ORGANISATION FOR ECONOMIC RESTRICTED

CO-OPERATION AND DEVELOPMENT

Paris, 7th December, 1977
CFA(77)11
Scale 2
Or. Eng/Fr.

COMMITTEE ON FISCAL AFFAIRS

REPORTS ON THE 1 MEETING OF TAX INSPECTORS

(Note by the Secretariat)

As agreed at the Plenary Session of the Meeting of Tax

Inspectors held on 21st and 22nd September, 1977, the
Moderators of Panels 1, 2 and 3 have prepared written summary
reports on the discussions held in their Panel.
At its meeting on 21st and 22nd November, 1977, Working
Party No.8 decided that the attached reports by the Moderators
should be forwarded to the Committee on Fiscal Affairs,
FOR INFORMATION, at its meeting on 18th and 19th January, 1978,
so that they may be given the appropriate publicity within each
tax administration.

38026
 _2-
CFA(77)11

PANEL No 1

(Moderator: Mr. M. Collins - United Kingdom)

The aim of this Panel was to consider. '.he problems of detecting,

proving and prevent ing tax evasion and fraud among traders and by
discussion on the basis of a number of particular case studies Le
provide sorry .in_orration to those taking part about the methods and
machinery adopted fur this purpose in our various countries and to
broaden our understanding generally in this field.

The method ado'p'iccl was to circulate beforehand fourteen case studies,

mostly of i .r:,c:;; L: e tax: fraud and evasion ( Lhougtl one or two had
interi atic•nal a3ncctsl. This Panel's ut)cration was a joint Franco-
British ter Anglo-Fiench) presentation. ieven of the case studies
were French and seven English and each of the French cases broadly
paralleled an t;ncll i::ï1 case and vice versa. They illustrated,
basically, what :;t't::`.ed co t:hose present the studies to he the main
methods adopted ir.' traders to achieve tax fraud and evasion, such as
th(. si: plc c+.net•_i11:.t11.:t of receipts or the making of claims to
ficti t iO C, s; t :•a •r.:.s ::, whether Of not aceoinanicd bv false invoices or
the C-''11c a'alrl'- nt. -i part üf a bu::i::ess by undervaluing or :_:cncealincl
purchas;Ls; and :.1..!l1t,.:n c)u:.Il• under'.a l. uing or cuncealing sales and so
on. in crdei t _'•:f)lt: tue devel(I'ment of the cases to be better
under_itoed, notes were also circulated beforehand on the legal and
administrativ Lackq;round in the two countries. The case studies
however also in fact illustrated the background.

The first session was given over to presentations by the Rapporteurs

of. the L tckt;ruuad fui1u•.it::1 by questions.: and discussions on this
general basis. Subsequent sessions were devoted to the presentation
of the case studies, each study being presented separately, with
opportunities for question and discussion to range freely in between.
Not all the case st',:dies were in fact I1reseIlted or discussed but it
w -3 s felt that to have available was a good thing. At the last
session an (J;:pOra',._. t_ wr:'; provic:c:i for a review of the Panel's
procee t.iings and f ,1' 't,f ,i"n .,tu and sL7'gLstioun which might have ù
bearing on the way in whir:h future conferences of this kind might be
organised.

Before the case s.tuc-ltes wc re examined an attempt was made to disc ver
what view partieipaws to{,k of the ut ate of tax evasion and fi .un .n
their vari!Jrs countr]t:s - was it ut-itic, increasing, or de,.l ir,in•: :
The response was 11t'e ;salily subjt 2tîV1• bee•su_, it is ext!t'l't+-
difficult, if not I:'=.i_):ni:,1e, tr' cru. a itify the ih1r:Idonce of ev. 1. .,
and fraud, but ii'. ''-:' •.ir trend •! is r h'.'1'''1:; - the answers i'td l t:, n '
a wide v_Sri t.f of 1!'+'.Ji_Vt'I, It :J,'1s: cicarly f..It t_h.1t !_:
need for '✓ V]a lan—e oit the pit of TAX Autli.'I i t i had not
 -3- CFA(77)11

A fair amount of interest was shown in the legal and administrative

background - not only in France and Britain but in the countries of
other participants -- but the fact that four out of the five sessions
were devoted to the case studies see;ned to be accepted as achieving
broadly the right balance. The discussion of these case studies was
not in fact exhausted at the end of the fifth session.

