Why does the TAXPARENT mark relies on positive motivation?
Rules alone will not stop bad behaviour. In line with latest results of behavioural science, regulations should not only prescribe or disincentivise, but also help achieve positive results. Thus, group of companies who would be voluntarily transparent could benefit from the possibility to use the taxparent mark.
Why does the TAXPARENT mark targets corporate anonymity?
Corporate anonymity is an anomaly allowing to perform immoral or criminal acts with impunity. It is a means for concealing tax evasion, money laundering and corruption.
What does taxparent mark actually mean?
Taxparent mark means that a company has made public its corporate ownership structure up to the ultimate beneficial owners and that its overall effective corporate tax rate is at least 10 %.
As of when will the taxparent mark be granted and by whom?
At this moment the taxparency idea and the concept of the taxparent mark is being introduced into the public discussion. Should we receive a positive feedback, Transparency International Czech Republic and Lexperanto association would like to put into operation the certification mechanism which would allow concrete firms to receive the taxparent mark this or the next year.
How will the taxparent mark ensure that the corporation does not channel out profits to tax havens?
Thanks to the fact that a corporation which would like to get the taxparent mark will have to disclose and evidence it corporate ownership structure up to ultimate beneficial owners, wherever they would be in the world, even in offshore tax haven. It would have also disclose and evidence how much corporate tax it pays in which country and that the overall overage exceeds 10 %. The taxparent mark as such, if it is successful, will be capable to create a de facto standard of good behaviour so that it would become socially inadmissible to buy or trade with non-taxparent firms. This can create social pressure on non-taxparent firms.
However, to oblige companies not to channel out funds to tax havens could only be achieved if the taxparent mark was a part of a binding law, and in addition if the firms whose overall effective corporate tax rate were below 10 %, would have to communicate their real effective corporate tax rate to consumers and the public.
What if I am only interested how much corporate tax does the firm pay in my country?
How much a company pays in corporate tax in your country will also be possible thanks to the taxparent mark. As the taxparent mark will be interactive, i.e. it will be on the website of the company and it will be possible to click on it, after this click the information about how much in which country the firm pays will appear.
Why does the taxparent mark concentrate only on corporate tax and not on the overall tax burden?
Because avoiding other taxes than the corporate tax is much more documents. Moreover, the amount of other taxes paid cannot be viewed from publicly disclosed documents – unlike the amount of corporate tax the amount of which is contained in the obligatory part of the profit and loss account which, in turn, is a part of publicly disclosed financial accounts. Put differently the overall tax burden is difficult to compare on a cross-country basis because in each country there are different taxes.
Why is the minimum for granting the taxparent mark 10 % (of the global effective corporate tax rate)?
Because the 10 % tax, so called tithe (decennium in Latin) was historically in the European cultural area, considered as moral. Moreover, today 10% is the lowest statutory corporate tax rate in the countries of the European Union (namely Bulgaria) so that granting the taxparent mark as of the threshold of 10 % cannot be discriminatory for any company in the EU.
Will the consumer not be only confused by another mark on the product when there is already a plenty of marks on each product?
Taxparent mark is not destined for being primarily placed on products, but on websites of companies because it is interactive.
Why should I consider the taxparent mark to be credible? How can I be sure that the information it communicates are accurate?
The verification of the accuracy of information about corporate ownership structures and the taxes paid will be performed by several means: First, any information in the corporate ownership structure will have to be substantiated by a documents published in a public register, for example by an excerpt or financial accounts document. Alternatively, if for example, the owners of the company will not be shown on the excerpt from the public register, the ownership will have to evidenced by an excerpt from a securities account issued by a bank or a confirmation of a bank that it took paper securities in an irredeemable deposit.
Second, if the information about the corporate ownership structure or the corporate tax paid will be evidenced by other means that by information from a public register, for example, by an excerpt from securities account issued by a bank outside an EU or OECD country, the company will have to add an authorisation to contact the bank to confirm the accuracy of the submitted information. In case of lack of cooperation or inaccuracy of submitted information or documents, the company will lose the taxparent mark.
