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Sunday, 10 April 2016

Ten things that you should realize about tax avoidance and evasion after the publication of the Panama Papers.. Pt 1

1. Paying taxes is a zero sum game: the more high net-worth people and multinational companies avoid/evade taxes, the higher the amount of taxes is that the rest of the population (i.e. the common workers) has to pay.

Say, you live in a country with 17 million people and some 250,000 companies, strangely resembling to The Netherlands. And say that the central and all local governments of this country need to reel in €350 billion annually, in direct and indirect taxes from people and companies, in order ‘to keep the shop open’ and maintain the normal standards of living, safety, progress and dilligence within the country.

In  this country in an ideal world companies pay €100 billion – of which €60 billion is paid by 3000 large, multinational companies and the rest by smaller companies – and the citizens pay €250 billion in taxes.

In the following chart you can see the devastating impact of tax avoidance and evasion on the financial situation for the remainder of the population.

The shifting effects of tax avoidance / evasion by
multinational corporations and high net-worth citizens
Data and chart by: Ernst's Economy for You
Click to enlarge
The math behind it is simple: when a central government needs a total of €350 billion in annual tax income, it will get its hand on this money, one way or the other. The result is that exactly those people and companies that cannot dodge taxes, keep footing the bill... always!

And to make things worse, there is hardly any central or local government in the world that puts a means to an end, when the tax yields promise to be disappointing as a consequence of economic crises or other drawbacks. 

When the tax yields promise to be too low indeed, these governments just raise the indirect and/or direct taxes. Governments simply need the money and mostly avoid cutting in their own flesh, in spite of some obligatory displays of austerity within their departments and offices.

The bitter result is that an ever smaller group of citizens and small companies must foot an ever larger amount of taxes, in order to keep the government happy.

2. The only people and companies that pay taxes, are the people and companies that really don’t have the means to avoid or evade them.

Even though I am a passionate believer in the goodness of most people and the relative benevolence of most companies, I get more and more convinced that every person and institution than can dodge taxes... will dodge taxes!

And I’m not talking about simply using all legal deduction possibilities, surcharges and subsidies that one has in modern countries, like The Netherlands, Germany, the United Kingdom or the United States.

No, I am talking about the usage of Dutch and Luxemburg letterbox firms, in order to flush profits and yields from dividends, overseas trade and usufruct away from the hungry eyes of the local, fiscal authorities to a warm and nice place where nobody can’t find them anymore.

Or about the creation and usage of “legal-ish” and fuzzy fiscal constructs, such as the ones that Mossack Fonseca and their likes in the industry create and endorse.

A genuine eye-opener was that in The Netherlands and abroad not only ‘the usual suspects’ (i.e. multinationals, extremely wealthy inhabitants, celebrities, government leaders and other insiders) belonged to the customers of the aforementioned lawfirm Mossack Fonseca, but even small SME companies, like ‘Good Meat’ butchery, furniture plant ‘The Splinter’ or flower shop ‘La Tulipa Negra’ [all fake names, of course – EL].

When even the owners of such small companies turn to tax avoidance / evasion through such fuzzy, fiscal constructs, there is really something wrong with the mentality in a country. And undoubtedly, the behaviour of such small business owners is spurred by the high-brow tax dodgers and multinational companies about whom they read in the papers and magazines: "When these guys don't pay taxes, why should I?!"

3. Multinational companies really don’t pay taxes... ever.

This logical-wisdom-in-hindsight was uttered by the financial sage and avid twitter jockey Robin Fransman (@RF_HFC, definitely one of my favourite Dutch twitter users), on the Dutch financial website “Follow the Money”. Here are the pertinent snippets of his statement:

Welcome in the miracle world of international profit taxes. In fact companies don’t pay taxes. They never did, nowhere in the world... Companies can’t pay taxes..., only people can! That sounds crazy, but is logical. Taxes are only paid by entities that cannot avert it on parties furthermore in the supply chain.

Every cent that companies pay in taxes, cannot be used for investments, to raise their wages, reduce the prices of their products or pay dividends to their shareholders. Taxes for companies hit you as a consumer, as well as they hit you as a worker or a shareholder (either directly or via your pension). “There is no such thing as a free lunch”.

Therefore for companies to survive, they must put energy in tax optimization (i.e. paying the least amount of taxes possible).When they refuse to do so, they are less competitive on the labour market, the consumer market or the capital market (mostly in all three simultaneously) and will fall down eventually.

Eventually, all taxes come from common citizens’ wallets. The question is of course: when companies don’t pay taxes, why are these charged to them in the first place?! Cynics point at the fact that corporate taxes are attractive for politicians, as it seems that normal citizens don’t have to pay them. However, there is another reason why governments want to charge taxes on corporate profits and that is that it offers the possibility to redirect taxes to tax-payers abroad.

Say, we charge taxes on a chocolate factory, which both exports a substantial amount of chocolate abroad and has foreign shareholders. Via the sales price of chocolate in foreign countries, as well as through the foreign shareholders, a substantial amount of taxes has been averted abroad.

This whole article of a few years ago is still a must-read for everybody who masters Dutch or is willing to accept the poor quality of automatic translation tools. While you don’t have to agree with Robin, you will nevertheless be impressed with the unavoidable logic behind his thesis.

