Tax havens tilting at windmills

The fight against those who avoid taxation through transferring money to tax havens constitutes a global problem, which to some extent resembles constructing anti-theft deadlocks. There are businesses and people who achieve a master level in developing security and become experts in bypassing security measures. A perfect system does not exist, but if it is highly accurate and advanced, it can eliminate a whole mass of tax fraudsters By Sergiusz Prokurat “Tax havens are at the heart of financial, budgetary, and democratic crises.” These words begin the book “Wealth of Nations” by Gabriel Zuckman, which introduces a thorough analysis of tax havens. Another acknowledged economist, Thomas Picketty, who also considers the problem of tax havens as a serious one, says: “Why is this so? Quite simply because modern democracies are based on a fundamental social contract: everybody has to pay taxes on a fair and transparent basis so as to finance access to a number of public goods and services. Of course, there is ample room for disagreement about what ‘fair’ and ‘transparent’ taxation means.” In practice, however, despite lofty goals of the state, high taxation and an overly restrictive fiscal system has lead to an expanding grey economy among the poor, and an exodus of the rich to tax havens. [caption id="attachment_98631" align="alignleft" width="300"] Image: shutterstock[/caption] If there is a choice, everyone will always want to pay less, not more, won’t they? However, the problem of avoiding taxation, both by individuals and large corporations, is a fact. And it constitutes an extremely serious threat. There is no state resistant to this type of phenomenon. Tax havens have never had it better. As Gabriel Zucman states: “On a global scale, 8 percent of the financial wealth of households is held in tax havens. For example, in the spring of 2015, foreign wealth held in Switzerland reached $2.3 trillion.” These exorbitant amounts were transferred quietly out of view and away from interest. And suddenly a financial tsunami for tax havens was released. The scandal of the Panama Papers – the leakage of documents from Mossack Fonseca & Co. – will lead to aftershocks for a long time. Since the editorial team of the German daily paper Süddeutsche Zeitung was contacted by a mysterious whistleblower, it has taken a year to analyze the 2.4 terabytes of data containing approximately 11.5 million files: electronic data, correspondence, document scans and identity documents belonging to the company’s customers. The whole thing would be unmanageable for one editorial team, so the journalists passed the received data over to the Washington-based organization, ICIJ. Finally, close to 400 journalists from 76 countries were involved in the processing of the documents. Among the documents that leaked out of the Panamanian law firm, some directly or indirectly indicate that tax havens have been used by a dozen current and former heads of state, and over 100 politicians and government officials. The data covers the period from 1977 until December 2015 and shames, among others; the President of Ukraine, Petro Poroshenko; the family of Xi Jinping, the head of China; people from Vladimir Putin’s political camp; footballer Lionel Messi; actor Jackie Chan; Silvio Berlusconi; Mexican drug traffickers and several Polish millionaires. One day after the disclosure of the Panama Papers scandal, irate Icelanders gathered on the streets of Reykjavik. The demonstrations numbered 22,000 people demanding the resignation of Prime Minister Sigmundur David Gunnlaugsson, whose name also featured in the documents. Mossack Fonseca is one of the five largest companies in the world offering legal services to business establishments in exotic countries, with discretion guaranteed. The firm employs over 500 people in more than 40 offices all over the world, including two in Switzerland and eight in China. In 2013 it issued invoices for amounts exceeding $42 million. It is the third largest law firm in the world, in terms of size. Its two larger counterparts still operate in the shadows, away from media publicity. There are also a number of smaller law firms dealing with the same subject. In 1994, Mossack Fonseca helped a small Pacific country – Niue, which has just 1,200 inhabitants – become a tax haven. The Panamanian firm chose Niue and wrote laws that suited its own needs, because it wanted a location in the Asian time zone without any competition. Mossack Fonseca has been given a 20-year exclusivity for the registration of companies on Niue. Niue’s advantage was that it offered registration of companies both in Chinese and Russian, which attracted customers. Up to 2001, the government of Niue received $1.6 million per year, but then obstacles began to appear and a search for new locations began. Ever since taxes have been in operation, the practice of tax circumvention has also been widespread. We must be aware that the closure of one entity and the development of regulations blocking one particular path, will lead to the creation of another entity and another way to optimize tax benefits. This is a natural process. For example, Panama has a zero tax rate for income obtained outside that country. And the lack of agreement on the avoidance of double taxation with Poland makes businesses registered in Panama virtually invisible for fiscal authorities. Establishing a company there, and the operative costs, starts from $1,000 per year. A company in Panama can be bought over the internet. There are also legal agencies offering the same services as Mossack Fonseca in Warsaw. However, they do not present as refined an approach to the subject as the leaders for accountancy services in tax havens. Governments around the world are trying to fight the avoidance of tax payment. For example, the US [caption id="attachment_98630" align="alignright" width="300"] Image: shutterstock[/caption] authorities are aware that this phenomenon ruins the budget and hits citizens. They are also convinced that they cannot afford to tolerate such abuse. Secondly, studies of this phenomenon in the US have been conducted for years, their trust law and holding law has a history of more than 120 years. This is why the law is very restrictive and precisely approaches the issue of tax evasion. It is associated with absolute penalties of imprisonments and huge fines. The US is the undisputed leader in combating the phenomenon of