How do individuals and businesses avoid paying taxes?

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THE LATEST mega document leak to the International Consortium of Investigative Journalists (ICIJ) caused a stir on October 3, when media around the world began to report on what they have dubbed the Pandora Papers. (Revelations are promised throughout the week.) The briefing sheds light on the financial affairs of dozens of world leaders, other government officials and billionaires in 91 countries. The focus of this leak, as with previous ICIJs, such as the Panama Papers in 2016 and the Paradise Papers a year later, are the offshore transactions of the global elite. Using an offshore company to move money or buy property isn’t necessarily shady; a billionaire can hide a purchase made with legitimate wealth for the sake of privacy. But shell companies registered in palm-fringed offshore centers (the British Virgin Islands are a favorite) are often used to avoid or evade tax, or to launder ill-gotten gains.

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There are a number of ways that individuals can legally avoid tax by using structured tax shelters or changing their place of residence. Tax evasion is another matter, treated as a criminal offense in many countries (although deemed to be treated more leniently in Switzerland). The smartest scammers use a combination of bank accounts, shell companies, trusts and foundations, often run by candidates, in one or more offshore financial centers. Corporate tax avoidance is a grayer area of ​​law. Businesses naturally push the boundaries, often betting that authorities will neither have the intelligence nor the resources to confront them over their tax minimization strategies – or that governments will accept less taxes in exchange for “capital” investments. mobile ”.

Denis Healey, a former British Chancellor of the Exchequer, once described the difference between tax evasion and tax evasion as “the thickness of a prison wall”. Both developed alongside financial globalization at the end of the 20th century. Escape became easier with the explosion of tax havens, tacitly endorsed by rich countries (especially Britain) who saw them as useful additions to their own financial centers. Today, the world has up to 50 tax havens, some of which are more accurately described as “secret jurisdictions”. Not all are offshore: US states such as South Dakota and Nevada peddle secrecy through the trusts they offer (which have featured in several of the Pandora Papers articles published this week). Multinationals, meanwhile, have found ingenious ways to exploit loopholes in cross-border tax rules, designed for younger ages. International and bilateral tax treaties designed to avoid double taxation can be called into play to produce double non-taxation.

The fight against such tricks began in the late 1990s, when the Organization for Economic Co-operation and Development (OECD), a forum of rich countries, declared war on “harmful tax competition”. It has risen and fallen since then, reaching a new level of intensity since 2008, as cash-strapped countries rich and poor fought harder to recoup lost tax revenue, as evidenced by the onslaught. American against Swiss banks. Tax havens have, under intense pressure, agreed to exchange more information about clients with their countries of origin. The world is moving towards an automatic data exchange system, even as some countries complain that this conflicts with their privacy laws. Others complain of being intimidated into providing data with no guarantee of reciprocity from the United States and other major economies. Still, life has become much more difficult over the past few years for people looking to dodge their tax obligations, and is likely to get even more difficult.

Reforming international business rules has proven to be trickier, but a consensus on the way forward finally appears to be forming. Some 140 countries and territories, including all major economies, are close to a deal that would see taxation more closely aligned with where sales are made, and a minimum overall tax rate of 15%. However, it is too much to expect all loopholes to be closed, and new loopholes are sure to open. Governments of rich countries have long tacitly encouraged certain types of avoidance for fear of being otherwise labeled uncompetitive and discouraging large investors. They may be less inclined for billionaires to avoid taxes in personal real estate transactions, but also reluctant to target plutocrats who make generous political donations. The Pandora Papers will not be the last in the series.

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