Milain Fayulu - G20 - Corporate Tax Evasion

WIRC 2014

Brief by | Milain David Fayulu with Helene Combes

G20 CORPORATE TAX EVASION

G20|CORPORATE TAX EVASION

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“It is more important now than ever that taxpayers pay the right amount of tax at the right time and in the right place.”

Masatsugu Asakawa,Chair of the OECD Committee on Fiscal Affairsand Deputy Vice-Minister of Finance for International Affairs, Japan in World

Commerce Review, June 2012

OVERVIEW Taxes are the main source of income for governments as well as a powerful political tool

worldwide. Globalization however has progressively opened the business transaction flows,

regardless of borders or state lines. As such taxation on international corporations has become

increasingly complex to regulate. The G20 will have to weigh the advantages and problems

caused by corporations which seek banking abroad in order to avoid taxation.

Corporate tax evasion has seen a growth in the past decade with the spread of profit

shifting. The OECD’s Base Erosion and Profit Shifting Project1 has exposed, international

corporations use more and more creative ways to use tax competition to their advantage by

shifting their profits and assets to different tax jurisdictions. The current challenge is to create a

level tax playing field worldwide and create a harmonized taxation system which would

counteract the spread of tax evasion. The G20 has had difficulty reaching a long lasting

agreement on the Corporate Tax Evasion issue because of the double standards some

countries utilize to ignore incriminating practices in their own jurisdictions. The abundance of

existing bilateral tax treaties have also made any resolution more complex because of the legal

intricacies they have created.

The international community’s previous attempts to solve the global tax dilemma have

lead to more legislation that has merely exacerbated the problem. As the G20 has pledged to

find a durable solution to the global tax problem, this committee will attempt to tackle this issue

of the globalized world.

1 OECD (2013), Addressing Base Erosion and Profit Shifting, OECD Publishing, Paris


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KEY ACTORS AND INTERESTS Globally, the equivalent of more than 5.1 percent of global gross domestic product never

reaches the coffers of 145 national governments in the form of taxes, according to a report by

The Tax Justice Network2, an independent group that promotes financial transparency. The

OECD underlines the increasing imbalance between increasing corporate revenue in the

national GDPs and a decrease in tax payments from these same corporations.3

The issue of tax avoidance is very complex because it conflicts most with moral

principles rather then legal ones and differs from tax evasion in that tax evasion is illegal as well

as morally reprehensible. Although most states and non-states actors have different views on

the issue, the ministerial level of the OECD council released a Declaration on the status of tax

evasion and the possible means to repress tax evasion.4 The countries that rely heavily on their

status as tax havens use their status to maintain their competitive advantage and dread the

forthcoming regulations.

Definitions

A tax jurisdiction is the land authority to which any company or individual will pay taxes

for living or working in the area of the jurisdiction.

A tax haven is a state, country or territory with a tax jurisdiction where certain taxes are

levied at a low rate or are absent. Different jurisdictions tend to be havens for different types of

taxes and for different categories of companies. We can distinguish between the following broad

categories: No tax havens, No tax on foreign income havens, low tax havens and special tax

havens.5

2 "The Cost of Tax Evasion Worldwide." www.taxjustice.net. Tax Justice Network, 23 Nov. 2011. Web. 23 Sept. 2013. 3 OECD, Addressing Base Erosion and Profit Shifting, OECD Publishing, Paris, 2013 chap. 2. 4 OECD Concil, Ministerial Level. Declaration on Base Erosion and Profit Sharing. May 29

th 2013. Paris

5 Orlov, Mykola. "The Concept Of Tax Havens." Asterlaw.com. N.p., n.d. Web. 02 Dec. 2013.


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No–tax havens are countries that have no income, capital gains, or wealth capital taxes,

and in which you can incorporate and form a trust. Primary examples are Bermuda, Bahamas

and Cayman Islands.

No-tax on foreign income havens are countries that impose income taxes, both on

individuals and corporations, but only on locally derived income. They exempt from tax any

income that is earned from foreign sources. Panama, Jersey and the Isle of Man are the best

examples.

Low Tax Havens are countries that impose some taxes on all corporate income,

wherever earned. However, most have double taxation agreements with high taxation countries

that may reduce the withholding tax imposed on income derived from the tax countries. The

British Virgin Islands is a good example.

