9 Recommendations of the
9.1 National initiatives
9.1.1 Development policy The Commission recommends that:
a) The Norwegian development assistance au
thorities should increase their commitment to strengthening initiatives which aim to improve tax systems in developing countries and offi
cial registries. Norway has substantial exper
tise in such matters. The commitment in this field should be broad-based and deal with con
ditions related to tax administration, utilisation of various tax bases and the formulation of con
tracts between multinational companies and developing countries on resource exploitation issues. Norway should contribute to and strengthen the African Tax Administrative Fo
rum (ATAF), which was established in 2009 at the initiative of a number of African tax admin
istrators in cooperation with the OECD. The ATAF aims to be a prime mover in the work of strengthening tax systems in its member coun
tries.
b) The Norwegian development assistance au
thorities should continue to give weight to the work of strengthening democratic processes in developing countries. Strong democratic insti
tutions are an important factor in the fight for sustainable economic development.
c) Norwegian development assistance should continue to support organisations and institu
tions working for greater transparency, democ
ratisation and accountable government. This should be pursued both through economic support and by demands from Norway in its di
alogue with governments that civil society should have a place and that the press should be free to do its work. A stronger commitment should also be made to improving the quality of the economic and financial press in selected developing countries, particularly in Africa.
d) The Norwegian development assistance au
thorities should strengthen the anti-corruption network financed by Norway.
e) The Norwegian government must ensure, across ministry structures, that industrial poli
cy and the exercise of Norwegian state owner
ship do not undermine development policy goals. This is particularly important in respect of large Norwegian multinational companies with high levels of state ownership and for an investment institution such as Norfund, be
cause their behaviour can contribute to setting good examples for developing countries.
A number of considerations underlie these recom
mendations, which coincide in important areas with the government’s proposals in Report no. 13 (2008-2009) to the Storting: Climate, conflict and capital. The existence of tax havens makes it sim
pler for power elites in developing countries to conceal the proceeds of corruption and other eco
nomic crime, and weakens tax revenues to the detriment of public investment and collective ben
efits. Chapters 4 and 5 have also shown that strengthening the tax system is one of the princi
pal challenges faced by developing countries.
Both research and individual cases show that the political and economic elite in countries with weak institutional and democratic control mecha
nisms can easily enrich itself at the expense of the popular majority with little fear of being discov
ered and brought to justice. These experiences show that the power elite in countries with high levels of corruption consciously seek to weaken control mechanisms, in part by avoiding or under
mining legal provisions, cutting back or inade
quately financing public institutions, and working against those seeking to combat corruption.
Strong institutional and democratic control mechanisms are crucial for combating economic crime. The fight against the use of tax havens to conceal the theft of resources from developing countries must also be pursued by developing countries through a purposeful commitment to strengthening and building up such institutions as the tax authorities, the judiciary and anti-corrup
tion agencies. At the same time, it is important that developed states combat bribery committed by companies domiciled in their own jurisdictions but which have operations in developing coun
tries.
Norwegian development assistance has con
tributed for many years to strengthening the insti
tutional capacity of and anti-corruption efforts in the countries with which Norway collaborates.
However, the results have been mixed. In a number of cases, the authorities in the relevant countries have been unwilling to adopt the neces
sary measures. This does not mean that Norway should give up, but rather indicates that, in the Commission’s view, the work should be rein
forced. At the same time, countries receiving gov
ernment-to-government aid must be required to increase their commitment to combating econom
ic crime.
9.1.2 National legislation, advisors and facilitators
The Commission recommends that the govern
ment consider the opportunities for taking the fol
lowing actions.
a) All Norwegian companies and individuals who facilitate or establish companies and accounts in tax havens should report this to a separate register linked, for instance, to the Norwegian Register of Business Enterprise in Brøn
nøysund. The Commission recommends that such a register should be open to public inspec
tion. The duty to register would also apply to companies which act as intermediaries for fa
cilitators located outside Norway. The Com
mission would specify in connection with this proposal that a list must be compiled of coun
tries to which the duty of registration would ap
ply. In formulating the regulations, it will be im
portant to ensure that both sides – in other words, both the owner and the facilitator – have an independent responsibility for ensur
ing that the correct details are recorded in the register. The registration must contain the name of the person or company with their per
sonal identity/organisation number. This re
porting and registration duty should extend from 2004.
