International Skulduggery

[A Nonny Moose 8,261]

There will undoubtedly be a flap over this.

Someone on the inside of this Panamanian law firm must have been pissed off in the extreme.

[krbe 193]

Politicians and others who benefit from moral outrage will rage a little, and then it'll be over.

I have a mostly positive view on tax avoidance/evasion. The reason is because all this is made possible with the legal instruments at the disposal of the citizens (although it helps that you have a bit of money as well): Capital transfers, bearer shares, international ownership of companies, straw man boards, powers of attorney, and so on. This situation is one which the powers to be are satisfied with. If the parliaments of the world wanted to weed out such forms of tax avoidance/evasion, they would have done a long time ago. I can only conclude that the status quo is as it should be. The lone exception (in certain respects) is the United States government, whose threats of punitive taxes on foreign banks operating in America or dealing with American clients actually showed that government regulation works (FATCA).

Without having the numbers at hand (so you are naturally free to dismiss the following), I believe that international tax evasion and fraud is more harmful to society. Terrorism gets politicians all worked up and they actually do something about. It doesn't always work, it's often harmful to the fabric of society and it has a tendency to slowly erode those rights and that society our forefathers spent hundreds of years of shaping and fighting for, but by and large, they are action-oriented. But given that terrorism involves dead people and explosions cause by dirty foreigners who might soon have a dirty bomb, and international tax scams does not, the measures that could combat tax avoidance/evasion -- such as centralised registries of corporate ownership, international capital controls, regulations of corporate ownership and management, etc. are nuisances too extreme to overcome.

[Ocram's Razr 964]

Well, krbe is correct; none of this would happen if the powers that be (politicians, executives, and corporations) were truly opposed to corruption.

[LexusInfernus 908]

Well, saying that the powers that be could easily solve tax havens is a stupid simplification.

First, if you don't happen to be part of the powers that be in a country that counts as a tax haven, you can't do anything because you can't change the laws of other countries. This has proven to be the largest problem for dealing with this, you require the cooperation of several other countries to change their tax policies. Even worse, combating tax havens doesn't just require cooperation, it requires coordination. Even if Panama, Ireland and the Netherlands were to change their tax rules and make it more expensive, companies would still move their businesses to the place with the lowest tax rate. Whether that tax rate is 2% or 20%, the guy with a tax rate of 30% still sees businesses move away and avoid paying tax in their country. If you want to eradicate this issue, you need to have the same tax laws everywhere, so there is nowhere to go to avoid paying taxes. 

Second, being a tax haven can  be very lucrative. In the Netherlands its estimated to bring in several billions a year. Of course, that number could be way higher if those companies actually paid the tax rates they are supposed to pay, but the Netherlands would miss out, because frankly there isn't a good reason for a lot of those businesses to be registered in the Netherlands, other than our absurd tax policy. So if the Netherlands changed it, we would lose out. In other countries, more developing countries, low tax rates or special tax zones are often a way to bring in investments and hopefully also jobs. Why bother investing in some business park in Kenya when you aren't really interested in their market, unless it provides you with a way to avoid paying a lot of money? Worse, this creates a race to the bottom, as companies will move to the next place if they offer even lower tax rates.  

And this is why those companies can do this. We are being played out against each other. Countries are given short term incentives to create favorable tax conditions, and once those are in place they can't be repealed because it would cost those countries money and business. So no, its not just a matter that would be solved if only politicians bothered to fix those loopholes.  

[krbe 193]

2 hours ago, LexusInfernus said:

First, if you don't happen to be part of the powers that be in a country that counts as a tax haven, you can't do anything because you can't change the laws of other countries.

That depends entirely. Ask the Swiss if their changes to secrecy laws have come about of their own accord, or if the Americans bullied them into that.

It is exactly the sentiment that 'it is impossible to do something unless you cooperate on tax law' that hinders any real development. Tax havens survive only because tax avoidance/evasion is not considered harmful enough to not cooperate on -- with the exception of the introduction of the FATCA.

But tax avoidance/evasion is only the end result of a series mainly completely legal advanced capital transactions, complex corporate and opaque management structures, with obsucre relations between banks, law firms, consultants, accountants and the tax avoiders/evaders themselves. The crime tax avoiders/evaders are guilty of is a relatively simple one compared to the extent of their legal activities: They merely choose not to report. The Tax Justice Network estimated the total loss from tax avoidance/evasion at 3.1tn USD in 2011.