Special tax havens are countries that impose most taxes but exempt companies in

specific fields to pay taxes. Liechtenstein is a tax haven that specializes in trusts structures for

companies. All these tax havens will be affected differently by different regulations and none of

them is willing to fully relinquish its status. Therefore, there needs to be an organism that

mitigates all the parties’ interests.

Actors

The Organization for Economic Co-operation and Development (OECD) is a body of 34

developed countries founded in 1961 to stimulate economic progress and world trade. In

response to public outcry in several nations that multinational corporations are using tax havens

to effectively avoid paying taxes in the countries where they do business the OECD is

spearheading three initiatives that are aimed directly at this objective. The first initiative is the

creation of a Global Forum on Transparency and Exchange of Information for Tax Purposes.

Secondly, as mentioned before, the OECD’s is committed to tackle what they label “Base

Erosion and Profit Shifting”, namely the booking of revenues in jurisdiction where a company

has limited or no operations. In line with the report presented to G20 Finance Ministers in


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February 20136, the OECD has developed an action plan to respond to BEPS. The OECD

together with the G20 countries is developing a global model for automatic exchange of

information as the new standard and plans to have this work completed by 2014.7 This latter

initiative is controversial because certain financial institutions could incur a loss of clientele if the

exchange of information is implemented.8 The OECD provides a forum in which member states

can work together to solve common problems. Consequently, the policies promoted by the

organization are a reflection of negotiations between members.

The United States government has agreed with the G20 plan to curb tax evasion

worldwide as well as with the OECD BEPS framework. One of the federal government’s

interests is to gain a better hold over the complex web of overseas tax havens and subsidiaries

used by America’s largest corporations. However, the U.S’ position is not that simple due to the

fact that recent tax initiatives in a number of foreign countries, including several of its G20

partners, appear to be primarily targeting American companies with global operations.9 This

could potentially harm both the US companies’ competitive position and subsequently the US

Treasury. That is why the current position of the administration is ambiguous. While the US

government concedes that the rules need to be updated and changed to some extent, they are

pushing for moderate change because they are committed to the success of their local

companies who appear to be very involved in the issue.

6

Gurria, Angel. "SG Report to G20 Leaders." Oecd.org. Organisation For Economic Cooperation and Development,

n.d. Web. 01 Dec. 2013. 7 OECD (2013), Action Plan on Base Erosion and Profit Shifting, OECD Publishing.

7http://dx.doi.org/10.1787/9789264202719-en

8 Guria, Angel. "OECD SECRETARY-GENERAL REPORT TO THE G20 FINANCE MINISTERS AND CENTRAL

BANK GOVERNORS." Oecd.org. Organisation For Economic Cooperation and Development, 20 July 2013. Web. 01 Nov. 2013. 9

Norris, Floyd. "G-20 Backs Plan to Curb Tax Avoidance by Large Corporations."Nytimes.com. New York Times, 19

July 2013. Web. 15` Oct. 2013.


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European Union officials believe “tax fraud and firms' aggressive cross-border schemes

to avoid taxes, cost the bloc's governments an estimated 1 trillion Euros ($1.3 trillion) a year”.10

Similarly to the United States, tax evasion limits the capacity of EU member states to raise

money and implement their economic and social policies. That could mean cuts in public

services and a slower economy. While many within the EU argue for a level playing field, many

countries like Ireland and Belgium are unhappy with the current push for more regulation due

their status of tax havens.11 Their interests collide with countries like France and Germany who

have relatively high tax rates and see their richest residents flee to more tax friendly jurisdiction

within the EU. A good illustration of the situation is the recent attempt by France’s richest man,

Bernard Arnault, to acquire Belgian citizenship to avoid paying taxes in France.12 Paradoxically,

when the European finance ministers met in Vilnius,Lithuania on the 14th of September 2013 to

discuss the issue of tax avoidance, Jeroen Djisselbloem the Dutch finance minister, declared:

“the meeting consisted of cannon shots going back and forth”.13 This declaration is symptomatic

of the current atmosphere within the union regarding the issue of taxation. There is a common

consensus around the necessity to take actions but countries like Luxembourg, Ireland or

Belgium that have built their reputation as destinations for foreign assets are not willing to

sacrifice their competitive advantage beyond a certain limit. Additionally, the city of London,

which is the backbone of the largest network of tax havens in the world and operates as a

government within the United Kingdom, makes it very difficult to agree on issues pertaining to

tax evasion and avoidance.14

10

Chalabi, Mona. "Tax Evasion: How Much Does It Cost?" Theguardian.com. Guardian News and Media, 27 Sept.