b) The recommendations in section (a) call for changes to the law. The Commission accord
ingly recommends the establishment of a do
mestic law commission to study the details of the registration requirement recommended in section (a). This commission should also con
sider the following:
– The fundamental problem with companies registered in tax havens is the opportuni
ties for misuse offered by the legislation, and the damage this misuse causes to other states. As a result of their registration, these companies are subject to the jurisdic
tion of the tax haven in crucial areas such as accounting and tax even though the com
panies do not generally pursue any real commercial activity there. The conse
quence is that companies/owners avoid legislation in the countries where their real activities take place, and where their busi
ness is pursued and the owners reside. At the same time, public and private interests in these states are denied access to infor
mation in the country in which the com
pany is registered. The law commission
should consider measures directed against companies with no activities in tax havens in order to prevent owners from using pure registration exercises to circumvent impor
tant interests and legislation where the services are provided or production is car
ried out.
– Enterprises established in tax havens are often holding or sub-holding companies with limited or no local activity. Among other considerations, experience shows that holding companies are often misused to conduct transactions through chains of tax treaties, both because the requirements for activity are limited and because the activities are subject to strict secrecy rules which make it impossible to know what is actually happening. The law commission should consider whether special reporting obligations should be imposed for such holding companies in those states where the services are actually provided and pro
duction is carried out.
– The concept of domiciliary or home state are key classification criteria for determin
ing where enterprises should be taxed under both domestic law and tax treaties.
The law commission should investigate possibilities for formulating simpler and more easily enforceable criteria than those which apply today.
– Experience shows that transactions are also conducted in group structures for pur
poses of misuse (in practice between related companies onshore and offshore).
Most multinational companies have estab
lished a large number of subsidiaries in tax havens. In practice, each state affected by the group’s operations currently has no opportunity to secure an overall view of intragroup transactions, in part because of tax haven secrecy rules – in the broadest sense. The law commission should study how greater transparency can be secured in order to reveal the substance in the transactions carried out.
– Artificial and sham transactions, both circu
itous and circular, are often used to conceal the connection between their beginning and end, and thereby to circumvent impor
tant third-party interests. The law commis
sion should consider the imposition of information duties which ensure that affected third-parties can obtain an over
view of the whole transaction chain, in order to prevent legitimate public and pri
vate interests from being thwarted by the lack of opportunities for accessing informa
tion.
– Advisors are often instrumental in organis
ing the use and misuse of tax havens. The law commission should consider whether special duties or sanctions should be imposed on advisors who facilitate harmful structures.
– The introduction of special compensation rules and/or sanctions should be consid
ered, including rules on the burden of proof related to the misuse of tax havens.
The Commission has shown earlier in this report that an overview of the amount of capital hidden in tax havens and of the identities of companies that make use of such jurisdictions is difficult to obtain. The recommendations above will help to highlight the activities of Norwegian companies and facilitators related to tax havens. This could encourage other countries, including developing countries, to follow Norway’s example and adopt similar regulations.
9.1.3 Norwegian accounting legislation The Ministry of Finance introduced new regula
tions in December 2007 on the documentation of transfer pricing. As an extension of these rules, the Commission recommends that the govern
ment consider whether it would be possible to re
quire that Norwegian multinational companies specify in their annual accounts:
– the countries in which they have legal equity interests in companies and other entities – the size of this equity interest
– the number of employees in the company – the gross income and taxable profit of each
company in each country
– how much tax is paid by each company in each country as a percentage of the taxable profit The Commission would point out that multination
al companies, in their reporting and on their web-sites, often claim to have ethical guidelines and broad corporate social responsibility. In line with such goals, the Commission believes that it would be appropriate for multinational companies to doc
ument publicly, to a greater extent than they do to
day, where they have operations and what they contribute to the community in the form of tax
payments. The recommended reporting would have a double function in that variations between expressed goals and realities would attract nega
tive attention. It would also make incorrect pric
ing of intragroup transactions a less profitable ac
tivity for a company. In addition, such reporting standards could influence other countries to adopt similar measures.
9.1.4 Transfer pricing
The Commission has established in various parts of its report and in Appendix 3 that incorrect pric
ing of intragroup transactions with the intention of transferring profits to low-tax countries is a major problem for both rich and poor countries. Accord
ingly, the Commission makes the following rec
ommendations:
a) The government takes the initiative on and supports work in Norway aimed at improving the rules of domestic Norwegian law so that the arm’s-length standard is supplemented with a broader set of instruments for determin
ing when internal prices are being manipulat
ed. In this context, the US rules on determin
ing internal price manipulation should be con
sidered.
b) The government should work to ensure that the OECD, the UN and the World Trade Or
ganisation (WTO) consider the desirability of a broader set of indicators to determine manipu
lation of transfer pricing than those currently in use.
