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Thursday, 28 April 2016

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

This is finally the follow-up on my last article, posted roughly two weeks ago. Labour-oriented obligations stopped me from finishing it earlier, but here it is.

6. Unless a global tax harmonization is established, the race for the best establishment climate for multinational companies is a tax race to the bottom, with only losers in the end.

Tax rulings – even though they are not destructive by default, as they offer clarity to multinational companies about their tax obligations – have turned into a weapon of fiscal mass destruction for many countries. 

Very often the countries that need the tax payments most – often poor countries in the Third World that either have supplied the raw materials and commodities to the multinationals involved or that are responsible for a substantial part of their realized profits – are deprived from receiving tax money by such rulings. The profit money, made during the commercial activities in these countries, flows towards ‘the path of least fiscal resistance’, aka the countries with the lowest tax rates.

While the original beneficiary – the country were the sales and profits were realized and where the tax money should have been paid – does not get the tax proceeds at all, the eventual beneficiary of the tax money – in most cases, the country having the most lucrative tax ruling for the multinational involved – does only get a token amount of tax money, that stands in no relation with a fair tax payment on realized sales and profits.

And so, often in three or four stages, the massive corporate profits disappear from the face of the earth: from f.i. Angola to Bermuda, with one or two layovers in The Netherlands, Ireland or Luxemburg.

Even though every tax-haven (including The Netherlands, the UK and Luxemburg) only gets a token amount from these corporate profits ‘on their way to the tropics’, no country wants to give such tax-rulings up for free. This is due to the fact that these fiscal rulings, and especially the fiscal and legal arrangements surrounding them, create substantial numbers of high-yield fiscal and legal jobs.

And the countries that still not have favourable, fiscal arrangements for such multinationals will do their utmost to also grab a slice of the pie, in order to make a few bucks on money that is not theirs in the first place. And so the perfect race to the bottom is established.

The only way to fight this phenomenon of corporate tax avoidance/ evasion is a global, fiscal harmonization. While this is perhaps a highly Utopian concept, it will prove the only way to fight this destructive behaviour by multinationals, but also by rich individuals, who use all kinds of (il)legal fiscal constructions, in order to dodge taxes. 

And even though multilateral agreements between all countries in the world will prove to be virtually impossible to achieve, the United States could perhaps force such a tax harmonization upon the rest of the world ‘at gunpoint’, by imposing draconian penalties on offenders of American tax laws.

7. The international battle against tax avoidance / evasion is a battle of ‘pots calling kettles black’.

Unfortunately, all countries are adamantly against tax avoidance and evasion... unless they do it themselves or profit (in)directly from it. Especially The Netherlands is a text book example of this schizophrenic behaviour.

In The Netherlands, it is allowed for the Internal Revenue Service to buy and use data sets, which are stolen or expropriated from banks and financial institutions in notorious tax havens (Switzerland, Liechenstein, Luxemburg and elsewhere), often by resentful (ex-)employees.

Where in the normal, economic circuits such behaviour would be called pilferage and should and would be considered inadmissible in court, it has become ‘a means to an end’ for the fiscal authorities, used to hit notorious tax evaders with stashes of money hidden in tax-havens after all.

And while I have not even the least sympathy for tax evaders (and even for avoiders), I consider this kind of pilferage nevertheless a crime, committed by an official government organization and therefore inadmissible in court, as far as I'm concerned.

Especially, as The Netherlands has spun a fiscal web with favourable tax rulings for multinationals, extremely low tax rates for certain kinds of taxes – for instance on foreign dividend yields and yields coming from related rights and patents-in-hand – and offers ample possibilities for the creation/establishment of letterbox firms, as ‘de jure’ headoffices for f.i. Russian oil companies or British / Irish rock bands, in order to avoid (or evade) taxes.

And not less hypocrite are for instance the United States, which hosts genuine tax havens, like the states Nevada, Wyoming and South Dakota or the United Kingdom, which is described by its own public broadcaster BBC as a tax haven for multinationals.