You do not need to change the laws in other countries to combat tax avoidance/evasion, but you must be willing to go to war, in a financial sense. Tax cheats do not transfer money out in suitcases and hide them in shoddy tropical banks. Their money are all in computers, their ownership registered on anonymous bearer shares, powers of attorney granting unlimited powers to faceless owners over named strawman board members; all this are transactions that can be regulated in order to curb tax avoidance/evasion. Information, technology and legal fiction enables everyone to avoid or evade tax if they so wish. And this is part of the domestic sphere politicans may control, but are unwilling to control.

Consider the total cost of terrorism, estimated at less than 55bn USD. I find it hard to believe that even the indirect impact of terrorism will reach the level of tax avoidance/evasion. Yet, if we're talking about a threat to international peace, one suddenly has very powerful tools:

• After 9/11 the Americans claimed that al-Barakaat, a Somali conglomerate which made up a large part of Somalia's modern corporate sector through the 90s and a lifeline for those in the country, was financing terrorism. They had had suspicions for years, but was unable to substantiate anything; with the new al-Qaida sanctions regime, they were able to impose financial sanctions on Somalia's largest business, active in banking/finance, construction, telecommunications, etc. -- severing the connection between those left in the failed state and the Somali diaspora. This was later found to be wrong, with no evidence of ties to bin Laden or al-Qaida.
• The Iranian nuclear programme led to Iran being shut out of the SWIFT transaction system, based in America and Belgium.
• Comprehensive trade sanctions, financial sanctions and inspect and seize regimes have been imposed on Libya and North Korea.
• The EU/US/Canada/Australia unilateral sanctions on Russia freezes the assets of certain persons, bans transactions with companies in certain sectors and prohibited the honouring of debt contracts.

2 hours ago, LexusInfernus said:

Second, being a tax haven can  be very lucrative.

As you surely know, until relatively recently international diplomatic etiquette divided the world in civilised and barbarian nations. If cheating on taxes really hurts nations, if it really tears a seam in the fabric of society, then they can do something about if they're willing to sacrifice something in return for a more ideal world.

Until that day comes, I would advise each and every one of us to make sure that the loopholes are exploited. The house always win and you should get in on it, too.

[LexusInfernus 908]

1 hour ago, krbe said:

That depends entirely. Ask the Swiss if their changes to secrecy laws have come about of their own accord, or if the Americans bullied them into that.

It is exactly the sentiment that 'it is impossible to do something unless you cooperate on tax law' that hinders any real development. Tax havens survive only because tax avoidance/evasion is not considered harmful enough to not cooperate on -- with the exception of the introduction of the FATCA.

But tax avoidance/evasion is only the end result of a series mainly completely legal advanced capital transactions, complex corporate and opaque management structures, with obsucre relations between banks, law firms, consultants, accountants and the tax avoiders/evaders themselves. The crime tax avoiders/evaders are guilty of is a relatively simple one compared to the extent of their legal activities: They merely choose not to report. The Tax Justice Network estimated the total loss from tax avoidance/evasion at 3.1tn USD in 2011.

You do not need to change the laws in other countries to combat tax avoidance/evasion, but you must be willing to go to war, in a financial sense. Tax cheats do not transfer money out in suitcases and hide them in shoddy tropical banks. Their money are all in computers, their ownership registered on anonymous bearer shares, powers of attorney granting unlimited powers to faceless owners over named strawman board members; all this are transactions that can be regulated in order to curb tax avoidance/evasion. Information, technology and legal fiction enables everyone to avoid or evade tax if they so wish. And this is part of the domestic sphere politicans may control, but are unwilling to control.

Well, the Americans have butter on their heads. They may have bullied another country in changing secrecy laws, their own tax code is so full of holes American corporations don't need to go to Panama or some other tax haven to pay no taxes. 

And yes, you most certainly do need to change the laws in other countries to effectively combat tax evasion. I mean, quite simply if your corporate HQ is registered in the Netherlands or Ireland, and you set up an entirely legal simple construction, for example by turning your entire American based operation into a franchise which basically owes all the money they make to corporate in the Netherlands, the Americans can't really tax any kind of profit because technically the American franchise doesn't make a profit. But what are you going to do about that? Ban franchising? How do you make these things illegal? And if so, how are you going to make sure these tax avoidance laws don't turn into a burden to legitimate businesses that are paying their taxes? 