2013. Web. 04 Dec. 2013. 11

"Ireland Pledges to Close Apple Tax Loophole." Financial Times. N.p., 12 Apr. 2010. Web. 04 Dec. 2013. 12

Masidlover, Nadia. "LVMH's Arnault Withdraws Belgian Citizenship Bid." Wsj.com. Wall Street Journal, 10 Apr. 2013. Web. 01 Dec. 2013. 13

"EU Finance Ministers Seek Ways to Combat Tax Evasion." CTVNews. Canada TeleVision, 23 Sept. 2013. Web.

04 Dec. 2013. 14

Shaxon, Nicholas. "The Tax Haven in the Heart of Britain." The Tax Haven in the Heart of Britain. News Statesmen,

24 Feb. 2011. Web. 04 Dec. 2013.


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China has agreed to join the global fight against tax evaders by signing on to the G20

agreement. Global Financial Integrity, a financial watchdog group, has estimated that more

money flows out of China from illicit financial activity than any other developing country.15

Figures released by China's State Administration of Taxation showed that anti-tax evasion

efforts by the Chinese government generated an additional income of some $5.7 billion last year,

nearly 30 times the amount in 2008.16 The Chinese position is unclear as the state apparatus

and the politburo of the communist party are involved and benefit greatly from failures in the

taxation system, notably through flows to the financial hubs of Macau and Hong Kong. Even

though the official position is in favor of more regulation, in practice it is highly unlikely that the

authorities implement any regulation to its full extent.

Multinationals like Apple, Starbucks and Google aggressively put income in countries

where the corporate tax rate is extremely low. In some instances these companies employ

another pervasive technique, which consist in sourcing the revenues “nowhere at all”. This is

referred to as the “stateless income” or “double Irish”.17 The goal for a company is to maximize

shareholders profits. Under the current global tax system, companies are obligated to take

advantage of tax breaks offered all around the world. The CEO of Google Eric Schmidt raised

an important point when he said, “with respect to the current sort of issues, I don’t think a

company should decide what tax policies should be, I think governments should.”.18 Multi-

National Corporations (MNC) are benefiting from loopholes in order to compete globally.

Recently, Apple’s CEO Tim Cook was heard by the senate finance committee concerning

15

Dawson, Stella. "China to Join Global Crackdown on Tax Evasion." Reuters. Thomson Reuters, 21 Aug. 2013.

Web. 04 Dec. 2013. 16

Nignzu, Zhu. "China Joins Global Combat Tax Evasion Efforts by Signing Multilateral Tax Convention - Xinhua |

English.news.cn." China Joins Global Combat Tax Evasion Efforts by Signing Multilateral Tax Convention - Xinhua | English.news.cn. Xinhua, 27 Aug. 2013. Web. 04 Dec. 2013. 17

Wood, Robert W. "Excuse Me Apple, Google, Starbucks & H-P: IRS Wants To Tax Stateless Income." Forbes.

Forbes Magazine, 06 Aug. 2013. Web. 04 Dec. 2013 18

Barker, Alex. "EU Rushes out Corporate Tax Transparency Law." Financial Times. N.p., 23 May 2013. Web. 04

Dec. 2013.


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Apple’s deferral income practices, which consist in recording income generated in Asia, Africa,

and Europe in Ireland, as Apple’s subsidiary in that country holds the company’s patents and

trademarks for those regions. Because the Irish company is not an operating entity, it pays no

taxes to the Irish government on the income it receives from other Apple operating entities.19

Echoing Mr. Schmidt’s comment, Apple is just using the tax system to its advantage. Ironically,

shareholders have criticized Apple’s management for not using the same loophole for their Latin

American operations (taxed in the U.S). MNCs are currently in favor of the status quo.

Banks are central to the issue because the money flows through their channels

worldwide. Therefore, they hold crucial information regarding multinational financial activities.

Tax authorities in many countries including the United States have pressured governments and

financial institutions in countries like Switzerland and Liechtenstein, who abide by the “banking

secrecy”, to surrender information. This highlights the double-sided problem of tax evasion. On

the one hand banks are competing to attract deposits, on the other they are forced to comply

with revenue-damaging regulations. The intrinsic competitive advantage Swiss banks hold has

been the fact that they were never required to share information about their clients. The current

regulatory framework, proposed by the OECD and adopted by the G20 and if implemented

successfully, will result in a loss of competitiveness for the Helvetic banks.