This is an important step forward against the current practice when all information about corporate ownership structures are based on the basis of either voluntarily or obligatorily communicated information in financial accounts and which are not substantiated by any evidenced nor checked.
How will the independence and impartiality of granting of the taxparent mark be ensured?
The impartiality of granting the taxparent mark is guaranteed by the reputation of Transparency International Czech Republic which is an independent, non-profit organisation within the world network of Transparency International organisations.
How will the functioning of the taxparent mark financed? Will it be dependent on a grant or a subsidy?
We assume that the development of the taxparent web application necessary for granting the taxparent mark would be financed through a grant. However, we want to keep the running and maintenance of the system ensuring the functioning of the taxparent mark mechanism independent of any third party financing in order to uphold the independence and credibility of the taxparent mark.
Will the taxparent mark be able to change consumer behaviour?
There are definitely successful consumer marks, such as FAIR TRADE, which managed to change behaviour of both consumers and firms. A mark is successful with consumers if the consumer is immediately able to grasp its meaning when he/she sees it. Studies show that marks like CE or CCC do not have much success since from the mark itself it is not easily understandable what does it certify and stands for.
Will the taxparent mark be able to change behaviour of firms?
A mark can change behaviour of firms, if it is obtained by a critical mass of firms and there is an avalanche effect. This effect can be generated if obtaining of the taxparent mark is easy, user-friendly and there is a public conscience about the mark so the consumers ask for it. On the basis of existing experience and studies it is possible to say that the mark can be credible if it is granted by the state or a non-profit organisation (marks granted by profit-making companies are not credible).
Why should firms be interested in getting the taxparent mark? Why should firms be interested in disclosing their ownership structures and information about how much and where they pay in corporate tax and which profit they make?
Because companies will have to disclose its ultimate beneficial owners to the public under the new EU anti-money laundering directives anyways. The obligation to indicate the turnover, profit and tax on profit paid already existed under the EU accounting directive.
Taxparent mark will allow firms to sell to customers the fact that they are transparent as far as their corporate ownership structure is concerned and that they publish financial accounts in public registers as they should. For firms it will be economically more advantageous to have the taxparent mark and make profits from transparency than to be obliged to be transparent without gaining anything.
For small firms, which are obligatorily transparent already today it will be very easy to obtain the taxparent mark. Entering information which they already disclose in corporate registers into the taxparent web application will take them at most several minutes. Thanks to this they will obtain a tangible competitive advantage in the form of a taxparent mark. As soon as more small firms will have the taxparent mark also larger companies will start to apply for it in order not to loose clients. Then a competition between the firms will arise as to who will have a higher number on the taxparent mark or have more stars as this will help them to attract customers.
Moreover, the state could reward transparent firms by an easier access to public contracts or lesser frequency of tax controls. If the company has a transparent ownership or tax structure, it is less likely that it is engaged in tax avoidance or corruption.
How could firms obtain the taxparent mark?
In four steps:
STEP 1: A company puts its shareholders, effective corporate tax rate and the amount of corporate tax paid in the EU into a web application.
STEP 2: Web application generates the corporate ownership structure and global effective corporate tax rate.
STEP 3: Company is granted a taxparent mark which it can put on its website and/or its shops.
STEP 4: Trustmark displays companies‘global effective corporate tax rate and amount of stars according to how much the company paid in the EU in corporate tax.
RESULT: Upon clicking on the e-trustmark on the company’s website, consumers can see the corporate structure and the amount of tax paid in each country.
As of when will the firms be able to obtain the taxparent mark?
At this moment the TAXPARENCY idea and the concept of taxparent mark is being introduced to the public debate. In the case of positive feedback Transparency International Czech Republic would like to make functional the certification mechanism enabling granting of the taxparent mark in the near future.
Will it not be sufficient for firms to put the information on their ultimate beneficial owners only to corporate registers? This is foreseen by the newly adopted fourth directive against money-laundering?
Firms can enter ultimate beneficial owners to corporate registers, but this will not allow them – unlike the taxparent mark – to get new customers and sell them the fact that they are transparent. In other words, they will not be able to make profit on transparency as in the case of the taxparent mark.
How is the overall (global) effective corporate tax rate indicated on the taxparent mark calculated?