The discussion underlined, not surprisingly, considerable differences

between the organisation adopted by the various participants to deal
with these matters, with consequential differences in the availabilit,
of information and in other factors (in some countries direct and
indirect taxes are operated by the same organisation; in others by
separate bodies; in some the investigation of tax fraud is more
centralised than in others). It highlighted differences of method
(in some countries the tax authorities themselves audit directly the
accounts of taxpayers; in others the trader's omissions from his
returned profits are more often established in less direct ways
such as by raising estimated assessments or by an examination of
his domestic expenditure).

Various other differences also emerged - information sources varied

quite widely, powers to demand and obtain information varied
similarly, distinctions between evasion and avoidance were not the
same in every country and the approach to delinquent taxpayers
varied - some tax authorities placing the emphasis on getting the
lost tax back from them and others on penalising them and publicising
the penalties so as to encourage the general body of taxpayers to
comply with the law.

Nevertheless, it was clear that there are a very substantial number

of common problems in this area, particularly, for example, the need
for information and the necessity to use resources for the best
results and thus the need to achieve a satisfactory procedure for
identifying and selecting cases for detailed investigation. It
was clear too that participants had devised to some extent similar
techniques for dealing with the problems - the investigation, for
example, of the trader's domestic expenditure and style of 'ife
either in ascertaining his personal taxable capacity or in checking
that of his trading activities and the general investigation of the
profitability of particular trades as a guide to the possibility of
understater.,er.t of profits by individual traders. (There was too
sons useful discussion of the difficulties involved in using those
techniques.)

Each participant will obviously have taken away with him or her a
different store of new knowledge and understanding. The main value
of the Panel's activities probably lies in this and in the stimulus
to further thought provided by the presentations and discussions.
It is perhaps to be expected that the more general lessons about
tax fraud and evasion which emerged from the Panel's sessions are
on the obvious side. These included, for example, a recognition
of the importance of having a wide variety of sources of informa-
tion -- local, national and international. They included too a
recognition of the infinite adaptability and ingenuity of the
determined defrauder though many trip themselves up by making
obvious errors they soon learn how to avoid these and how to
minimise the effect of the techniques adopted by Tax Authorities
to defeat Lu e known methods of fraud and evasion so that it is
necessary for the Tax Authorities to become even more sophisticated
to keep pace with the opposition. It was made clear, if it was not
 CFA(77)11 -4-

already so, that all Tax Authorities have a great need for skilled
and trained staff and that having an adequate knowledge of the trade
which the taxpayer is carrying on is an essential tool in ascertaining
a trader's proper tax liability. It was also pointed out that there
is a growing tendency for the more sophisticated tax evaders to look
for tax havens to help them exploit their evasion methods or to
store the results of their evasion at low or no tax cost and that in
view of this tendency to internationalise tax evasion it was highly
desirable to improve the international cooperation of Tax Authorities.

From the Chair it seemed that those participating had found the
conference worthwhile -- not only because of the formal sessions but
also because of the opportunities provided for informal contacts with
representatives of other countries working in the same field. It
also seemed to the Moderator that the subject matter of the Panel's
discussions had -been of considerable interest to those participating
who were tax agents, auditors or inspectors actually confronting tax
evaders and defrauders and had provided a useful framework enabling
them to contribute from first hand experience to a discussion which
was of direct relevance to their daily work. The case studies had
been adequate in number, had illustrated practical problems, and had
been well selected for their purpose.

The background note had been necessary and useful. The presentations
by the French and British Rapporteurs were an essential stimulus
to the discu:'sions and the Rapporteurs are very much to be thanked
for the ;.%irk they put into both the preparation of their papers and
the actual discussion of them. There was considerable participation
in the discus!;ions by the other countries' representatives but it
seemed to thc Moderator that there could have been more of this if it
had been posible to overcome more easily the difficulties faced by
those having to speak in a language not their own. The Secretariat
are greatly to be thanked for the smooth flow of the conference
arrangements and the work of the simultaneous translators, who also
much deserve our gratitude, was not only, as ever, performed with
great skill but also a very important ingredient in furthering our
mutual unclorstanding in the discussions.