1 hour ago, krbe said:

Consider the total cost of terrorism, estimated at less than 55bn USD. I find it hard to believe that even the indirect impact of terrorism will reach the level of tax avoidance/evasion.

I'm not disputing that tax evasion/avoidance is a much bigger problem than terrorism. I'm saying its just not a matter of flipping a switch and things will change. Complex problems do not have easy solutions, even if the people of a nation wanted to change things, even if their politicians could somehow resist the pressure from those large corporations to keep some loopholes in, even if they change their own laws, businesses can simply move to a place where that didn't happen. 

1 hour ago, krbe said:

As you surely know, until relatively recently international diplomatic etiquette divided the world in civilised and barbarian nations. If cheating on taxes really hurts nations, if it really tears a seam in the fabric of society, then they can do something about if they're willing to sacrifice something in return for a more ideal world.

Until that day comes, I would advise each and every one of us to make sure that the loopholes are exploited. The house always win and you should get in on it, too.

As the Germans say: 'Erst kommt das Fressen, dann kommt die Moral'. A developing country is more interested in getting its people to work, getting economic activity set up in their country, and if that comes at the cost of some rich Western Nation not getting as much tax dollars, then that is to bad, but not their problem. 

[krbe 193]

19 minutes ago, LexusInfernus said:

And yes, you most certainly do need to change the laws in other countries to effectively combat tax evasion. I mean, quite simply if your corporate HQ is registered in the Netherlands or Ireland, and you set up an entirely legal simple construction, for example by turning your entire American based operation into a franchise which basically owes all the money they make to corporate in the Netherlands, the Americans can't really tax any kind of profit because technically the American franchise doesn't make a profit. But what are you going to do about that? Ban franchising? How do you make these things illegal? And if so, how are you going to make sure these tax avoidance laws don't turn into a burden to legitimate businesses that are paying their taxes? 

That's the problem. It's legal because someone has decided that it should be legal. In the Netherlands, it's an internal problem the Dutch must tackle on their own through their own legislation. If foreigners can't stand the Dutch Sandwich, it is for them to take other countermeasures. Sanctioning an otherwise civilised country might sound harsh, and indeed introduces burdens to businesses. But such is the nature of legitimate business -- they are regulated.

Obviously, constructs such as the EU, international agreements, etc. will make this hard. And thus, one is back to saying 'need cooperation ... because we're not at all willing to sacrifice anything', meaning that tax avoidance/evasion is not actually that much of a problem.

19 minutes ago, LexusInfernus said:

I'm not disputing that tax evasion/avoidance is a much bigger problem than terrorism. I'm saying its just not a matter of flipping a switch and things will change. Complex problems do not have easy solutions, even if the people of a nation wanted to change things, even if their politicians could somehow resist the pressure from those large corporations to keep some loopholes in, even if they change their own laws, businesses can simply move to a place where that didn't happen. 

You are of course entirely correct that it is a complex structural issue. I do hesitate to call it a 'problem' though; tax avoidance/evasion isn't. If it were, one would have tackled it. It's a minor financial nuisance, but the losses are more than acceptable. If they were not acceptable, other measures would have been taken a long time ago.

And this is just not a facetious statement: One of the major problems in fighting tax havens is that major countries each rely on them. China has Macau, France has Monaco, the US the Caribbean. And we all have Holland, Ireland, Belgium, Austria -- hell, even Norway can be considered a tax haven for special purposes. 

The papers are supposed to be published in May. Come August, and we've all forgotten this.

[LexusInfernus 908]

1 hour ago, krbe said:

That's the problem. It's legal because someone has decided that it should be legal. In the Netherlands, it's an internal problem the Dutch must tackle on their own through their own legislation. If foreigners can't stand the Dutch Sandwich, it is for them to take other countermeasures. Sanctioning an otherwise civilised country might sound harsh, and indeed introduces burdens to businesses. But such is the nature of legitimate business -- they are regulated.

Obviously, constructs such as the EU, international agreements, etc. will make this hard. And thus, one is back to saying 'need cooperation ... because we're not at all willing to sacrifice anything', meaning that tax avoidance/evasion is not actually that much of a problem.

