In part one of this series, I provided a brief primer on the Panama Papers and described why the individuals and organizations involved might not be held accountable. This article takes a closer look at the prevalence of tax evasion, and argues that leaks like the Panama Papers illustrate the need for enhanced global tax cooperation.
Cracking down on international tax schemes is no easy task. Nicholas Shaxson, journalist and author of Treasure Islands: Tax Havens and the Men who Stole the World, has argued that tax authorities are frequently "undermined by armies of offshore enablers looking for loopholes: accounting firms, offshore company formation agents and trust companies and banks."
Shaxson proposes that, in order for any headway to be made in tackling the "sprawling and many-layered system of tax havens and offshore secrecy," the international community needs to introduce tighter regulations, tough penalties for tax cheats, and more consistent enforcement. To achieve these objectives, the international community needs to develop better inter-jurisdictional information sharing practices.
There are several jurisdictions willing to look the other way while those with enough resources or technical knowledge find ways to avoid paying taxes.
The effort to promote global tax cooperation and information sharing is a longstanding international project. Current initiatives originated in the 1980s as a response to the deregulation of financial markets and the globalization of financial services.
In 1988, the OECD developed the Convention on Mutual Administrative Assistance in Tax Matters (the Convention), which they describe as a "comprehensive multilateral instrument available for all forms of tax co-operation to tackle tax evasion and avoidance." The Convention currently has 80 signatories. By September 2018, each of them will be required to obtain information about foreign account holders and exchange that information with the jurisdictions in which foreign account holders reside.
While this is a good start, there are still many barriers to cooperation. The most obvious of these is that many countries have not signed on to the Convention. Those absent include known havens such as Panama, and the world's leading financial power, the United States.
As Shaxson points out, another hurdle to curbing tax evasion is that havens are not confined to small tropical nations. There are several jurisdictions willing to look the other way while those with enough resources or technical knowledge find ways to avoid paying taxes. Some governments are quite content to pad their balance sheets by actively encouraging this type of behaviour.
The United States offers some lucrative opportunities for those looking to avoid taxes. Nevada and Delaware are notorious examples. According to The Atlantic, these jurisdictions provide the essential formula for successful havens: low tax rates and high secrecy. In turn, they receive hundreds of millions of dollars in revenue from corporate filings.
Columnist Daphne Bramham suggests that Canada is also complicit in supporting tax havens. She argues that some of Canada's bilateral tax treaties allow Canadian corporations to declare earnings in jurisdictions with low tax rates and then transfer them back as dividends without paying Canadian tax. This strategy, known as base erosion and profit shifting (BEPS), is widely used by multinational corporations across the globe and is a major focus of the OECD's tax cooperation efforts.
Many Canadian financial institutions have effectively doubled down on these tactics by setting up shop in offshore financial centres. Figures from Statistics Canada show that, in 2014 Canada's finance and insurance sector held $313.5 billion in offshore holdings. Not all of these dollars represent investments in tax havens, but places such as Barbados, the Cayman Islands, and Bermuda do account for a substantial amount of Canada's FDI.
Canada and the United States are certainly not the only offenders. Oxfam's research indicates that European jurisdictions such as Luxembourg, Malta, and Andorra are sitting on a sizable pile of cash. As a whole, they estimate that the European Union is home to roughly two-thirds of the money hidden by wealthy individuals in tax havens across the globe.
Difficult though it may be to address, tax evasion is a problem that cannot be ignored. It is hard to know exactly how much money is hidden in tax havens or passed through elaborate BEPS schemes, but some estimates range from $21 trillion to $32 trillion US.
Oxfam proposes that missing taxes from money stored in offshore accounts represents $156 billion in lost tax revenues -- enough to lift every person on the planet out of extreme poverty. Shockingly, their calculation doesn't even include revenues lost to the tax dodging initiatives employed by multinational corporations. When corporate filings are considered, the European Union found that tax evasion could costs up to 1 trillion euros, or 1.14 trillion U.S. dollars.
The Economist has argued that governments hoping to combat tax evasion should try lowering corporate tax rates. They propose that taxing corporations is inefficient, as costs are often passed on to consumers. Lower taxes, they say, would reduce the incentive for corporations to shift profits to different jurisdictions. However, they also concede that, because many individuals would simply incorporate themselves to take advantage of low corporate rates, this strategy would require increased vigilance on the part of tax authorities.
Rather than throwing in the towel, governments could make an earnest effort to tighten their domestic regulations and continue to pursue multilateral initiatives aimed at combating tax evasion. Increased cooperation and transparency would greatly reduce the need to partake in a race to provide the most corporate-friendly tax laws. Instead, governments could focus on investing in the infrastructure and skilled populations that corporations need to thrive.
International economic activity is continuously bolstered by technological improvements and increasingly robust legal frameworks designed to facilitate international trade, investment, and financial services. If the economic growth associated with globalization is to be fair, inclusive, and socially and environmentally sustainable, governments must ensure that regulatory standards keep pace with these economic agreements and technological advancements.
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