M H COLLINS

4 October 1977
 -5- CFA(77)11

PANEL N° 2

(Moderator: Mr. B. Runge -- Germany)

Introductory Remarks

The method of workinr in Panel conformed to that in Panel

1. The orranizati onal set-up of Lax administrations in the
Federal Republic of Germany and the United States of America
was kfirst presented and discussed, the better to understand
the approach adopted by the authorities in particular. cases.
Then specific cases were dealt with: only a few, but each
of them very extensive.

The results of the napers that were presented and of the

subsequent discussions fall naturally uncle a formal and a
material heading: administrative structures and conclusions
drawn from cases in point.

A. Administrative structures

Worthy of note are the folIowin.c points arising from di ,--

cussinn of t'le organizational set-up.

1. Improvements to the administrative structure

Some tax administrations have centralized their adult

services or make use of specialized staff to audit both
multinational enterprises and international transactions.
They have had rod results with arranremeriis of this kir.,'
and look on them as a considerable improvornent to their work.
ßy sending auditors abroad to obtain thei.r data, some countries
have been able Li, make their audits more effective. This was
CFA(77)11 - 6

done with the approval of the countries concerned and was

often agreed with the taxpayers as well. Good results were
also achieved by the audit services of various countries
coordinating their activities in specific cases (e.g. USA
and Canada, or the Scandinavian countries).

2. Audits carried out

The selection of firms to he audited and the frequency scope

and duration of audits are of rreat si{rni ficance Co their
outcome. The completion of an audit within a fixed period
(if, for instance, the rrznnincT; of nrescript:i.ve time is not
interrupted by audit activities, or the allocation of a pre-
determined period o`' time (manpowerctdays) to the whole audit
or specific sections thereof may have an adverse effect on
results.

3. Presentation of records

Some tax administrations requested residenC parent companies

to make records of their subsidiaries available for inspection.
No problems arose in connection with subsidiaries sending such
records to the parent company. The countries in which the sub-
sidiaries are resident did not regard this .as a breach of
their soverei_p;nty.

4. Report on the organization of individual tax administrations

Reports on the orranization or individual tax administrations

have already been submitted at the meeting as part of the con-
ference documentation. It would be welcomed if the OECD were
to compile a separate collection of documents on the work or
individual tax administrations, to be supplemented if required
by an extensive treatment and i t i nr; and tax invent ir;a i i on
servi ces, and also request trie name of other rt.mbei. countries.
An informatory brochure of this kind would provide a great
deal of advance information and thus facilitate cooperation
hetwcFn tax od•'inintrations, p.articulrlv as far :is the ex-
chanrr of inf-► rmatinn in cony ernorl.
 7 CFA(77)11

B. Conclusions drawn from cases in point

1. Detection of facts relevant to taxation

a)It was clearly shown by the cases presented and by

the discussion that auditors were often compelled to
fall back on speculation and had very little to go on
in detecting facts relevant to taxation. For the
most part, they had to depend on their experience
and powers of perception, particularly where they
were not normally allowed to question employees not
named as sources of information or other third parties.

b)The international exchange of information is of par-

ticular significance in view of the few openings there
are for the detection of facts relevant to taxation.

c)It has been shown time and again that the success of
an audit (detection of relevant facts and prevention
of double taxation) depends on the personal involvement
of the auditor and the persons representing the com-
petent authorities.

2. Content of the request for information

In the international exchange of information it has re-

peatedly turned out to be the correct approach for a
request for information to include a detailed account of
the background to the case and the auditor's reasoning, if
the tax authority to which the request is addressed is to
be of real assistance, and thus as the case may be to cover
information that is also of interest to the latter authority.
CFA(77)1I -8 -

3. Triangular arrangements

In many cases it was only the international exchange of

information that made it possible to expose triangular
arrangements involving tax havens, for it is only seldom
that information can be obtained from enterprises resident
in tax havens or from their tax authorities.

