Tax evasion in investment activities is changing – the Finnish Tax Administration steps up control

News, 9/18/2019

International investment activities involve several tax evasion and income hiding phenomena. According to a recent report, more effective legislation is also needed in order to combat them. The Finnish Tax Administration's new control project investigates arrangements related to nominee-registered shares.

It has become considerably more difficult to hide incomes and assets from the authorities in the last few years. As a result, actors who earlier utilised banking secrecy, for example, have developed new ways of avoiding taxes.

– It has been possible to utilise the insurance wrappers offered by foreign life insurance companies not only in investments, but also in arrangements to avoid taxes. The Finnish Tax Administration is currently investigating whether some of the cases involve tax evasion,  says Antti Tokola, Senior Inspector from the Grey Economy Information Unit.

According to the report, the number of artificial emigration cases observed in tax control has also increased in the last few years. Some of the cases have involved the sale of investment assets immediately after emigration, and the migration destination countries have often been states in which capital gains are not taxed.

Changes based on broader exchange of information

Arrangements concerning the utilisation of tax haven companies and banking secrecy remained almost completely hidden until the 2010s. The situation changed after the financial crisis when tax havens were urged to exchange information, and the banking secrecy was removed.

Later, the Finnish Tax Administration for the first time gained tools for controlling monetary transactions across the Finnish border and the use of foreign credit cards in Finland. The automatic exchange of account information, which was launched between more than a hundred countries in 2017, has given tax control access to an incredibly vast amount of information on income from international investment activities.

Still room for development in legislation and agreement networks

Some countries that are important in view of investment activities remain outside of the automatic account information exchange scheme and the international recovery agreement network. Furthermore, there are some material defects in the Finnish national legislation. For example, different ways have been available to avoid the tax withheld at source levied from dividends paid for nominee-registered shares.

– Arrangements for avoiding tax withheld at source on the basis of transactions concluded around the dividend distribution date could be intervened in through legislative means and by changing tax treaties, says Tokola.

The Finnish Tax Administration has launched a control project in order to eliminate arrangements for avoiding tax withheld at source

Arrangements for avoiding tax withheld at source as well as cum/ex and cum/cum transactions are a broad international phenomenon, which has caused major tax losses in many European countries. The phenomenon refers to arrangements and transactions taking place around the time of paying dividends and aimed at gaining tax advantages.

– We launched a control project at the beginning of this year, the purpose of which is to outline the scope of the phenomenon in Finland and also to implement comprehensive control measures to eliminate the phenomenon, says Director Marko Myllyniemi from the Corporate Taxation Unit.

The project has started with collecting reference data materials. Owing to the nature of the phenomenon, however, its investigation is challenging and will continue to call for cooperation with the tax administrations of other countries in the future.

– As we see it, the control project will continue for a long time. It is possible that we will publish the first findings towards the end of the year, says Myllyniemi.

Read more about the report:
Verovilppi kansainvälisessä sijoitustoiminnassa – Ilmiöt Suomen näkökulmasta (in Finnish)