tax and Development Case Study: Tackling multinational tax avoidance in Mongolia (OECD, 2022), https://www.oecd.org/content/dam/oecd/en/topics/policy-issues/tax-and-development/tackling-multinational-tax-avoidance-in-mongolia.pdf.
[19] See: “Base erosion and profit shifting (BEPS)”, OECD, n.d., https://www.oecd.org/en/topics/base-erosion-and-profit-shifting-beps.html; and “Global Minimum Tax”, OECD, n.d., https://www.oecd.org/en/topics/sub-issues/global-minimum-tax.html.
[20] Freshfields Bruckhaus Deringer, UK tax analysis: refresher on beneficial ownership (Freshfields Bruckhaus Deringer, 2024), https://www.freshfields.com/4a26a3/contentassets/a01aea16332e48628b40f02547a2544f/uk-tax-analysis---refresher-on-beneficial-ownership.pdf.
[21] FATF, International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation – The FATF Recommendations (FATF, updated 2021), archived 17 November 2021, at the Wayback Machine, 117, https://web.archive.org/web/20211117201823/http://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF%20Recommendations%202012.pdf.
[22] See, for example: Alan Rappeport, “I.R.S. Deploys Artificial Intelligence to Catch Tax Evasion”, The New York Times, 8 September 2023, https://www.nytimes.com/2023/09/08/us/politics/irs-deploys-artificial-intelligence-to-target-rich-partnerships.html.
[23] UK Government, HM Revenue & Customs, “Chapter L: Tax gap by customer group and behaviour” in Official Statistics – Tax gaps: Methodological annex, updated 20 June 2024, https://www.gov.uk/government/statistics/measuring-tax-gaps/methodological-annex.
[24] The use cases section will specify whether information relates to relationships between legal vehicles or between individuals and legal vehicles. The final section will discuss how this information can be best collected.