I. Relations between tax authorities

1. Request for information and mutual agreement procedure

Practical experience has sho,in that complex cases cannot

be cleared up without submitting requests for information,
and that these in turn often lead to informal or formal
mutual agreement procedures.

2. Investigation can also benefit the taxpayer

If the exchange of information is used as a means of de-

tecting facts and of determining a reasonable arm's-length
price in the case of associated enterprises, circumstances
in the taxpayer's favour should also be taken into account
(heading: set-off of advantages and disadvantages).

3.Effects of profit adjustments

The impli;aions of profit adjustments in the case of

associated companies were the subject of protracted dis-
cussion, particularly as to their effects on constructive
dividends end equity contributions. There was quite
 CFA(77)11

evidently a lack of common consent on the necessity, ad-

missibility and the limits of follow-up adjustments.

4. Simultaneous audits

Carrying out simultaneous audits was seen as a positive

measure. It enabled the respective attitudes of the ad-
ministrations involved to be brought into line in good
time. It was possible to achieve good results despite
d._fferences in the legal basis, without at the same time
imposing a double burden on the taxpayer.

5. Broadening the exchange of information

The investigation of complex cases or enterprises with e

widespread network of affiliates and subsidiaries frequent-
ly involves broadening the international exchange of in-
formation to include tax authorities that in the first
instance had appeared unaffected. In this way, the
different approaches to the enterprise can be harmonized
and the possibility of tax authorities being played off
against one another can be ruled out.

H. Carrying out in-firm audits

1. The function of base companies

If base companies are involved, it has been shown that a

thorough analysis of the functions of these companies can
provide essential information for the assessment of their
legal status, and this applies in particular when the legal
existence of these companies cannot be denied from the point
of view of tax law and the economic significance of the
transactions handled through them has tc, be assessed.
CFA(77)11 -10 -

2. Scope of the examination of records

It is advisable to extend the scope of an audit to include

general commercial records (e.g. minutes of meetings,
consignment notes) in addition to financial accounting
records.

3. Transfer prices

It is evident from the cases presented that the principles

for determining an appropriate transfer price can often be
inferred from the taxpayer's own records. In many cases
it will be possible to decide whether or not specific
data are relevant only in collaboration with foreign tax
authorities. This in turn means that agreement will have
to be reached with the foreign tax authorities to avoid
imposing a double burden on the taxpayer.
 -11- CFA(77)11

PANEL No. 3
(Moderator: Mr. J. Bublot -- Belgium)

1. The discussion in Panel. No. 3 centred around concrete

cases of fraudulent evasion presented by the Canadian Delegation
(cf. TIM-3.4) and the Swedish Delegation (TIM-3.2). The case..,
presented deal with two quite different types of fraudulent
evasion which were examined in turn:
- fraudulent evasion within a country through the issue
of fictitious invoices;
- international fraudulent evasion through the inter-
position of companies formed in haven or low-tax
countries.
A. Fraudulent evasion within a country by means of fictitious
invoices:
2. The first case presented by the Swedish Delegation
("the Iron Case" - cf. TIM 3.2) is typical of this form of
fraudulent evasion. Here we find a manufacturing firm B
which has entered in its accounts bought invoices made out by
its iron wholesaler, company A. A tax audit at the premises
of A shows that the alleged sales to B have not been recorded
in Ats accounts and that they did not really take place. The
amounts paid by B in settlement of these invoices were returned
to the owner of firm B. The same fraud was perpetrated between
A and other "purchasers", firms C, D, E and F.
3. In the opinion of ceveral Delegates, this is one of the
methods of fraud that are most widespread and most difficult
tc detect. The Panel therefore considered, first, how the
Inspector could be put on the track of such a fraud —F77-77t in
motion a thorough audit of the firm.
Often the Inspector will only be put on enquiry by :;Dine
chance circumstance, some detail which will attract his at!eniion,
or even on accident or stroke of luck! Several aspects may how-
ever be clues here:
 CFA(77)ii -12 -

(a)False invoices sometimes differ from genuine invoices:

as there are only a few persons privy to a fraud of
this type, the invoices will sometimes be made out
by hand; they will not be numbered, or will not be
numbered in the same way, or else they will not have
been produced on special invoicing machines.