The Commission takes the view that the transfer pricing issue provides guidelines for the shaping of corporate taxation, leads to extensive competi
tive distortions between national and multination
al companies, and can cause a substantial loss of tax revenues. All these considerations are very important in developing countries, both for gov
ernment tax receipts and for the ability to develop national commercial activity.
To document how big a problem transfer pric
ing might be for developing countries, the Com
mission has commissioned a research team at the Norwegian School of Economics and Business Administration/Institute for Research in Econom
ics and Business Administration to study the be
haviour of multinational companies in Norway.
See Appendix 3. The hypothesis is that if the prob
lem is substantial for a country with such good tax controls as Norway, it will be considerably greater in developing countries. The research team dem
onstrates on the basis of Norwegian enterprise data, that multinational companies transfer profits to low-tax jurisdictions. Estimates suggest the tax loss could be on the order of 30 percent of the po
tential revenue from foreign multinational enter
prises. The study also finds that multinational companies in Norway have a profit margin one and a half to four percentage points lower than comparable national enterprises.
As mentioned above, new regulations on the documentation of intragroup transactions and transfer pricing were introduced by Norway in 2007. These mean that the OECD’s guidelines on transfer pricing by multinational enterprises have been given a more formalised status as a source of law in the Norwegian legal system. The arm’s
length principle is the basis for transfer pricing in the OECD’s guidelines. In the Commission’s view, the opportunities to utilise a broader set of meth
ods than those enshrined in the OECD’s model tax agreement and Norwegian domestic law need to be studied. The Commission finds that the US tax authorities have made considerable progress in utilising various sets of regulations to deter
mine incorrect pricing of transactions. Among other things, the US has applied the “comparable profits method”, whereby profits are compared between companies in the same industry. If a sub
sidiary of a multinational company reports profits which are significantly lower over time than the average for the industry, this could provide evi
dence of transfer pricing. Under specified condi
tions, the company will have its taxable profits ad
justed to a normal level. The Commission takes the view that it could be useful to consider the adoption of this and other methods for determin
ing whether intragroup transactions are incorrect
ly priced.
The Commission also takes the view that the need to reform the legal regime must be carefully considered, including changes to company law, accounting law and legislation related to securi
ties and key rules of civil law. Large Norwegian multinational companies, some with a considera
ble proportion of state ownership, have substan
tial operations in developing countries. Norwe
gian legislation in this area is accordingly impor
tant for developing countries.
9.1.5 National centre of expertise
The Commission has found that the public sector knows too little about research related to internal prices and tax evasion. Such knowledge is also as
sociated with a general understanding of tax sys
tems and has great social value. The Commission accordingly recommends the following:
a) The establishment of a national centre of ex
pertise to draw on the disciplines of econom
ics, law and social sciences. Such a facility could secure leading-edge expertise for Nor
way on international tax questions, transfer pricing, tax havens and capital flight, and will be able to support the Ministry of Finance, the Ministry of Foreign Affairs and Norad on such issues.
b) A centre of expertise of this kind should have strong links to the tax authorities, the National Authority for Investigation and Prosecution of Economic and Environmental Crime in Nor
way, and the Ministries of Finance, Justice and Foreign Affairs in order to exploit the experi
ence gained by these institutions on various tax issues and to contribute to a mutual build-up of expertise through their networking function.
c) The centre should collaborate with research
ers and research institutions in developing countries.
d) The centre should possess or forge links with institutional expertise on developing countries, and have general empirical knowledge.
e) The centre should contribute to the education of people from developing countries.
f) A facility of this kind should be closely affiliat
ed with or form part of a productive research milieu in order to ensure that existing exper
tise is utilised by the specialist institutions and to lay the basis for further expertise develop
ment and innovative research.
A general problem for all nations, but particularly for developing countries, is that expertise related to tax evasion techniques and transfer pricing pri
marily exists in the private sector, where the will
ingness to pay for such knowledge is great. The public sector, including higher education institu
tions, have weak incentives to develop such exper
tise, and public-sector pay levels – particularly in developing countries – are very low. That helps to draw specialist expertise to the private sector in attractive areas such as taxation and law. A Nor
wegian centre of expertise could contribute to al
leviating this problem by helping to educate peo
ple from developing countries in these areas. The Commission would emphasise that the desire and need for a long-term approach means that funding for a centre of this kind must be secured through an annual basic appropriation independent of the
programmes pursued by the Research Council of Norway.