CHRONOLOGY

Corporate tax evasion is a problem that traces back to the Greek civilization. Empirical

evidence even suggests that ever since taxation was introduced, people and organizations alike

have been trying to decipher ways to circumvent them.

19

"Summary: Tim Cook’s Senate Grilling on Taxes." Corporate Intelligence RSS. Wall Street Journal, 21 May 2013.

Web. 04 Dec. 2013.


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1920s/30s: The technical use of the words evasion/avoidance in the modern sense originated in

the USA where it was well established by the 1920’s, as multinational companies began to

emerge as forces in world markets. The 1920’s were an interesting era because it led to one of

the biggest financial crisis in the history of the world, the Great Depression. After America was

hit by the 1929 stock market crash, President Roosevelt decided to tax American businesses

heavily in order to finance the reconstruction of the country. During his tenure as President he

went as far as proposing a 100% marginal tax rate on the rich. During this time rich Americans

and corporations began strategizing about ways to hide some of their profits. The issue was

brought to national attention during the Bullen v. Wisconsin case20 where lines were officially

drawn between tax evasion and avoidance.

1930s: Most of Europe was facing some combination of political instability, powerful labor

movements, and strong political pressures to raise public revenues to placate those movements.

Switzerland began to provide a convenient and secure tax haven when the world was in dire

need for it in the 1920s. Although England had the larger economy, Switzerland held a key

advantage because of the legal leeway Swiss bankers possessed through the highly

decentralized state. In contrast, the UK’s policy involved balancing the temptations to become a

tax haven against the pressures of raising money for urgent public purposes.

The deregulation of the 1970s:The trend of deregulation was particularly pronounced in

America and Britain. Ronald Reagan campaigned by touting tax cuts as a means to rescue the

American economy from stagnation. According to data from the economist, during his

administration, top marginal tax rates dropped in steps from 70% to 28%. In Britain Margaret

20 "Bullen v. Wisconsin - 240 U.S. 625 (1916)." Justia US Supreme Court Center. N.p., n.d. Web. 07 Dec. 2013.


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Thatcher slashed the top marginal income tax rate from 83% to 40% between 1979 and 1988.21

As the financial liberalization pushed by Reagan and Thatcher began having an effect, it

increasingly allowed companies to “shop” around for jurisdictions to escape tax and circumvent

regulations. These measures were designed to strengthen the economy, but the easy flow of

capital worldwide that resulted from this era of deregulation encouraged many companies and

rich individuals to move more money around and participate in tax evasion

In August 2007: The IRS issued the first round of guidance on the Foreign Account Tax

Compliance Act (FATCA) which is a law aimed at foreign financial institutions and other financial

intermediaries, to prevent tax evasion by US citizens and corporations through the use of

offshore accounts. The first round of guidance was published with two models of

intergovernmental agreements. In the first, financial institutions in the partner country would

report information about U.S. accounts to the tax authority of the partner country either with

reciprocal information (Model 1A) or without (Model 1B). In the other (Model 2) where partner

country financial institutions reported directly to the U.S. Internal Revenue Service, and the

partner country agrees to lower any legal barriers to that reporting.22 FATCA implementation

faces legal hurdles because it may be illegal in foreign jurisdictions for financial institutions to

disclose the required account information. There is a controversy regarding the appropriateness

of intergovernmental agreements to solve any of these problems.

2 April 2009: The G20 gathered in London to discuss the financial outlook and discuss policy

changes aimed at stabilizing the ailing global economy.23 Some of the changes brought forward

included growth, jobs, repairing the financial system to restore lending and strengthening

financial regulation to rebuild trust. This summit marked the awakening of the international

21

GI. "How Mrs Thatcher Smashed the Keynesian Consensus." The Economist. The Economist Newspaper, 09 Apr.

2013. Web. 01 Dec. 2013. 22 http://www.irs.gov/Businesses/Corporations/Foreign-Account-Tax-Compliance-Act-(FATCA) 23

http://www.imf.org/external/np/sec/pr/2009/pdf/g20_040209.pdf


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community to the catastrophic consequences of the global crisis of 2008. As a result of this

awakening, financial regulation worldwide was put at the forefront of the legislative agendas.