It was also pointed out that false invoicing was some-

times carried on at several stages, the alleged seller
himself being passed off as a buyer from another enter-
prise. Thus, the fictitious.1 y purchased goods some-
times pass through a long and complicated circuit, and
at the base one sometimes finds a "taxi", a company set
up for a short period, which pays no tax and which will
have disappeared by the time investigations are made
(cf. 3rd case presented by the French Delegation -
TIM 1 .4+) .

(b) PF.ls e invoices are often paid in a different way from

the others; usu.-11y, they are paid immediately, either
in cash or in c.h. ques cashed at the bank or by the
owner or manager of the r'irerl which has issued the false
invoice. When investigaticns ut banks are authorised
scrutiny of the cheques sometimes r+r'incs anomal. ? ; to
light. Sometixte:; cu.'c'.=. h a ve i't-t-n rc',rTie icr'+..., wh e' r'e
the banker wss an accomplice, 1: i:7 '.:et being to r'eLurrl
to the al l e1,ed Loyer the :amount of the fictitious
invoice after it had been paid.

(c)Cross-checks made in the f"irms concerned sometime

reve:t f 'in'julLe t fraeLi.c. , c+. thi, ki.tJ: thus, it
11.3,ybe .1 OUui 1 I=i._li_ he ;,11+' 'f''i pi , l 1+ I. lias, .;()filf'tlrill'; ,
"Su] d" a liurfmbe'I' of whereas ne had
nut 1. ... 1 lier, in Hock; !:.11'ei' r' - ~.c'.'l':: .;onie times
yield t e. l+. f 111(.• lt'.':r : F l t'I,,' 1 i1:' LI the 3l l ev.ed
pt.-chaser. : ',•.. r flt:. t ic eross- ..t,eeks between supplier:
anti 'ti"Lha L rio .ks_iLL uvtke it 1, ): 1 h' 'o limit cases
lie .','" .'[ [.I r]LJ'rta, ti+ 1+1011 t l e'" + [ , t;.'ldere' here:
Leu.., iii l'er'r':;r, ilrir,i'i w:.i_ tl h'v+. t' + fVA sy:;tem
(1,;u. '_l+ ul•,: fseli"iurfi) oit lJl.uill':: e ), :1 ; L1'It, r.[,

t + Llf't'' 1I, 1+ t t < i 0 l ++,r1lt . .i 111't r_9f ;i ly:;e+t

r31,'I t rl•1 f !,? of':'.', t ion col:{ f.'t'll I rl'' t " h ih ! 1 V l'ILt'3 L [ url'1 iri:;er
y or hp: I Il.' I ++il 1_t. lii... tax
t.i 1f-.

('1) 'l'-3x ;1if[i 1 t f;11-•;; nl:_,e rind l{s

r_ 1 t. e[: t iv+: 7,y loot. t lin t, t f'y :et'f
I I,f :et'r ] f'd ,iu.t oii+
t^[ure yu;t:'s a ,t 1'f•r' tlit, tukoti p
which riv''e t l., i rriudil c t.t i,,.i ; t t1t':. ,I L 1 ' lit t i hie I boy
nrUr'd 1.0 00111 1 01 Li e i r r+t'tle t 1+ e•; :I11t1 "[ I t'uuti HT" t I e t t'
1.-1; Tr , ;IV , i[ 1 thi . 11' iwr :+ 4; Iii ~ tl. ', I ,I'[' telt'
7 I'
' t:
r ., r'~r r11j' ++ lt, i+l •.r1di ! I '+ll i, i. f 'Ir ,. I t
1 r'.;t, itf, 1.1e I.'Iii: mi I t++tl. + t; iv ' I.:i'
an-ti [:~!''/: . !iJ::t. I e ,t'' ; tI ! . ++nit't f Irl+'. : 1 k' I' 1; I HI 1'1
11'I t,r r'4'. t i r.t' ! i .'1 +,''rr ri [ .
 -13 - CFA(77)1I

4. Other aspects of tax inspection:

The discussions among the Panel revealed other interesting
aspects, which are referred to below (although of course the list
is not exhaustive):

(a) Taxation according to outward signs of wealth:

(luxurious style of life - ownership of secondary

residences, pleasure craft - purchase of immovable
property or certain types of movables, etc.).

