Tighter Control Over International Tax Evasion and Avoidance

foreign individuals are not taxed. As a result, citizens of developing countries will transfer money to US banks. Under the tax treaties, the US must, when requested, provide the parties to the treaties with information relating to bank deposits in the US of citizens of the signatory countries. However, the US can refuse to do so. The US has recently shown that it is ready to provide information to European countries. However, the US is willing to refuse to provide information to many developing countries with which it has signed tax treaties [84].

1.2.3.2. Promoting tax competition

Over the years, countries have used taxes as a tool to compete to attract investment and boost their domestic economies. One way of competing that has received considerable attention is through tax incentives. Temporary tax exemptions, reduced tax rates, investment permits and import duty exemptions for capital goods are the most common forms of tax incentives. The practice of using tax incentives in countries shows that:

- Poorly formulated tax incentives such as temporary tax exemptions and reduced tax rates are ineffective in encouraging investment and may result in loss of tax revenue to the country.

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- Temporary tax exemptions are not beneficial to encourage both domestic and foreign investment.

- Incentives focused on new capital investment in machinery and equipment can be an expensive way to attract capital and new forms of investment.

- Businesses must be assured that tax policies and tax administration are reliable and that policies do not change after tax incentives are introduced.

- Other economic development features such as infrastructure, sound legal systems and well-functioning administrative agencies are more important than tax incentives.

Tax incentives must certainly be used very carefully and sparingly to ensure their effectiveness and limit their abuse. The potential for abuse exists both on the corporate and government sides. For example, areas designated for export production

Export processing zones such as export processing zones are sometimes designed to provide significant tax advantages. The existence of such zones often creates an opportunity for tax evasion when firms fraudulently sell goods to the domestic market. Selling a small proportion of goods to the domestic market may be acceptable, but it is difficult to control when this limit is exceeded. Similarly, allowing goods to enter the zone duty-free may be exploited to divert goods into the domestic market. On the government side, granting tax concessions can be abused when government officials accept bribes. Government officials in a position to grant tax concessions may favor unqualified firms or give excessive incentives. The tax system must be designed to limit such tax evasion practices [84].

To compete, countries also tend to set low corporate tax rates. In many cases, countries have turned themselves into tax havens, allowing firms to pay lower taxes on economic activities that take place primarily in other countries. These tax havens often offer very low tax rates and seek other ways to collect income from multinationals, such as a fee. Developing countries are both the recipients and victims of tax competition. In some cases, developing countries have tried to attract foreign investment by offering large tax incentives to foreign companies or by offering unusually low corporate tax rates. Some of the early successes with these tax incentives have prompted developing countries to offer their own tax incentives, which are often larger than those offered by the developing countries with which they compete for investment. Multinational corporations often provoke or pressure developing countries into competing for investment capital. Some developing countries actively engage in what the OECD calls harmful tax competition. They adopt bank secrecy laws and regulations that encourage international tax evasion and avoidance. Many citizens of both developed and developing countries use natural resources.

tax havens to hide their income resulting in huge loss of tax revenue for governments.

One solution to counteract harmful tax competition between governments is tax cooperation. Agreements between countries to harmonize tax rates and then allow tax incentives to a certain extent will lead to less competition in economic activities. Commitments to higher tax rates will limit the possibility of some countries becoming tax havens. The European Community has also discussed harmonizing corporate income tax rates but has not yet reached an agreement even with some member states. Therefore, governments cannot achieve a higher level of cooperation without the auspices of some existing international organization such as the United Nations or some new organization created to deal with international tax issues.

Another form of tax competition that countries are increasingly interested in is reducing the costs of tax administrative procedures. This seems to be the most positive way of tax competition. Modernizing the tax system, making it transparent, simplifying administrative procedures, and reducing the time it takes for businesses to complete tax procedures and obligations to the budget is a very healthy form of competition. From there, the country's tax competition ranking will be improved, the government's reputation will be enhanced, and both domestic and foreign businesses will benefit from this form of competition. Therefore, this is a form of competition that should be encouraged. To rank tax competition among countries in the world, the International Finance Corporation (IFC) has developed an index to classify the level of convenience in paying taxes. This index is synthesized from 3 different indexes. The first is the index on the number of times of paying taxes and other obligations to the state during the year. The second is the index on the time it takes businesses to complete tax procedures and other obligations to the state. The third is the index of total tax rate. It is the percentage between total tax and other obligations that enterprises must fulfill with the state on total business income [79].