18 March 2010: FATCA is signed into law in the United States.

FATCA will have a far-reaching impact on US-based companies as well as foreign companies

with US assets or clients. Under the new provisions, a Foreign Financial Institution (FFI) may

enter into an agreement with US tax authorities (IRS) requiring it, among other things, to report

information on the foreign institution’s US accounts. A FFI that enters into such an agreement

becomes a "participating FFI”.24 According to the law, if a FFI does not enter into an agreement

with the IRS, all relevant US-sourced payments, such as dividends and interest paid by US

corporations, will be subject to a 30% withholding tax. The same 30% withholding tax will also

apply to gross sale proceeds from the sale of relevant US property. All FFIs must comply with

FATCA or be subject to withholding. Given the significant lead times large companies may need

to comply with FATCA requirements particularly for it system changes.

May-November 2011: Protest Movements. Worldwide protests rose to challenge social and

economic inequality, greed, corruption and the perceived undue influence of corporation on

governments particularly from the financial services sector. Movements such as the Spanish

Indignados or Occupy Wall Street used direct democracy to emphasize direct action. These

Movements and the subsequent ones lead governments worldwide to act more aggressively on

issues such as tax evasion, a subset of the many inequalities highlighted by the protesters.

September 11 2012: Bradley Birkenfeld a former UBS banker transmitted crucial information to

the IRS about schemes used by Swiss banks to help clients evade money. The disclosure of

24 "FATCA Knowledge Center." Foreign Account Tax Compliance Act (FATCA) Resources. Ernst & Young, n.d. Web.

29 Nov. 2013.


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Swiss banking information, which caused a fierce political debate in Switzerland before winning

approval from the country’s Parliament set off such a panic among wealthy Americans that more

than 14,000 of them joined a tax amnesty program. I.R.S. officials say the amnesty program has

helped recover more than $5 billion in unpaid taxes.25

April 2013: Offshore leaks. A cache of 2.5 million files revealed the secrets of more than

120,000 offshore companies and trusts, exposing hidden dealings of politicians and wealthy

individuals. The secret records obtained by the International Consortium of Investigative

Journalists exposed the names behind covert companies and private trusts in the British Virgin

Islands, the Cook Islands and other tax havens. The leaks are said to include information about

various major corporations and their dealings in fiscal paradise as well as high net worth

individuals26. The leaked files provide facts and figures, cash transfers, incorporation dates,

links between companies and individuals that illustrate how offshore financial secrecy has

spread aggressively around the globe.

May 2013: England cracks down on ownership secrecy. David Cameron announced plans

to crack down on UK accountants, lawyers and business figures who use shell companies to

hide the identity of ultimate beneficiaries. Firms registered in Britain will come under a legal

obligation to obtain and hold adequate, accurate and current information on the ultimate owner

who benefits from the company and be required to place the information on a central register

that would be maintained by Companies House. In a speech to the Open Government

25

Kocienwiski, David. "Whistleblower Awarded $104 Million by I.R.S." Nytimes.com. New York Times, 11 Sept. 2011.

Web. 04 Dec. 2013. 26 Ryle, Gerard. "Center for Public Integrity." Center for Public Integrity. N.p., 20 Nov. 2013. Web. 24 Oct. 2013.


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Partnership Summit in London Cameron surprised some business leaders by insisting the

register must be open to the public as well as officials.27

June 2013: G8 Summit. G8 leaders gathered in Lough Erne in Northern Ireland to agree to

further transparency on the sharing of tax information and bring the international tax rules into

the modern age. As the summit closed the G8 leaders’ communiqué announced that they will

move to establish the automatic exchange of information between tax authorities as the new

global standard. The G8 leaders stated their support for the OECD’s work to tackle tax

avoidance by multinational companies, and announced that they will draw up a template for

global corporations to report to tax authorities where they make their profits and pay taxes

around the world. This would give governments a new tool against tax avoidance by

multinationals and would be particularly helpful to the governments of developing countries.

Under the agreement reached the G8 seek to provide support to developing countries to collect

the tax they are owed.