 

How are you going to impose sanctions on say the Netherlands? If you are an EU country, well you can't really, because that would mean you are breaking EU law. If you are the US, well maybe you could try. But how? Who are you going to target? The government? The greater economy? What type of sanctions are you going to impose that will either cause businesses to stop setting up their HQ in the Netherlands or make the Dutch government change the tax laws? And how do you achieve any of that without causing a diplomatic incident or imposing some ridiculous measure that doesn't pay off? 

Also, it seems you fail to see the game theory behind this. If one country makes a move first, without knowing if other countries will follow its example, it would institute a policy that results in direct financial losses for no real gains. Worse, if no one follows, everyone else gets to keep making money from being a tax haven while you just did the 'right thing' and get nothing in return. How do you expect people to overcome this problem without cooperation on the matter? Countries need assurances that they aren't the ones making the first move only to find that no one else moved, and for that cooperation is simply a requirement. 

Quote

 

You are of course entirely correct that it is a complex structural issue. I do hesitate to call it a 'problem' though; tax avoidance/evasion isn't. If it were, one would have tackled it. It's a minor financial nuisance, but the losses are more than acceptable. If they were not acceptable, other measures would have been taken a long time ago.

Thats ridiculously stupid circular logic. Because its not a problem we aren't fixing it and because we aren't fixing it its not a problem. Thats not how policy works. Politics isn't about fixing obvious glaring problems, its about fixing the problems that for some reason get attention. Terrorism was a problem long before 9/11, it was just that after 9/11 everyone got scared and it made the whole thing go up on everyone's priority list. Tax avoidance is a massive problem, it has always been a massive problem, but it has also always been a really boring complex problem that can't easily be reduced to a number of soundbites. Its not something that can easily be solved by one or two politicians making speeches, or by declaring war on something or by sending drones/fighterbombers to blow up the problem. 

Its boring, complex, related to math and accountancy and complex legal terms and rules and explaining it requires massive spreadsheets and powerpoint presentations. In other words, no one can score by tackling it and besides, if you do want to tackle it you are gonna have a very long and lengthy battle with an army of lawyers and lobbyists, so why bother? 

That said, it might be that publishing the panama files can attract enough of the publics attention and help explain what a terrible problem this really is, which in turn will push this issue straight on top of the agenda for a lot of politicians who see an opportunity to score on this issue. 

[krbe 193]

3 hours ago, LexusInfernus said:

And how do you achieve any of that without causing a diplomatic incident or imposing some ridiculous measure that doesn't pay off? 

If this really was a massive problem, 'causing a diplomatic incident' should be the least of the problems. The US managed to bully banks around the world into complying with American standards, simply by threatening assessing ridiculous taxes on non-compliant institutions. If the Netherlands was a large problem, it should quite naturally be targeted in the same manner. An assets freeze on Dutch businesses fleeing taxes would help.

And if Corporation A, headquartered in the Netherlands and exports X in profits to the Netherlands from country B every year, an assets freeze on A would lead A to relocated to a civilised jurisdiction, or profits to be redistributed to other actors not from the Netherlands. If the business (activity, not entity) disappears entirely, it is a sign that the business was not viable in the first place. If the Dutch practice is a major problem a general embargo of some sort should be able to pressure them, unless they are like North Korea or Iran.

And you are of course entirely correct that the EU is a major obstacle. Taxes are a matter for the member state themselves, while any effective retaliatory measures would have to be trade based and hence illegal. The Dutch know this, and operate accordingly. And this is part of the reason why I do not consider it a massive problem. Sure, countries around the world lose a lot of money, but as long as it's more important to stay friends with some people living in a bog than protecting your own coffers, nothing will happen.

3 hours ago, LexusInfernus said:

That said, it might be that publishing the panama files can attract enough of the publics attention and help explain what a terrible problem this really is, which in turn will push this issue straight on top of the agenda for a lot of politicians who see an opportunity to score on this issue. 

No. As you stated in the previous sentence, why bother? In a few months no one will even care. In the same manner the LuxLeaks didn't affect us too much, and the ones responsible for the leaks being chased by the village sheriff, no one is going to care once the immigrants return this summer. 

EDIT: Tax avoidance require extensive use of corporate structures. The Economist has a short introduction as to how you go about.

 

  Edited April 4, 2016 by krbe  

[LexusInfernus 908]

3 hours ago, krbe said:

If this really was a massive problem, 'causing a diplomatic incident' should be the least of the problems.

Why? Just because its a problem doesn't mean it suddenly justifies a diplomatic incident, nor does it mean that causing a diplomatic incident isn't also a problem. 

