Aggressive Tax Avoidance

Here’s the bottom line: tax evasion is illegal; tax avoidance, aggressive or otherwise, is taking advantage of legal loopholes specifically created by politicians who depend on big business for campaign contributions. Western tax codes are profoundly complicated, a compendium of “incentives” to encourage certain activities (e.g., mortgage deductions encourage home ownership), reactions to egregious practices (e.g., “alternative minimum tax” for folks with too many deductions) and benefits to those who lobby the hardest and make the biggest campaign contributions (e.g., the “carried interest” rule that allow fund managers to convert what would be ordinary income for any other job category into low-rate capital gains without the need of making an investment).

Keeping money overseas in low rate alternative nations or even in anonymous Swiss bank accounts (most probably used for illegal evasion or money laundering) is an epidemic that deprives too many jurisdictions of tax revenues to which they really should be entitled. If you are big enough and powerful enough, you can even negotiate your tax rate with a friendly government, a practice that has lured more than one multi-national to a tax situs in Ireland. Wouldn’t you like to be able to negotiate your tax rate with the government? It seems that the IRS (and other taxing authorities) loves killing the little and middle guy, but is willing to entertain “deals” with the big tax avoiders.

At the close of the G-8 (eight most powerful nations on earth) summit in mid-June which took place in Northern Ireland, a policy was passed to create the kind of open information-sharing – matching tax payments with where a company generates its profits – that could work… if the nations involved really take this issue seriously… and there aren’t a whole pile of countries striving to make sure this never works. “The Lough Erne Declaration - signed by the UK, US, Germany, France, Italy, Canada, Japan and Russia - vows to ‘fight the scourge of tax evasion’ by ensuring automatic exchange of tax information and changing the rules to stop multinational companies shifting profits across borders to avoid paying their fair share…

“[British PM David Cameron stated]: ‘We agreed a Lough Erne declaration that has the potential to rewrite the rules on tax and transparency for the benefit of countries right across the world, including the poorest countries in the world… We have commissioned a new international mechanism that will identify where multinational companies are earning their profits and paying their taxes so we can track and expose those who aren't paying their fair share.’… Mr Cameron was hopeful that Britain's G8 partners would agree to draw up action plans showing who owns and controls the companies based in their countries.” BBC.co.uk, June 18^th.

But tax havens aren’t going down without a fight. Entire financial systems have been built around banking secrecy, specifically designed to allow tax-cheats to deposit vast sums into local banks, far away from the prying eyes of governmental tax authorities. High on the list: Singapore, Hong Kong and most notoriously, Switzerland. But as Swiss Banks expand into multi-national operations overseas, they are increasing facing hostile governments on the prowl for “missing money” from such tax cheats. “In January Switzerland's oldest private bank, Wegelin, closed after being indicted and fined $58m by the US authorities after admitting in court to helping American customers to hide more than $1.2bn from the Internal Revenue Service… In 2009, Swiss bank UBS paid $780 million and handed over details of more than 4,000 accounts in order to avoid indictment.” BBC.co.uk

As pressures from the United States and the European Union against Swiss banking secrecy mounts, the Swiss are pushing back, even though such efforts are likely to backfire against Swiss banking assets outside of Switzerland: “The lower house of Switzerland's parliament has refused to debate a bill that would allow Swiss banks to pass client information to the US tax authorities… The bill is the result of pressure from the US following revelations that Swiss banks had helped American account holders to evade taxes… The US had demanded action by 1 July, but the Swiss parliament summer session ends this week.

“The bill will now return to the Senate…The lower house decided by 126 votes to 67 not to discuss the bill. A second rejection by the lower house would effectively kill the draft law…The bill would allow Swiss banks to sidestep strict secrecy laws and release information relating to clients' accounts… It also contained secret clauses requiring the banks to pay an estimated $10bn (£6.4bn) in compensation for lost tax revenue.” BBC.co.uk, June 18^th.

We really need to start with our own tax code, dismantling a system that allows the biggest and the baddest tax-avoiders the tools for “aggressive tax avoidance.” Our Congress created these loopholes, so their complaints about the “unfairness” of it all seem to be the epitome of hypocrisy. The Swiss feint is a necessary effort, but perhaps it is just a distraction that takes our focus away from the miscreant Congress that opened all these secret little doors along the way.

I’m Peter Dekom, and the unfairness in tax avoidance is something that our Congress has the power to fix.