1.2.3.3. Changes in tax policy and tax administration

Free trade is the mainstream of international economic integration. Therefore, removing tariff barriers is an inevitable part of the work that countries pursuing trade liberalization must do. Of course, there will be impacts from reducing import tariffs. In addition to the direct loss of tax revenue from tariff reduction, a developing country may also lose revenue indirectly, at least in the short term. On the other hand, previously protected producers may lose market share to imports, thereby reducing profits and income tax payments to the budget.

Tariffs account for about a quarter of tax revenue in low-income countries but less than a tenth in high-income countries [84]. Economists hypothesize that taxing consumption on foreign goods is more beneficial than taxing imports, such as VAT. VAT will generate equal or even greater government revenue than import taxes. With VAT, domestic producers will be able to produce goods with higher value at world prices. Whereas, with import tariffs, domestic producers' production decisions will be greatly influenced by the variety and frequent changes in import tariff rates. In addition, the deadweight loss to consumers may be larger or smaller with a consumption tax, but the larger the country, the greater the benefits of shifting to a consumption tax on foreign goods.

Not only removing tariff barriers, when integrating into large playgrounds such as the WTO, countries must also implement the principles and basic regulations of these organizations. Therefore, tax policies and tax management policies must be supplemented and revised. From there, it has certain impacts on tax management.

1.2.3.4. Tighter control over international tax evasion and avoidance

a) Transfer price issue

Transfer price is a general international term reflecting the way of calculating prices in internal economic transactions between parties in a multinational corporation. Due to the nature of internal transactions, the price calculation of the seller and the buyer, although expressed by legal invoices, the basis for calculating prices often does not reflect the true economic value as in transactions between independent parties according to the principle of transaction.

Independent transaction or competitive market price (the price between buyers and sellers voluntarily on the basis that buyers want to buy cheap, sellers want to sell expensive). Originating from the economic dependence between members of a group, the price charged for related transactions is often to be most economically beneficial, that is, to minimize the cost to maximize profits, in which tax is an important cost factor. Therefore, multinational corporations often tend to concentrate income in places with low taxes (or no taxes) and push costs to places with high taxes, and an effective tool to legalize is to use transfer prices. In the conditions of economic openness, trade and investment liberalization, if there are no legal regulations on how to calculate prices in transactions between related parties, parties with common economic interests, transfer prices will be an effective tool for multinational corporations to evade taxes and avoid taxes legally [67].

Due to the characteristics of transfer prices that are not negotiated in competitive market conditions but are associated with an affiliated relationship (i.e. an enterprise directly or indirectly participates in the operation, control or capital contribution to another enterprise or both enterprises are under the control, operation or capital contribution of another entity) between the transferor and the transferee , there is often an exploitation of prices to calculate unreasonable income and expenses with the aim of reducing taxable income to minimize the tax obligations of the transferor (or transferee).

Because the transferor and the transferee are both in the same group, the group's total income does not change (it can be compared to income being transferred from left hand to right hand), while the transferor and the transferee are often taxable entities in different countries or have different tax obligations (for example, one party enjoys tax exemptions; the other party must pay normal taxes), so transfer pricing is considered an area that can cause great tax risks for countries with corporate income tax regimes or strict foreign exchange management regimes.

The impact of exploiting transfer pricing to evade taxes is huge, not only economically but also in terms of disregard for legal regulations and creating

unfair competition between domestic enterprises and foreign-invested enterprises. Therefore, transfer pricing is always a concern of tax authorities and multinational companies because it plays an important role in the division of income and profits when determining income tax obligations in each country. Currently, many countries in the world including Canada, Mexico, the UK, France, Spain, Germany, Australia, the US and Japan have passed new transfer pricing laws, or amended and strengthened existing transfer pricing laws. Most emerging economies such as China, Indonesia, Malaysia, Thailand, Slovenia, Brazil... since 2000 have started to issue policies and strengthen management of transfer prices to prevent the situation where up to 70-75% of foreign invested enterprises declare losses, the main cause of which is corporate income tax fraud through transfer prices (although revenue and market share are still expanding) [55].

