We have often heard how major Fortune 500 companies based in various parts of the world have avoided paying their fair share of taxes to the governments, thereby costing them billions, if not trillions, in lost revenue on a global basis. The act of Tax Evasion, or even Tax Sheltering, has for long remained as an activity that is vehemently looked down upon, and very well ranks as one of the highest degree of crimes, right alongside others, like murders and assaults.
Given how there have been significant efforts to curtail the spread of such acts on a global scale, they still exist and flourish beautifully, so why is it that the legal minutiae between legal and illegal Tax Evasion never paid attention to? And why are laws that allow for such an activity still remain in place, when there is a global crackdown on all sorts of activities like these?
To start off, we need to lay down a groundwork for the debate. Recently, we have all come across the expose that the Pandora Papers have provided us, which encompass details about the financial (and a significant chunk of illegal holdings) of various powerful people and organisations all around the world. Many of these people who have these holdings have been doing so with the purpose of avoiding taxes and disclosures which were mandatory to be disclosed by the letter of the law.
However, many of these holdings are not legal, and have been made following all of the legal requirements that have been put in place. Therefore, this expose of the Pandora Papers puts a difficult topic in front of all of us: If shelters that allow for tax evasion exist, and are legal, why is it perceived as illegal, when it is actually not?
This begs the question: How do such large companies, conglomerates and corporations avoid paying taxes and aren’t prosecuted, and do not get a hint of the backlash that they so deserve, whereas individuals with multiple holdings (albeit with all legal requirements) face the brunt of the impact?
Well, there are apparently many ways used by corporations to escape their tax burdens and shelter their profits for multiple years without paying a single penny of taxes on them. One of these methods is IP Structuring, where a company (usually located in a tax haven) is made the owner of extremely important IP rights, and their distribution to companies (that have their base of operations in high-tax jurisdictions) is charged. Such payments for the use of critical IP are made to the company located in the tax haven, which allows them to transfer their profits to companies in tax havens, and pay minimal to no taxes in the countries where their base of operations are located.
The most notorious way of all is the use of the Double Irish & Dutch Sandwich method, which has been used by many tech companies to transfer their holdings to low to no income tax economies to allow tax evasion. This involves the setting up of the same type of IP owning organisation in Ireland, and thus channel payments there from the sale of goods from a country like the USA. Another company is set up in Ireland, which receives payments from an established Dutch intermediary from the sale of goods in Europe.
All of these methods are allowed by legal provisions, however are frowned upon, extremely In 2016, Ireland was pressured by both the US and EU to drop this provision, and levied the largest fine for tax evasion, to the tune of €13 billion, for evading tax payments on €111 billion of earnings. Ireland gave time up till 2020 to all organisations to wind up the use of this method for all existing users.
Furthermore, the use of other methods, like the Single Malt, existed for a while but were then dropped from legal provisions. So, we can safely say that the attempt to curb the attempt of tax evasion has been on the decline over the years, but the exposure provided by the Pandora Papers begs the existence of the opposite.
The expose reveals how many powerful people across the world have set up a network of corporations that allow them to divert payments and conceal the paper trail to avoid disclosures of their frivolous, and sometimes illegal activities. This joint effort between various journalists and organisations that worked together on this expose for years, reveals that no matter how many laws that prohibit tax evasions exist, they will continue to exist as long as people remain rich.
Some of the documents revealed by the investigation show the compliance of individuals with the legal provisions and domestic and international law to set up corporations, while the existence of other corporations tends to the concealment of activities like corruption, money laundering, and maybe even for worse-off things.
So, the question that arises here is, if laws that allow for such activities exist, and allow for their use in such a manner that allows people and corporations to funnel payments and transfer assets through a network of corporations in tax havens that have minimal to no taxes?
The United States, which has been the driving force behind reforms in tax laws in the first place, has itself emerged as one of the most preferred tax havens in the world. In states like Nevada and Wyoming, where the establishment and existence of LLCs allows for people to pay no state taxes and all, with unparalleled limited liability protection and privacy. However, federal norms would need to be adhered to, but it would still allow you to place your money securely without much of a cost to it.
The final rodeo, as it is, of the debate is this: Why is there a stigma around the movement of funds and capital when there are multiple ways to do so, legally? Well, the stigma really does matter to an individual, especially if they are put under the limelight in a situation like the Pandora Papers leak. And it doesn’t help that whenever someone is moving around money or capital, it usually is for avoiding taxes or partaking in illicit activities that are certainly not legal.
Transferring money offshore isn’t illegal, but it isn’t good PR either. But will these facilities, provisions, still exist, even and especially if they have been outlawed? The answer’s yes. No matter the manner or degree in which laws that curb tax evasion are enforced, as long as money and rich people exist in the world, they will find a way to move it around. The thing that shall always remain to be seen, was if the way was legal, or not.