Directors of multi-jurisdictional structures must diligently manage the risk of facilitating tax evasion.

In Jersey, as in many other jurisdictions, directors of multi-jurisdictional structures must diligently manage the risk of facilitating tax evasion. One reason is facilitation could be criminal.

The Criminal Finances Act 2017 (CFA) was given Royal Assent on 22 April 2017. The CFA is intended to address some perceived weaknesses in existing legal frameworks and strengthen the powers of law enforcement in four key areas:

1. Unexplained wealth orders,
2. Interim freezing orders,
3. The Suspicious Activity Reports (SARs) regime and
4. Failure to prevent the facilitation of tax evasion.

Although some of these changes only affect regulated firms, failure to prevent the facilitation of tax evasion by ‘associated persons’ applies to any business entity, whether regulated or not.    The Act sets out two new offences:

• Failure to prevent facilitation of a UK tax evasion offence.
• Failure to prevent the facilitation of a foreign tax evasion offence.​

These two new offences criminalise three types of behaviour:

1. A UK-based body failing to prevent those who act on its behalf from criminally facilitating UK tax evasion
2. A non-UK based body failing to prevent those who act on its behalf from criminally facilitating UK tax evasion
3. A UK-based body failing to prevent those who act on its behalf from criminally facilitating tax evasion overseas where such evasion is a criminal offence under local law.

Considering the above and thinking about what a director must do, they should ask themselves the difference between tax avoidance and tax evasion.

A simple answer is:-

1. Tax avoidance
• Tax planning entered with an honest belief that it is a legal method of reducing tax liability is not tax evasion, provided there has been no dishonest misrepresentation or non-disclosure to a tax authority [e.g. HMRC].
2. Tax evasion
• Is the unlawful non-payment of taxes that are legally due, such as a deliberate, intentional failure to declare income on investments held offshore or payments of falsified expenses to an offshore structure to create deductible expenditure dishonestly.

With the simple “compare and contrast” above, the following provides some fundamental best practice considerations for a director in their duties to demonstrate they are managing legal risks along with their fiduciary duty to act in the best interests of the company and its stakeholders.

A director 1] should have the knowledge, 2] should ask questions, and 3] should challenge the following factors.

1. Legal and Regulatory Awareness:
• Directors should thoroughly understand local and international tax laws, regulations, and reporting requirements.
• Regularly monitor changes in tax legislation to ensure compliance.
2. Due Diligence:
• Conduct due diligence on business partners, intermediaries, and service providers.
• Ensure they adhere to anti-money laundering (AML) and anti-tax evasion regulations.
3. Risk Assessment:
• Identify and assess tax-related risks associated with the company’s operations.
• Consider the complexity of cross-border transactions and the jurisdictional differences.
4. Internal Controls and Policies:
• Implement robust internal controls to prevent tax evasion facilitation.
• Develop clear policies and procedures for tax compliance.
• Monitor adherence to these policies.
5. Training and Education:
• Directors should stay informed about tax avoidance and evasion risks.
• Regularly train employees and associated persons on their responsibilities.
6. Third-Party Relationships:
• Be cautious when dealing with intermediaries, agents, and vendors.
• Ensure they do not engage in tax evasion facilitation.
7. Documentation:
• Maintain accurate records of transactions, including transfer pricing documentation.
• Document decisions related to tax planning and risk management.
8. Whistleblower Mechanisms:
• Establish channels for employees and associates to report any suspicious activity.
• Encourage a culture of compliance and ethical behaviour.
9. External Advice:
• Seek advice from legal, tax, and compliance professionals.
• Consider engaging external experts for specific tax matters.
10. Board Oversight:
• The board of directors should actively oversee tax risk management.
• Regularly review tax-related policies and controls.

Remember, along with legal risks, directors have a fiduciary duty to act in the company's and its stakeholders' best interests. Managing tax facilitation risks requires vigilance, transparency, and a commitment to ethical business practices.

Sources

• https://www.simmons-simmons.com/en/publications/ck0d8arkcuag60b85a5lh07fj/191017-tax-evasion-facilitation-the-new-front-in-financial-crime-compliance-risk
• https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/672231/Tackling-tax-evasion-corporate-offences.pdf
• https://www.nortonrosefulbright.com/en/knowledge/publications/5529eea5/multi-jurisdictional-comparative-guide-on-legal-professional-privilege-and-the-implied-undertaking
• https://www.accaglobal.com/gb/en/member/sectors/internal-audit/our-publications/tax-evasion-minimising-risks.html