Taxation on this basis is permitted in many countries.

France has even established a scale indicating figures
of minimum taxable income according to various elements
of style of life.

In the general view, this form of taxation is only a

minimum solution and only enables a part of taxpa_yerst
income to be caught in the net. In fact, only a part
of expenditure is usually known, and it becomes less
with the increasing possibilities of investing or
spending abroad.

The need for international co-operation is therefore

apparent in titis field also. It would be desirable
for :i ta tes to exchange information on large-scale
ponding or buying in their territory by non-residents
(purchases of immovable property, registration of
yachts, etc.).

In addition, the French Delegation reported that in

their country there was a special brigade responsible
for detecting taxpayers indulging in large-scale
luxury :pending or investment (purchase of luxurious
villas, yachts, regular patronage or casinos, etc.) .

(b} Ex t ent or legal means of investigation:

Legal means of investigation vary largely according to

Stet.£ ,;, particularly as regards possibilities of making
investigations in banks, obtaining information from
insurance companies, etc. in Sweden, certain tax
Inspectut':• 'ait ,arch the taxpayer' i business premises
at any time ani 1, v, ith leave from the Tax Court, which
is easily obtained, can seuroh private premises also.
In Canada, Inspc. e tors have power to seize the taxpayer e
books and papers in Lha: cuurrc of an audit, and can
speedily obtain t'rum the Court a warrant to carry crut
a search ttt' l .t! l y in t R (it'll' but Li [sit at the owner.*
sir Ittat'taget'T. ; !'!v ft 1't 1plc°n.'r , and at titer pt'emnisei. of
his lawv(. • c1 wf IIii 1t,ittl { ,t• - !t his lank.
 CFA{77}11 - 1'1 -

Fairly wide use of such powers at an early stage in

the audit procedure often yields spectacular results.

(c) Organisation of tax inspection:

Some countries have set up special "brigades" or

teams to carry out investigations into particularly
large-scale or complex frauds. Thus, in Canada, a
Tax Avoidance Division formed in 1968 consisting of
about 20 particularly dynamic and competent officers
responsible for undertaking in-depth investigations
of the more sophisticated evasion or avoidance schemes.
These Inspectors work in close liaison with the District
Income Tax Offices and with the Legal Services
(cf. TIM 3.). France also has "Drivades drIntervention
Financic're" composed of Tax Tnpectors and Police
"Commi wires" or Inspectors. 'T],ese "F3rit;ades ", which
act -.ai n1 y on report., from informer hilvp earch powers
and can seize taxpayers papers..

(d) Co--operation reauired from taxpayers in cases of strong;

1,1-e : ump t ion of fraululent evn; l en :

In seller'a i court tr'ie , the taxpavPr against whom strong

r'_'e Ul,,i•t 1t.,I?: t' . ['.s?_ttiult•Ilt t ti'_t.;ir_rt ]l:t'Je t,t?erl ra1.3ed,
t'r~r+~. tll y r :11 1t s upon to m:lkr u cention, i.e. to
t r'.lnl llllf r;t o!'er u ti otis Ltn i to produce
rec t i t i t•.] 1.111 .' tl: i tax rot- urn::; thatlkr to t hi
[?r'C+('t'';l;r', • ; i' t rtlt t.1rLE'.' po: :;r I,iE' to dr left the
I r';,ll:ill i , r, t rl r: rnl t t +=°,] li,ut r r 11c e'] l l y or unravel
•.t 1 ,•. I, t l'rt,c r '''tt'+ +, t't'r•r incentive t;
; r,t t t , t i., t r'l, t'rl.''u i , hi t tt:t t- 71rl i rlcorttilletc
ur i'!;:or•r't i ,} t f..,. inn ;? T r'• „ ' t :' "i . : it ' rt ,s, rrre art Cite Lax
n'.ini_ ] ( p(•I' ; r!t.t in . Arr:•' iirn), tt,l. t.,r:p-ayr who li-i::
t' .'.' 1 cit. .11n (u'r, t 4: i t I :•u t I'r only pecut 1 l 't ey
1,+-1: -.l • , ,:r_. ._t 1 e:• l•:•tivo']
(Hi r r 'r [.' 1 1 ? tl rt t ,-r~i1r r;l Lt4 ct-Ifwn
::t !I ( I 11: t.F t i (!,' j51 wl , il. t
; -!1,
.i it i n t..) ;iccou (rlt

