The recent release of the Panama Papers by the International Consortium of Investigative Journalists has caused a great public stir. This is the first of a two-part series in which I will discuss the tax scandal unearthed by the release of these documents, describe why experts think it will be difficult to hold those involved to account, and, finally, argue that these events can also serve as the impetus for a fairer, more cooperative global approach to taxation.
To begin, it is important to provide a brief primer. The Panama Papers consist of leaked legal documents from Mossak Fonseca, a Panamanian law firm. These documents expose the efforts taken by the world's business, financial, and political elite (as well as criminal and terrorist networks) to shelter their wealth in offshore bank accounts. These individuals are essentially hiding their money in order to avoid paying taxes and, sometimes, to disguise the questionable means by which their fortunes are amassed.
The most prominent feature of these tax schemes is the creation of shell corporations. Shell corporations are essentially corporate entities that don't engage in any business operations or hold substantial assets.
Shell corporations are not always illegal, and can sometimes serve legitimate purposes. However, they are also often used to conceal wealth and avoid taxes. Because some offshore jurisdictions do not require companies to disclose the identity of their directors, assets transferred to shell companies located overseas can be very difficult to track.
The fact that the world's wealthiest people use overseas tax shelters to avoid paying taxes isn't new, or surprising. For example, court documents obtained by CBC and Ici Radio-Canada in 2015 revealed that KPMG -- a well-known accounting firm that provides audit, tax, and advisory services -- was being pursued by the Canada Revenue Agency (CRA) for setting up shell companies in the Isle of Man. These services were targeted towards wealthy individuals who were promised that they would pay zero tax on their investments.
It has yet to be determined whether the tax avoidance schemes revealed as part of the Panama Papers leak will be found to be criminal. Speaking to the Guardian, the law firm involved in handling the overseas accounts vigorously defended their activities, stating that similar services are commonly provided worldwide and that their activities comply with international tax protocols.
The thing is, audacious though it may seem, they may well get away with it... and therein lies the rub.
To understand why, it is helpful to start by understanding the legal difference between tax avoidance and tax evasion. According to the CRA, there is a "definite distinction" between tax avoidance and tax evasion. Tax avoidance consists of actions taken to minimize taxes that run contrary to the spirit, but not the letter of the law, whereas tax evasion "involves deliberately ignoring a specific part of the law."
This legal differentiation may seem clear cut; however, the wealthy entities that use elaborate schemes to avoid paying taxes can afford the best tax lawyers, and often have no problem dragging cases out over lengthy periods of time. Further complicating matters, the scenario presented by the Panama Papers implicates thousands of individuals, corporate entities, and their intermediaries, located in different countries across the globe.
Even when presented with less elaborate schemes, governments find it difficult and costly to prosecute tax evasion. To return to the Canadian example discussed above, although there was documented proof that KPMG had intended to deceive tax authorities, no penalties were dealt out to the wealthy investors who benefitted from the scheme. Instead, they were simply required to pay back the amounts owed to the government. Speaking to the CBC, a CRA spokesperson explained this course of action by stating that "lengthy litigation is costly to all parties and the outcome of complex, tax-related litigation processes may be difficult to predict."
Critics argue that this predicament creates a double-standard wherein the average person is more likely to be wrung through the court system, while wealthier individuals are emboldened to pursue elaborate tax schemes that take advantage of questionable legal loopholes.
After all, if the only likely repercussion is that you'll be forced to pay back your ill-gotten gains, why not roll the dice?
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