3 hours ago, krbe said:

The US managed to bully banks around the world into complying with American standards, simply by threatening assessing ridiculous taxes on non-compliant institutions. If the Netherlands was a large problem, it should quite naturally be targeted in the same manner. An assets freeze on Dutch businesses fleeing taxes would help.

Well, first, before you can start freezing assets, they first need to have broken the law in one way or another. No one has broken any laws just by setting up tax optimization structures. As for freezing the assets of the Dutch government itself simply for not adopting a certain type of tax code, well just see how well that kind of diplomacy flies. Realistically that is never gonna happen, nor should that happen. Its ridiculously stupid diplomacy. 

3 hours ago, krbe said:

And if Corporation A, headquartered in the Netherlands and exports X in profits to the Netherlands from country B every year, an assets freeze on A would lead A to relocated to a civilised jurisdiction, or profits to be redistributed to other actors not from the Netherlands. If the business (activity, not entity) disappears entirely, it is a sign that the business was not viable in the first place. If the Dutch practice is a major problem a general embargo of some sort should be able to pressure them, unless they are like North Korea or Iran.

Again, you can't just go around freezing assets when the owners of said assets haven't broken any laws. And its even more difficult when you don't have jurisdiction over where said assets are located. See, freezing Iran's assets was only possible because basically the whole world agreed with the sanction imposed on Iran and took part in the asset freeze. If one country decides to start freezing an other parties assets, they can only freeze the assets over which they have jurisdiction. Its a pointless move unless you have several other states that cooperate with you on this issue and also decide to freeze the assets of the party you want to hurt. 

The same goes for a general embargo, those things only work if the vast majority of the rest of the world agrees to impose such an embargo. Again, cooperation is key here. 

 

[krbe 193]

7 minutes ago, LexusInfernus said:

Again, you can't just go around freezing assets when the owners of said assets haven't broken any laws

Actually, yes, you can, assets freezes are generally imposed on mere suspicion or by virtue of association. Or in the case of the UN, they make up a crime to fit the punishment. Other financial measures are also effective; e.g. the US enforced its Cuban blockade overseas. (Danish company bought Cuban cigars from German company and intended to pay via wire transfer. The transfer was seized by American authorities as the transfer used the SWIFT network.)

[Ocram's Razr 964]

The USA could change the laws to make this type of tax evasion illegal. There was a loophole used by Apple that let them register in Ireland without paying Irish taxes either, in effect going untaxed on a sizable portion of their income.

My ideal solution is to enact pollution taxes and presume everything is made with dirty coal unless proven otherwise. The EPA regulations are a type of proof and EPA inspectors could inspect various factories around the world or allow local governments to inspect for them. If the EPA disallowed tax havens from using their own inspectors and put their priority on inspections behind willing collaborators (who want EPA inspectors), well... you get the point.

I know that the Netherlands is a really clean/green/eco-friendly country but a 5-year punitive pollution tax (since many countries would probably opt to use American inspectors) could get tax havens under control along with polluters.

[Alejandro24 575]

Are there people from tech companies -Google, Microsoft, Apple, Samsung, et al...- involved in the panama papers scandal?

[LexusInfernus 908]

7 hours ago, OcramsRzr said:

I know that the Netherlands is a really clean/green/eco-friendly country but a 5-year punitive pollution tax (since many countries would probably opt to use American inspectors) could get tax havens under control along with polluters.

Hah, no. The Netherlands is hardly clean/green/eco-friendly. We are somewhere at the bottom of the list of European countries when it comes to our use of clean energy. And no, no country in the world would opt for using American inspectors. Also, how are you going to tax the Netherlands? And on what? 

[A Nonny Moose 8,261]

Marco, I don't think what you propose is feasible even if the Congress should be so foolish.  It could get the U.S. kicked out of the G20.  There will always be tax dodgers, and the only good weapon against them is transparency.  Publish what they are doing.  This kind of thing doesn't do well when lighted up.

[Ocram's Razr 964]

A pollution tax is more fair than strict environmental standards and accross-the-board tariffs. Pollution is harmful and it can be reduced further with fewer job losses by taxing it directly.

 

Pollution is a negative externality, tariffs punish all firms in a category, regardless of compliance with standards, disallowing "untrustworthy" nations from certifying environmental standards will ensure no firm is undertaxed from corruption and can generate extra revenue from overtaxing economic activity in tax havens before they are inspected