(e) I ::u I f ., of t.'i:! 1 rtr i o` t i (t5

,hrl:.tr" t •llt'tj.''l , . ;trlrlll:tI1Y '1 I t fi t t ::i'",yr , r':; Whr7tt•

::. .: tt't' t +"']1 I+pt.''ti1le I, jr;,I 'st 1f'', t11 i):lrt 1 ,:tt I t
t J:, '] t : 'tt • . 1 tt I r rlr t ' ,
lrtt r _' sf ltlr` :[It " t.'!'t. ut 1 . 1';111'111!f n'_ + 'Ju.' '+ 1 11 ;Irr. i' tt ?1lt"llt',I
it! 11,'l( f. (' ,I t.' WI.?'"t ;ter' ti it I I Ht+'t trll ' , IL' HIP in: ]It'r'-
t,.. r ttit r . ',rc r: ( ; i r,i tr A t ,I~ } , +,'t rn`1tr r'i 1 1
1 'i d 01 I h i .' I. 11 Ns . ir r I! r' 1 rl, r'lltt,' I ir I r'r? 1 tr i ri
l( •, r• i' tr1. 11, I.' '
 -15 - CFA(77)11

B. International fraudulent evasion throuEL the interposition of

"front" companies established in haven countries:

5. Both cases presented by the Canadian Delegation

(cf. doc. TIM 3.4) and the second and third cases presented by
the Swedish Delegation (cf. TIM 3.2) concern this type of
fraudulent evasion: in each case, a "front" company is set up
in a haven country or low tax country and is interposed in the
relations between the taxpayer and his suppliers or customers,
Transfer prices are so fixed as to allow the maximum profits to
be accumulated in the company established in the haven country
and, generally, such company is a simple "front" and does riot play
any substantial part in the business tl';lnsactiuns. As is known,
such devices or contrivances have become widespread over the last
twenty or so years.

Business relations with related companies (or companies

presumed related) eti,tablish o ci in }"I f. en countries arouse the
suspicions of the inspection services; lut thisi:_: not
sufficient to demonstrate the presumed 1'r-olr.nlent evasion. iii
this connection, two problems telleraily arise, the solo i ion to
which is all the more ciifficu] t as the haven countries generally
refuse to disclose any irrtormaLion and, tn particular, refuse to
make any discluallr e on the 1 lnt_ s of t:'il:I t. is recommended in
Article 26 of the OECD Model ( 'nrivent i en:

6. First problem: how is the irltereonnertion between the

taxpayer and the corr jr nv in t :l,' i1;.t' ll c o urlt;,y to re
e ;tal_Ili:'he i?

- ln certain haven countri e.s, the re s; i a ters of the

f'ormatiotr vi' ecimp u nies ,trr pullic L:1.,1 1_ao be consulted,
at least by certain persona. Thr: ::AMC rumcti mes 1107(i:,
good for refri:;ters or compendiums in which certain
financial data euncer'nin( euuip`1rii e :' are reproduced .
Iiut ti;c r'.: t 1 i den Li t.y i tiL' inn< ul'p..it' tors, s1h re-
holders or d i r'uc rOr:,. .:t4dor,l :.sili)f'äl', in such documenta
1r;r1Ich _•;onc'1•o l 1 y mention only "111e11 of t. traw", who _:t'c'
often l 11e tu::ii,sy,"1':' e

