Making agreements with tax havens serves as a preventive measure against tax evasion and increases the transparency of the tax system. Another important tool in the fight against tax evasion is international agreements on the avoidance of double taxation. These agreements enable cooperation between the tax authorities of individual countries, ensuring better coordination in tax collection, reducing potential tax evasion, and facilitating the effective exchange of relevant information.
Making agreements with tax havens serves as a preventive measure against tax evasion and increases the transparency of the tax system. Another important tool in the fight against tax evasion are international treaties on the avoidance of double taxation. These treaties enable cooperation between tax authorities of individual countries, ensuring better coordination in tax collection, limiting potential tax evasion, and effective exchange of relevant information.
The European Parliament and the Council of the EU issued Directive 2015/849, which focuses on preventing the misuse of the financial system for money laundering and terrorist financing. This directive emphasizes ensuring greater transparency of financial transactions and legal entities with the aim of combating criminal activity within financial systems. Based on this directive, the Czech Republic adopted the relevant national legislation, implementing it through the AML Act, which sets measures against the legalization of proceeds from criminal activities and terrorist financing.
Beneficial owners cannot be hidden
The AML Act imposes obligations mainly related to verifying the origin of assets, determining the purpose of transactions, and identifying the beneficial owner of legal entities. These steps are essential to create effective mechanisms that prevent the misuse of the financial system for illegal activities such as tax evasion, money laundering, and financing terrorist organizations.
One of the key elements of the AML Act is the obligation to identify the beneficial owner, meaning to find out who actually controls the given legal entity, thus limiting the possibilities of hiding behind complex company structures or accounts in third countries. Furthermore, financial institutions are required to monitor suspicious transactions, verify the origin of funds, and report any suspicions of illegal activity to the relevant authorities.
The goal of these measures is not only to increase transparency and accountability in the financial system but also to actively contribute to the international fight against money laundering, tax evasion, and terrorist financing.
Tax laws of the Czech Republic also “fight” tax havens at a purely domestic level, introducing numerous restrictions that prevent tax evasion. The Income Tax Act defines taxpayers, which can include tax non-residents — persons without a registered office in the Czech Republic. A taxpayer can also be an entity designated by international treaties, including companies based in tax havens. Non-resident taxpayers have tax obligations on income derived from sources within the Czech Republic, including income from a permanent establishment, but not income sourced abroad. To avoid ambiguity about income that tax non-residents are required to tax within the Czech Republic, the legislator specifically defines these sources in Section 22 of the Income Tax Act.
The Income Tax Act also regulates special tax rates, including withholding tax mechanisms that allow tax to be collected directly at the source before the income reaches the taxpayer.
The necessity to tax certain types of income at the source lies in the fact that the recipient may not be obliged to prove their identity or may be an entity located abroad, where tax obligations to the Czech Republic cannot be enforced. The purpose of this provision is to ensure taxation and prevent tax evasion by taxing the income at the source before the payment is received by the taxpayer. These types of income are also specifically defined in the law, and analogous application to other cases is not permitted by tax law.
Prevention of tax base erosion is further ensured by Section 23(7) of the Income Tax Act. This provision addresses abuse of relationships between parties to a contract when they are not unrelated persons. Due to the dispositive nature of the Civil Code and contractual freedom, prices agreed upon can be intentionally financially disadvantageous to one party in order to create a tax advantage for the other. However, the law sanctions this by increasing the tax base.
Risk of reputational loss
Another reason for companies exiting tax havens may be the threat of reputational risk. Companies based in tax havens often lack public ownership transparency, with unclear property relations, which can mean worse collectability of receivables for creditors and, consequently, difficulty in obtaining external capital, including bank financing for further investment plans.
Other methods to combat tax avoidance within tax havens include the establishment of international organizations. The Financial Action Task Force (FATF) is an international intergovernmental organization recognized as the global standard-setter in AML/CFT, aiming to combat money laundering. The organization publishes “Black and Grey” lists identifying jurisdictions with weak measures against money laundering and terrorist financing in two public FATF documents released three times a year.
To prevent abuse of public funds and strengthen protection against misuse of tax systems, in 2020 the European Commission issued a recommendation to member states not to provide financial support to companies connected to tax havens. The withholding of financial support should also apply to companies convicted of serious financial crimes. However, it is up to the individual member states to decide whether to provide financial support or not.
Lastly, a reason for companies exiting tax havens may be the conditions of public procurement tenders. The contracting authority does not only define the subject of the public contract but also the requirements for suppliers. It must be remembered, however, that discrimination is not allowed, meaning the contracting authority cannot restrict participation in the tender to suppliers domiciled in EU member states, the European Economic Area, Switzerland, or other states that have an international agreement with the Czech Republic or the EU guaranteeing access to the public contract for suppliers from those states.
This article is from the website Ekonom.cz