ROOT CAUSES

Human Nature

The main origin of tax avoidance is simply human nature. Individuals will do whatever it

takes to maintain and strengthen any form of superiority they hold. Hence they act in their own

best interest when it comes to giving up wealth. The basic theory28 used in nearly all compliance

research builds on the economics-of-crime model, in which an individual “maximizes the

expected utility of the tax evasion gamble, balancing the benefits of successful cheating against

the risky prospect of detection and punishment”. This approach asserts that compliance

27 Wintour, Patrick. "Register Revealing Firms' True Owners Will Be Open to Public, Says Cameron." The Guardian. Guardian News and Media,

31 Oct. 2013. Web. 02 Dec. 2013.

28 [1] Alm, J. "Tax Compliance and Administration." In Handbook on Taxation, edited by W. B. Hildreth and J. A.

Richardson (741-68). New York: Marcel Dekker, Inc., 2000. 28

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depends largely upon audit and fine rates. Indeed, its central conclusion is that an individual

pays taxes only because of the fear of being caught and the resulting punishment. However, it is

clear that compliance cannot be explained entirely by the level of enforcement. The levels of

audit and penalty rates are set at such low levels that most individuals would evade if they were

rational simply because it is unlikely to get caught. Although it must be noted that government

are drastically changing their behavior in regards to tackling tax evaders due to budget

constraints.

A Legal Limbo

Taxes depend on definitions of legal terms, which are usually vague. For example, the

distinction between "business expenses" and "personal expenses" is of much concern for

taxpayers and tax authorities, as the proper distinction between the two is not properly defined.

As a result, any term of tax law becomes a potential source of tax avoidance As legislators act

independently of their constituents on many issues, tax laws do not reflect the interest of the

majority of a jurisdiction’s population (poor and middle income). In an article for the Guardian,

Joseph Stieglitz noted, “Companies like General Electric lobbied for provisions that enabled

them to avoid even more taxes”.29 MNC, like General Electric lobby for, and usually obtained,

amnesty provisions that allow them to comply with the letter of law, while avoiding its intent. In

the case of tax law, GE can bring their revenue back to the US at a special low rate, on the

promise that the money would be invested in the country. The lack of clearly established

definitions as well as the exemption and amnesty provisions create a legal limbo which allows

for more tax avoidance and evasion.

29

Stiglitz, Joseph. "Globalisation Isn't Just about Profits. It's about Taxes Too." The Guardian. N.p., 23 May 2013.

Web. 29 Oct. 2013.


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Tax shelters

Tax shelters are investments that allow, a reduction in one's income tax liability. The

term "tax shelter" was originally used to describe primarily certain investments made in the form

of limited partnerships, some of which were deemed by the U.S. Internal Revenue Service30 to

be abusive. These loopholes allow financial engineers and advisors to devise strategies to pay

as little tax as possible within the law. In 2003 the Senate's Permanent Subcommittee on

Investigations held hearings about tax shelters which are entitled U.S. tax shelter industry: the

role of accountants, lawyers, and financial professionals.31 Many of these tax shelters were

designed and provided by accountants at the large American accounting firms. Examples of U.S.

tax shelters include: Foreign Leveraged Investment Program (FLIP) and Offshore Portfolio

Investment Strategy (OPIS). Partners at the accounting firm, KPMG, devised both programs.

These tax shelters were also known as "basis shifts". Contrarily to the overall vague legal

definitions of taxation, clear laws govern tax shelters.

POLICY OPTIONS

Governments worldwide generally use two types of tax compliance policies. On the one

hand, policy options aimed at coercing tax compliance by increasing risks for practicing tax

evasion, and on the other hand a set of policies emphasizing development of supportive tax

paying values among citizens via service improvement and informational strategies.

Governments’ tax agencies tend to favor coercive policies.

The first policy option or strategy is directed at enacting statutes and adopting

administrative powers and procedures which coerce compliant behavior. The strategy of taking

these actions is what we are witnessing throughout the developed world in these days of budget

30

"Tax Information for Individuals." Tax Information for Individuals. Internal Revenue Services N.p., n.d. Web. 30 Oct.

2013. 31

"Senate Report 109-54 - THE ROLE OF PROFESSIONAL FIRMS IN THE U.S. TAX SHELTER INDUSTRY."

Senate Report 109-54 -


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constraints. Coercive policies are based on increasing the risks incurred when practicing tax

evasion. These policies are improving evasion discovery capabilities32, increasing evasion

penalties and strengthening delinquent tax collections capabilities. Hiring more auditors and

supplying them with computer technology improve discovery capabilities.33 Another policy which

may be enforced and has been implemented in many European countries, would be to make

evasion penalties more stringent by increasing interest rates on delinquent accounts and raising

fines, and by elevating tax evasion from misdemeanor to felony status.34 These practices are

designed to influence taxpayers' mental calculations in such ways as to induce compliance.