The global effective corporate tax rate is a ratio of (i) the sum of money effectively paid in corporate tax in preceding fiscal year by all entities within the corporate structure up to the ultimate beneficial owners for the previous fiscal year*, and (ii) the sum of gross operating profit posted in the same year by all entities within the corporate structure up to the ultimate beneficial owners (based on accounting profits).
Global effective corporate tax ratio (GECTR) = Σ amounts paid in corporate tax by all entities within the group for the preceding fiscal year / Σ amounts of profits of all companies within the group for the preceding fiscal year (based on accounting profits).
How do you deal with the problem that the taxable base set for counting the corporate tax is in each country, especially outside the EU, determined on the basis of different criteria?
Instead of the taxable base, for the purposes of the taxparent mark, the overall effective corporate tax rate is calculated from the accounting profits which is for the firms from EU countries defined uniformly in the EU accounting directive (for firms outside the EU the equivalent amount defined in IFRS or US accounting standards (GAAP) would be taken.
On which basis was the formula for calculation of the overall global effective corporate tax?
The GECTR formula defined as the ratio of corporate tax paid on gross operating profit emanates from the so-called “micro backward looking methodology”. This methodology based on real life data and using financial statements to derive effective corporate taxation. The indicator of global effective corporate tax rate is advanced by renowned academics dealing with questions of tax avoidance, for example E.D. Kleinbard from the U.S. or professor Gabriel Zucman from the United Kingdom.
Why should state be interested in supporting of the taxparent mark?
Because thanks to the taxparent mark it could increase its income from corporate tax collected from firms linked to tax havens and be more successful in fighting tax avoidance. Moreover, it could lower corruption in public contracts and disposal with public assets, and thus make savings of public expenses. Apart from that the state could better enforce targeted international sanctions.
Could the grantors of public contracts in public procurement require that the winners of public tenders have the taxparent mark?
Yes, public contractors could require that the public tender winners (legal persons) have the taxparent mark, but it would be sufficient to require that they are registered in the taxparent web application (without obtaining the taxparent mark).
Could the state, regions or municipalities require that firms which receive grants of public subsidies or with which they conclude public contracts outside the public procurement regime have the taxparent mark?
State or municipalities could require that the legal persons to whom they grant public money have the taxparent mark, but it would be sufficient to require that they are registered in the taxparent web application (without obtaining the taxparent mark).
How could the taxparent mark help in the control of public expenditure?
Public institutions do not currently monitor who is the ultimate beneficial owner of firms which receive public funds or dispose with public property. Hence, the taxpayer’s money can be paid out to firms whose ultimate beneficial owners can use these monies for financing of criminal or terrorist activities or individuals from states who are subject to international sanctions.
How could taxparent mark enhance enforcement of international economic or antiterrorist sanctions?
Sanctions against persons suspect of terrorist activities or persons responsible for the crisis in Ukraine prohibit, amongst others, disbursement of public funds to companies owned by those sanctioned individuals. Currently, however, if a company applies for a public contract or subsidy, the official responsible for granting the contract or subsidy has no possibility to find out whether such company is not owned by such black-listed person.
Which other positive effects could the TAXPARENCY bring?
Increased efficiency in fighting money-laundering by larger accessibility of information about corporate structures.
The unmatched advantage of money laundering through disbursement of dividends via corporate structures is that it provides legitimate reason for a payment of money of originally illegal source. Payment of money to a company under a fictitious contract and disbursement of the same amount to the “anonymous” shareholder as a dividend represents the safest means of money-laundering: in the company the “dirty” money gets mixed with the “clean” money making it usually impossible to trace and legally prove that the money disbursed by the company to the “anonymous” shareholders are still “dirty” money. TAXPARENT solution would significantly improve the accessibility of information about corporate structures, in particular of those extending beyond the EU, for all types of public authorities, such as tax authorities, authorities charged with control of money laundering, public prosecution authorities etc.
Increased fiscal revenues.
Fiscal revenues of Member States from the corporate tax could be increased. Since corporate anonymity provides a means for corporate tax evasion, if it was lifted, public revenue from corporate taxes could be increased. The voluntary transparency coupled with tax-related behavioural incentives could lead to more direct increases in fiscal revenues of Member States from corporate taxes.
