Tax Inspectors Shrug Off Borders to Track Multinational Evasion

(Bloomberg) Step aside, Doctors Without Borders. A new class of professionals is ignoring national frontiers to come to the aid of economically struggling nations.

A team called Tax Inspectors Without Borders will begin helping developing countries deal with the flood of income to low-tax jurisdictions once it’s established next week by the United Nations and the Organization for Economic Cooperation and Development.

The idea: to boost local tax agencies’ efforts to ensure that multinational corporations pay what they owe to governments in regions such as Africa, which alone loses more than $50 billion a year to illicit financial flows, according to a UN report.

The UN and OECD, which represents rich nations, will draw up a list of several dozen tax inspectors from advanced countries who could be summoned to help local agencies understand what anomalies to look for and what documents they need. Of special concern are transfer-pricing cases involving assets moved among a corporation’s units in multiple countries.

It’s the sort of advice that netted authorities in Kenya more than $23 million in a single case, thanks to veteran tax inspector Lee Corrick.

Corrick, who works for the OECD, flew to the East African country in 2012 to give a workshop on advanced tax auditing. It wasn’t long before Kenyan tax officials told him about a major problem they were encountering.

They described a complicated arrangement involving a tea-auction license to a Kenyan unit of a multinational, letters of credit from a related U.K. unit and supposedly unrelated buyers who purchased tea from both entities.

Sealing Agreement
After Corrick advised them on what to look for, and held two more workshops, the tax authorities met with the company and sealed an agreement for the tens of millions of dollars in extra tax payments—among the largest adjustments ever by Kenya.

“It’s about the transfer of knowledge and skills,” says Corrick, who joined the 34-nation OECD after a career as a tax inspector in the U.K. and South Africa. “The first objective is to help them to make sure they obtain the appropriate tax from their audits and to be sure that they apply the rules in the appropriate way, to apply them consistently.”

That case, and similar gains in a pilot program in Colombia, prompted the UN Development Program and the OECD to scale up the plan, which they will present on July 13 at a financing conference in Addis Ababa, Ethiopia.

Tax Inspectors Without Borders would take on projects or audits either by flying in to hold workshops, as Corrick did, or embedding themselves full time in a tax agency for several months, as with another pilot program involving Italian inspectors in Albania, said Pascal Saint-Amans, director of the OECD’s Center for Tax Policy and Administration.

The group’s name is an echo of Doctors Without Borders, the medical charity that provides services in poor or disaster- struck countries.

Corporate Inversions
Corporate efforts to avoid paying taxes in countries where they generate sales have become a hot political issue over the past year, particularly in the U.S. Lawmakers and agencies have been seeking to limit what they see as loopholes, partly by pushing for greater Internal Revenue Service scrutiny of tax avoidance in offshore locations.

The U.S. Treasury last year issued new rules to discourage so-called inversions—where U.S. companies avoid taxes by shifting their legal addresses abroad, usually through an acquisition of a smaller foreign firm.

In developing countries, the biggest share of money is lost through commercial illicit financial flows, including tax evasion, trade and services mispricing, and transfer-pricing abuses, according to the report this year by the UN Economic Commission for Africa. Revenue drained by criminal activities and corruption come lower on the list, the report says.

Some Doubters
The plan has its skeptics.

“Of course, it’s useful to have as much help as possible for tax collectors in developing countries,” said Jack Blum, a former U.S. Senate investigator and expert on money laundering and offshore havens. “But how do you teach anyone to do what the IRS has a hell of a hard time doing?”

In Kenya at least, Corrick’s workshops have had an impact.

Once he helped the tax agency determine what was going on with the multinational tea buyer in 2013, the authorities met with the company and reached the agreement for the additional payment.

Corrick says he doesn’t know the name of the company since it was presented to him anonymously to comply with Kenyan taxpayer-confidentiality rules.

Kenya has started imposing extra taxes on other companies too. Revenue collected from transfer-pricing adjustments more than doubled to $107 million in the year ended June 2014 from $52 million two years earlier, according to the OECD Observer, citing Kenya’s tax authority.

“There is a lot of enthusiasm from developing countries” for this initiative, said John Christensen, the U.K.-based director of the nonprofit Tax Justice Network.

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