Although there is a long list of individual countries with good methods to decrease tax evasion,

the problem of the globalized nature of the economic system and the use of other jurisdictions to

bypass national laws remains the main cause of the continued issue of tax evasion.

The second policy course would be to encourage compliance through a variety of

services such as instructing taxpayers about tax regulations, and through installing a firm sense

of civic duty and moral obligation among citizens. In opposition to the first strategy, which

constructs a threatening environment, the second aims to establish a cooperative relationship

between taxpayers and their government. Governments can instill string compliance values so

that obedience to tax laws becomes more an automatic or natural act. Values can be reinforced

through promotional campaigns and other means that inform citizens of the societal costs of tax

evasion and which illustrate the positive externalities a society gains from it. Furthermore,

improved service and tax education efforts can empower citizens with the knowledge they need

to comply and avoid mistakes in calculating taxes owed, and contribute to removing frustrations

32 "

Internal Revenue Manual - 25.1.1 Overview/Definitions." Internal Revenue Manual - 25.1.1 Overview/Definitions.

Internal Revenue Services, 16 Dec. 2011. Web. 03 Dec. 2013. 33

Kristof, Kathy. "Obama Budget Surprise: More Tax Audits." Cbsnews.com. Cable News Network, 15 Feb. 2011.

Web. 02 Dec. 2013. 34

Wood, Robert W. "Not Even Probation For Stephen Baldwin's Tax Evasion, Jail For Wesley Snipes." Forbes.

Forbes Magazine, 02 Apr. 2013. Web. 02 Dec. 2013.


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and the sense of mystery in tax filing. In the UK for instance, the government is working to

prevent tax evasion by giving people the opportunity to declare what they owe. They are running

campaigns to encourage people to tell HMRC (Tax agency) what they owe. So far HMRC has

“raised 547 million dollars from voluntary disclosures and almost 140 million from follow up

activity including 20 000 completed investigations”.35 This type of initiative should be expanded.

Monitoring tax evasion is a very complex endeavor. Ultimately, there are only two broad

course of action possible; one being reactive, meaning acting after the fact to recoup what was

lost through fines and penalties, the other being proactive, by developing a set of tools to

prevent tax evasion from happening in the first place. Changes in policies and the so-called

“fiscal instability” will constantly reshape citizens’ behavior. The emphasis therefore needs to be

utilized for improvement to occur.

PROJECTIONS The tax evasion issue has increased impact on the global world and could reach new

heights. The income inequality gap between the very rich and the rest of the world’s population

will widen to levels that will pose serious threats to the market economy. When a system fosters

inequalities cracks will start to appear. As a direct consequence of the non-confidence in the

system, people that are marginalized economically will take to the street and social unrest will

cause many developed nations to implode. We already witnessed this phenomenon in

countries like Greece and Spain. In those two countries the potential consequences of

prolonged protestation were mitigated by the intervention of the IMF, Germany and the

European Central Bank. However, if this was to happen in bigger economies, namely France

and/or Italy, the magnitude of the disaster would be extremely hard to combat.

35

"Tell Us What You Think of GOV.UK." Reducing Tax Evasion and Avoidance. Her Majesty Revenue and Customs,

08 Oct. 2013. Web. 03 Dec. 2013.


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Another potential consequence of a failure to reach a long-term agreement would be the

unbalancing of the world economy, with risks of destabilization for entire economies due to a

possible sudden repatriation of huge amounts of liquidity. As a matter of fact, a recent report

commissioned by the tax justice network and written by former McKinsey chief economist

James Henry found that wealthy individuals and corporation have accumulated $21 trillion in

secretive offshore accounts.36 That’s a sum equal to the gross domestic product of the United

States and Japan combined. In the event that this money was to be brought back “on shore”,

entire economies would collapse under the pressure caused by the influx of cash.

In conclusion, the issue of tax evasion is simply the mirror of the society we have

decided to build for ourselves. So long as we believe the system the way we conceived, which

is the most adequate to ensure relative stability and prosperity, we will see the issue of tax

evasion remain. It is deeply rooted at the core of the free market economy. It is unlikely that

there will ever be a full end to tax evasion, but this committee has the chance to take great

strides to significantly diminish the problem.

36

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Economy & Finance

Milain Fayulu - G20 - Corporate Tax Evasion