Increased competition on the market for public funds.
Due to better information on the competitive structures on the market for public funds and resulting more intensive competition on this market, important savings public funds could be expected.
Equal treatment of SMEs and large multinational companies.
If, today the information about the direct shareholders of limited liability companies is generally available to the public, in particular about limited liability companies with direct final shareholders – physical persons which are mostly micro-enterprises or SMEs, the same information about ultimate shareholders is usually not available for joint-stock companies or group of companies, especially when they have a corporate cross-border structure or when their corporate structure ends in non-transparent tax-havens. This apparent and unreasonable discrimination between the ultimate owners of small companies and large companies would be eliminated by the TAXPARENT mark scheme.
Why is the solution at the European level a priority?
The European solution has a much higher potential to change the behaviour of companies channelling out funds to tax havens than a solution limited to the Czech Republic only. The EU market is the biggest in the world. Those firms are more likely to change practices of tax avoidance if pressed together by European institutions and all 28 EU Member States together.
Are there any concepts similar to TAXPARENCY elsewhere in the EU or in the world?
Yes, the Belgian government came in May 2015 with a very similar concept of taxation of income of natural persons which those persons received from corporations of groups of corporations ending in offshore countries outside the EU. The U.S. President Obama when presenting the proposal of the U.S. budget on 1 February 2015 announced that all future profits of U.S. corporations reported in offshore countries outside the E.U. will be taxed by 19 %.
Will the taxparent mark be granted for each country in the EU separately? Can a firm obtain more than one national version of the taxparent mark?
Yes, there will be 28 different versions of the taxparent mark for each country. One company can obtain more national versions of the taxparent mark.
Will the taxparent mark start to function at the same moment in all countries of the European Union?
We would like to start the pilot project of the taxparent mark in the Czech Republic. In the case of positive feedback we would like to try to extend the taxparent mark also to other European countries by help of other organisations of Transparency International in the world.
Should the taxparent mark not be granted directly some of the European institutions?
Latest studies of the European Union indicate that it is not appropriate for trustmarks to be granted directly by public institutions. The experience with this type of projects so far shows that spontaneously created trustmarks have more success both with consumers and business. The role of European and state institutions should consist in the support of those trustmarks which help to implement certain public interests.
Why should taxparent mark be incorporated into a law?
If the taxparent mark was incorporated into a binding law, it would have much more power to prevent tax avoidance and corruption compared to the situation when it would be purely voluntary. A binding law could prescribe that companies whose global effective corporate tax rate is less than 10 % should obligatorily disclose their real tax rate. If the obligation to disclose the corporate and tax rate was a part of a binding law, it could be enforced by public authorities.
Can the taxparent mark function also without being a part of a law?
Taxparent mark can function also on a purely voluntary basis, but will not be so effective; in particular it will not be able to generate increased income to public budgets.
Would the granting of taxparent mark not lead to discrimination? What if the firm will not be able to find out its ultimate beneficial owners?
Granting of the taxparent mark cannot lead to discrimination. The disclosure of corporate ownership structure is a legitimate requirement from the public interest point of view as it prevents corruption, fraud or conflict of interest. This was expressly confirmed by the grand chamber of the European Court of Justice in Luxembourg in 2011 its decision in the Mikaniki case. OECD documents as well as documents of other international institutions go in the same direction.
The taxparent mark works in the same way as the rules against money-laundering. If a company does not show its corporate ownership structure to the bank, the bank is prohibited from creating a bank account for such company. If the company does not show its corporate ownership structure to the public, it will not be able to obtain the taxparent mark. A Czech firm owned from Marshall Islands will thus be in the same situation as a Dutch firm owned from Marshall Islands or a Cypriot firm owned from this territory.
How will the protection of personal data be ensured?
Natural persons who are ultimate beneficial owners will have a possibility not to make their personal data public, if those data were not obligatorily made public in a different public register without losing the right to have the taxparent mark. Otherwise the same regime as under the fourth anti-money laundering directive will be applied in respect of which the European Data Protector confirmed that it is in line with the data protection rules.