- in several countries the tax authorities can reciu.ir'n

informalion fr um their ta peye:-Ceillunie. O11 sub:;iJiorica
set Up tt4ruati; but IsOwt 1'.' nr 1!LVL O t I i',`:t i ùn are I es:
certain ¶iII('ll it come :1 t, "r1oLv,1" t'olrli'cInier" i.e.
((,rTtNt1l lf' t ('1 l ts!' iu, t 0 -1 11 , un- :';ro111) as t 1lC' Laaxpe Yci
i,e l !li'

Tt is however tu';1:;ior to tr'':t.` hack to th i1:tr', nt company,

i .f', tr) rle tf`r'lnir,t ``t/.wt 1t <<r't11.1p the ..'.o1II .irry 14-ing rlll.li tef 11.'t1`n;',.,;
;Irldi i f t"hc l':tr "r1i , t;lr1}`",I,y l l 1~ ii ' k tl , ('1)1111111 t•li 1,0111.11
t iort (r111Vc Ilr <<II (1,r ":'1 li ll: Icir' ,, IIt111ll.;tI'It iv n )
t1r etI ' on(' 11111 •It , t I , 1• i :I , ! i:..l rl I .'•t : I i, II 11 11 1 , u11 1 t'y c' ilr ttt`
CFA{77}11 --16 -

questioned so as to find out all the ramifications of the group.

Some States are prepared to furnish this kind of information on
the basis of Article 26 of the Model Convention.

7. Secondroblem: how is the abnormal character of the

ons to be established and how is the amount of
transacti
profits diverted by the firm in the haven country to be
determined?
(a) The inspection services can generally recuire the
taxpayer to prove the bona fide character inter-
position of the foreign company in the commercial
circuit:

- interposition in the purchase of goods or merely

in the invoicing;

- the number of the foreign companyts employees;

- the powers exercised by the foreign company:
who decides the quantities, qualities and prices
of the products bought in a third country, the
delivery dates, etc.?

- the foreign company 1 s profit and loss account

sLuti•: i t., Tu Lt of expo! t: incurred by it in
comparisan with its pror'i't . T. such profit
consistent with the activities carried on and the
respnnsi bil ities ,issurned?

(b) In the cu c• ni operation::, i.e. involving

en tc rpr i .-,.. of' t wo :; tatE.., i,nnn,. i'y cl double taxation
cnnver,t io and `1 company e:;t,_:1+11:- 11ci in a haven
country, (c-operation l e11 werrr the :'aid iwo :Ttates
r•an :e! tit' !ho r('1c played
t'y r i.c :.':p iny in rh{! h vu[, :1: }.r' j ? e:: I.enll in y' th'.
rrir,' iptu, r:r_• r, ut r "n,,I'.j ni .,clritaire n
ar(iià:l'} ' ',lln t I , t - which ('u-op I., iv I : i•V''11 Li I1g or
-0:, 1•.•
• ' 1. r + .'t. t i 'r.'i1 r l' 1 r. + , 1.. +_'' c.,:; l un.

Lr: t E, i: r,r r c.r, r t titi' ::1 r, 1 01 t t Ll,tl t t }1('

{."4r1 !+i'. 1
han 1 ,. t :ri, 1 •'h _rI
cier"-~ 1 1 on I : n, t, r+ I
€ r:t 'I'},T', . C . r , t.l,+ , .Ir i"' ':1... I 1,:1Vr I I11 C'r 11rr:ir'fl
41.1.U0•1 f'. , t ~I . :. }.1 i 11 c: .~, ti 'UL t V7 n t
1 -11 iI',r f. I ' .' .r . 1

(c) Finally, it w'1.' },r,l?ltr'rl ont tlr'lt within :! country

n I r t. 1 i l l r 11: , f: 11.C.1 I, i • t t :t t .l'Il o-
1 i rn( . ` r 'rl: i I r''t . t Iii I (-I.1 r'1 r rl 1' 1r'! er r r'rl
 -17 - CFA(77)11

in view of certain features of the investigations

made by the Customs Administration: verification
of origin of products, declarations of value on
importation and exportation, the technical skills
of certain services of the Customs Administration,
co-operation between Customs Administrations of
States belonging to a Customs Community.

J. BUBLOT