And one even starts to understand the reluctance of multinational companies to pay their tax dues, albeit without defending their (sometimes immoral) actions to dodge taxes.

4. People of substantial private wealth, who generate their annual income through the usage of this wealth, will hardly pay taxes either.

Simply stated: while there are only a few ways for workers to legally avoid or (illegally) evade taxes, the ways for owners of substantial private wealth to dodge taxes are numerous and still growing in numbers.

Especially in The Netherlands and other modern countries, the fishing net of the internal revenue service for common workers is ubiquitous and omnipotent.
Simply stated, payment of taxes in The Netherlands is a question of: 
  1. Visiting the website of the Dutch revenue service;
  2. Looking up one’s tax data;
  3. Checking the numbers of earnt income, mortgage and interest deductions and at last the various surcharges there;
  4. Change everything that needs to be changed...; 
  5. And then hit the Send-button! 

Wham, bam, thank you, Sir and Ma’am!!! Your tax charge will be collected from your bank account with no. 48.99.28.293 at two week's notice! 

There is simply no way to escape from an institution that sees everything and knows all there is to know about one's employer, one’s income, one’s expenses, one’s mortgage, one’s family situation and everything else. The only thing that you can do against it... is just paying your dues!

However, when private wealth comes in the equasion, the internal revenue service suddenly plays a whole different tune. Suddenly a host of possibilities opens up to move money around the globe until nobody knows where it is anymore, hide it in a opaque trust on Jersey or invest it in non-existing firms on a sunny and warm island in the Atlantic or Pacific Ocean.

Where the grip of the Dutch Internal Revenue Service on workers’ taxes is almost 100% complete, its grip on owners of private wealth is much more loosely. 

And the more money people have, the more it pays out to hire fancy sollicitors, legal wizards or the best tax specialists in the business. It is a simple question of spending one million to save ten millions or more... You can do the math yourself!

The people involved in such tax avoidance (evasion) businesses don’t look at things of morality and fairness towards the rest of the population. They simple look at their own interests and act accordingly. “Too bad for you, but it is my money and I already paid my share in taxes when I made this money in the first place. And I don't want to be taxed twice for it!”

And so the bill is eventually footed by the workers and other people that don’t have access to the tips, tricks and legal possibilities of the rich and shameless...

5. The morality of people endorsing tax avoidance / evasion in the financial or the legal industry is stupefied with every all-nighter and every paycheck, under extreme pressure of their piranha-like superiors and peers.

This morning, I read a revealing article of Dutch anthropologist and journalist Joris Luyendijk, about the people working at banks and law firms in the London City and elsewhere. These are the people who carry out all the legal paper work and establish the fuzzy fiscal constructs, necessary for large scale tax-avoidance (evasion) by companies and wealthy citizens.

Here are a few snippets of this disturbing article, translated by me:

As stated earlier, bankers are no monsters so you can just ask them, face to face: “How can you live with yourself, when you do things like that?!”

Often, their first answer was: “We just don’t think about that”. As a female worker at the legal department of a large bank expressed, while looking back at the years in which she established “shell companies” on the Virgin and Cayman Islands: “When you are in the middle of it, and you work until very, very late on a daily basis, you just don’t ponder about such things. Only later I realized: ’Hey those products are probably used for tax avoidance’. When you are a rapidly moving part of the machine, you are exclusively focused on the next stockpile of documents, coming your way.”

Everybody who has a good job at a bank, a lawyer’s office or a consultancy firm works long, long hours: especially in the London City, but to a lesser degree – also in Amsterdam. 

Many of those employees either suffer from insomnia or live like a ‘Spartan’. Especially in London, the ‘bosses’ expect from the ‘juniors’ that they make regular all-nighters: one works all night, returns home with a cab at six o’clock in the morning and takes a shower and a clothes change, while the taxi waits. And then it’s back to the office, for yet another long, long working day. 

Such pressure undermines all ethical awareness, according to interviewees. One is exclusively focused on ‘corporate survival’: getting the job done!

All these workers are probably the best of the best and the brightest of the brightest, with all the possibilities in place to really make a difference for everybody else in the world. 

Yet, their superiors ask them to act like brainless, corporate piranhas, who neglect or even mislead their customers and harm their countrymen, their families, their friends and especially their own conscience in their hunt for money, status and luxury in a city that has turned into a ghetto for the wealthy.

Their “training on the job” is not so very different from the training that Marines, SAS troops or Navy Seals receive to extend their physical and mental limits, stultify their own emotions and turn into killing machines who can kill enemies in a split second, without blinking an eye. 

Also these all-nighter workers learn to push their emotions and conscience aside and extend their mental and physical limits, in order to fight the exhaustion and despair that undoubtedly accompany the difficult moments in their jobs. Failure is not an option!

Consequently, it is no wonder, that these workers don’t ponder about the ethics or the impact of their activities with regards to the rest of the world. 

They have learned to look at customers as muppets and common citizens without a big checkbook are not even worth mentioning. Emotions are a luxury that they simple can’t afford to have in their struggle to stay on top of the food chain.

So, when an extremely wealthy customer walks in, who wants to evade taxes via the Cayman Islands, so be it! "His wealth is my commission and I need that commission in order to survive!"


To be continued!

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