companies fleeing to tax havens. Despite this, kings of tax dodging – the Googles, Apples, and Amazons of this world – produce and sell the most, but often pay little in taxes. In the EU the coordination of action is more complex. In most EU countries the General Clause is valid. It is an instrument intended to combat the avoidance of taxation. The solution offers tax authorities the possibility to contest certain types of contracts or transactions – of a civil-law character – that, according to these bodies, are focused exclusively on tax dodging. Furthermore, a draft of a directive on a Common Consolidated Corporate Tax Base (CCCTB) was developed, which was to facilitate the creation of appropriate solutions for the taxation of international corporations, and discourage corporations from avoiding and syphoning taxes. Unfortunately, the idea has failed. Although the adoption of the project has already been made, eight member countries, with Poland among them, have not agreed to introduce these regulations. Poland contests the idea of the CCCTB directive, because it fears that areas of certain countries will be better utilized by international holdings. The EU cannot reach a consensus on tax rates either. Moreover, some countries knowingly introduce some solutions that encourage taxable persons from other countries to move their income tax to their territory. For example, Austria and Luxembourg and even the Czech Republic or Slovakia are called “smart tax havens” within the European Union. From the pool of European countries we can also add Switzerland. The message is simple – run your business in another country, but come to us to settle your taxes. You will have better conditions and higher profits and our tax control will be hospitable. It is a “quiet” agreement, based on the promise that if you come to us and pay taxes, we as a country, will not scrutinize you. The European Union has noted this damaging practice and has forced Luxembourg and Austria to make adjustments. The status of a tax haven is also slowly diminishing in Cyprus, which has been forced to change its operation model due to the rescue program imposed by Brussels. The euro zone has agreed to save this tiny country from bankruptcy, but at a price of greater transparency. [negative]$1.6 million is how much the small pacific nation of Niue (1,200 inhabitants) received per year from registration of foreign companies[/negative] Nevertheless, for some, the battle against tax havens has been viewed as lost from the start. From London to Delaware, from Hong Kong to Zurich, offshore banking centers are essential cogs in the financial machine of capitalism, used by the rich and powerful throughout the world. We can’t do anything about them. Some countries will always impose less tax and fewer rules than their neighbors. Money will always find a safe haven: strike here, it will go over there. Tax avoidance takes place on a global scale, and the only effective way to help it are measures taken at international level. A lot has been done. At a summit held in April 2009, the leaders of the G20 countries declared the “end of bank secrecy.” Since then, offshore tax evasion has been high on the political agenda. As a result of international arrangements, after 2018 there will be four tax havens in the world: Panama, Bahrain, Vanuatu and Nauru. Their total population is only 0.06 percent of the world population and their gross domestic product constitutes 0.12 percent of global GDP. From a territorial perspective these states constitute only a fraction of the Earth. All other tax jurisdictions in the world have agreed to exchange information automatically, e.g. if a Polish citizen receives money in a Peruvian bank, Peru, even unasked, will forward this information to the Polish authorities. More than half of the world’s tax jurisdictions, including the whole of the European Union (except Austria), will introduce this system by 2017 and the remaining countries by 2018. This global agreement, under the auspices of the OECD, does not solve the problem of tax avoidance completely, mainly because it does not comprise companies, nor does it comprise complex legal entities in which the beneficiary of the funds is difficult to identify. But this is what other initiatives are for, as on a European level, the OECD, or the largest economies in the world that are part of the G7 or G20. This year, the UK will be the first to introduce a ban on registering companies with bearer shares, which allows the concealment of the identity of current and former holders of shares. Moreover, in Poland, from January 1, 2015, Poles who control companies abroad must notify the Polish tax authorities about this fact. This change has been recommended to the member states by the OECD; and it applies not only to companies operating in tax havens, but also in countries which apply more favorable tax rates than in Poland. [caption id="attachment_98629" align="alignleft" width="300"] Image: shutterstock[/caption] According to Zucman, an important step should be the creation of a worldwide register of financial wealth, tracking who owns what in stocks and bonds. This international financial register would act as a central depository: it would be coordinated by governments and international organizations, allowing national tax administrations to fight tax evasion and to levy taxes on capital-income flows and wealth stocks. Central depositories already exist, but they are not truly global, rather national, and importantly they are private, not public. Among others are the Depository Trust Company (DTC) in the US, and Euroclear and Clearstream in Europe. The problem is that these private institutions do not exchange information with governments and tax administrations on a systematic basis. Zucman’s proposal is clear. Governments should take control of these central depositories and gradually unify them into a global financial register. This, however, will increase the role of the state and limit freedom of investment among individual entities and businesses. Until the formation of central repositories, everything is in the hands of local public authorities. Each state should create an individual tax system, so that economic entities are aware that, on the one hand, it does not pay to avoid taxation, and on the other hand a favorable system has been created, so it is more beneficial for a business owner to pay taxes and develop a business in their country of origin.