The most common principle applied by international organizations, the business community and tax authorities to prevent the abuse of "transfer prices" and protect the tax base (revenue) is the "market price" principle or the "arm's length principle". The two leading trends in transfer prices are the OECD and the US.

b) Tax haven problem

Tax havens are places with the following characteristics: very low or no taxes; lack of transparency in the application of tax laws; lack of information exchange with other agencies and organizations; and confidentiality of personal financial information. Tax havens are usually countries with very small areas and small populations but where a large number of companies around the world are registered to operate. These companies mostly have no or very few employees and operate only as a postal address. The strong trend of globalization and international economic integration has promoted the free movement of capital and people. Tax havens have become ideal places for multinational companies to transfer prices to their subsidiaries located here and enjoy extremely low tax rates. In addition,

With the characteristic of lacking information transparency, tax havens are also places for individuals to hide illegal income for money laundering or tax evasion. Therefore, tax authorities of countries encounter many difficulties when investigating the income of their citizens depositing money in tax havens or multinational companies with subsidiaries in tax havens. Some quite famous tax havens in the world are the US State of Delaware, the Principality of Luxembourg, Switzerland, the Cayman Islands, Bermuda, Hong Kong...

1.3. OECD tax administration and lessons learned for Vietnam

1.3.1. OECD Tax Administration

OECD is the abbreviation of the Organization for Economic Cooperation and Development, established in 1961 on the basis of the Organization for European Economic Cooperation (OEEC) with 20 founding members including countries with developed economies in the world such as the US, Canada and Western European countries. Currently, the number of OECD members is 30 countries. The initial goal of OECD is to build strong economies in member countries, promote and improve the efficiency of market economies, expand free trade and contribute to economic development in industrialized countries. In recent years, OECD has expanded its scope of activities, sharing research results and development experiences with developing countries and economies in transition to market economies. Through studying OECD's tax management experience, we can draw many valuable lessons for Vietnam.

1.3.1.1. On the organization, functions and tasks of the tax authority

First, about the organizational structure of the tax authority :

OECD countries often choose one of four models of tax administration organization as follows:

- Solely under the Ministry of Finance: The tax management function is the responsibility of a single agency within the structure of the Ministry of Finance.

- Under many branches within the Ministry of Finance: Tax management function is the responsibility of many agencies within the Ministry of Finance.

- Unified semi-autonomous mechanism: Tax management functions are performed by a unified semi-autonomous agency, whose leaders can report to the Prime Minister.

- Unified semi-autonomous mechanism with supervisory board: Tax administration functions are performed by a unified semi-autonomous body, the head of which reports to the head of the Government and the supervisory board consists of external staff.

Among the 30 OECD countries, 13 countries apply a unified semi-autonomous mechanism, 4 countries apply a unified semi-autonomous mechanism with a supervisory board, 7 countries have a single subordinate organizational model within the Ministry of Finance, and 6 countries have a multi-branch subordinate organizational model within the Ministry of Finance [82]. The organizational model of tax authorities in OECD countries is illustrated in Appendix 1.

The semi-autonomous unified mechanism with a supervisory board is a modern model with a high degree of autonomy and self-responsibility. The formation of a specialized agency for tax administration covering all types of taxes (sometimes also customs revenues), separate from the internal structure of the Ministry of Finance, combined with a supervisory board reflects a larger development of public administration and is a reasonable trend. As an autonomous organization, it can manage its affairs in the same way as a business organization, free from political interference in its daily operations, and can recruit, maintain or fire staff to ensure the efficiency of the operating apparatus. Some typical countries applying this mechanism can be mentioned as:

- Canada: The Canada Revenue Agency Oversight Board, established in 1998, is a fairly independent government agency that administers tax and customs revenues. The board consists of 15 members appointed by the Governor General and 11 members nominated by the provinces and territories. The board is responsible for the organization and management of the Canada Revenue Agency. The head of the tax agency is a member of the board. The board is not involved in all activities of the Canada Revenue Agency. In particular, the board does not have the power to manage and issue laws. The board does not have access to confidential customer information.

- United States: The US Internal Revenue Service (IRS) has a nine-member oversight board established by Congress under the IRS Reform and Restructuring Act of 1998.

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