Summarized, all countries hate each other's guts, in case their own citizens and companies are offered possibilities to avoid / evade their own imposed taxes, but don’t feel bad about offering such possibilities to companies and citizens from other countries.

8. Don’t automatically expect your leaders to pay their fair share in taxes. The chance that they don’t, is substantial.

PM David Cameron and Russian president Vladimir Putin were amongst the most conspicuous ‘users’ of the Panamese law firm-used-for-tax-avoidance Mossack Fonseca, but probably many more global government leaders try to hide their own nest eggs cleanly out of sight, while urging their own citizens to pay their taxes or else...

It is like in the famous quote of George Orwell’s Animal Farm:“All animals are equal, but some animals are more equal than others.”

Of course, such government leaders understand the importance of paying taxes for the financial wellbeing of their state or country, as no-one else does. Nevertheless, they consider their own efforts and sacrifices for God, their country and ‘momma’s apple pie’ as having such magnitude, that ‘special arrangements’ apply to themselves and to their (political / personal) friends and beneficiaries.

The results of such destructive behaviour is that tax payments become more and more a common man’s party, while the elites – both represented by the large companies and rich and famous private persons – find both ways and justifications for not paying their fair share of taxes.

9. The battle against corporate tax avoidance / evasion is a battle fought with one’s feet and one’s wallet.

Even though the playing cards in the deck are not stacked in favour of the ordinary tax-payers, he or she still has a possibility to show his opinion about private and especially corporate tax avoidance / evasion: don’t use the products and services of such tax-avoiding companies! 
  • Abolish certain hamburgers, when the issuing chain of restaurants evades taxes at home or abroad;
  • Don’t drink coffee from that famous store chain, when this company ‘burns’ its profits, using opaque constructions regarding the delivery and payment of ‘their special and unique’ coffee bean blend;
  • Don’t shop at store chains that avoid / evade taxes;
  • Don't do your private or corporate, financial transactions at banks that help others to avoid / evade taxes. Don't save or lend money there and don't execute your stock transactions at such a bank;
  • Don’t buy clothes or shoes from certain famous brands, when not a fair share of the producer’s profits is paid in taxes. 
Just like with the alleged usage of children’s labour by western companies or the manufacturing of clothes and shoewear under extremely dangerous circumstances, the consumers have a voice that can be heard in the most remote places and in the boardrooms of the leading companies; the only thing that they have to do is not squandering their principles on cheap offers and impressive television advertising campaigns.

10. One day, tax avoidance / evasion among companies and wealthy citizens could spur the end of capitalism, one way or another. An uprise of the tax slaves could be nigh when the economy does not quickly recover from the current depression.

I am not a doomsday believer at all. As a matter of fact, I am always quite optimistic about things making a turn for good, in the end.

What I do believe, however, is that the corporate tax evaders and the rich elites should read books about the economic situation and the public anger in the prelude to the French Revolution, the Russian Revolution or the Second World War. And then they should ask themselves how much the current, financial and economic situation, and also the public anger in many empoverized countries, differs from the situation in those shaky times.

As far as I’m concerned, it was always the dire situation of the common people and small enterprises, in comparison with the inconceivable richness of the wealthy elites, that led to such massive and brutal political changes; not so much the emergence of new and different political ideas.

As I stated in the first part of this article: when rich people and large companies are not willing to pay their fair share of taxes, all income for the state must be supplied by the common people, whether they like it or not. This outrages the common people, who are already strapped for cash, when in difficult, economic situations.

So while the capitalism was the undisputed winner of the battle against Communism in the Nineties of last century, it runs the risk of losing its number one position due to the sheer, intrinsical arrogance that comes with it: "Why would I sympathize with empoverished people and families?! I am a winner and poor people are losers, who failed to grab their opportunities and must suffer for that through poverty"). 

And also for its misunderstanding for the needs of the needy, common people, who all want to have THEIR share of wealth, job-certainty and general well-being, instead of being treated as guinea pigs in a laboratory.

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