Tuesday, June 13, 2017
Smart companies often share methodologies with criminal income/tax evaders. Their overall vector is to move money, licit and illicit, to a deposit accounts and economic operations in a foreign country where one or more of the following “benefits” may be available: banking secrecy (directly or through the use of privately-held entities where true ownership is hidden or disguised), favorable tax treaties with the United States and exceptionally low tax rates (statutory or open to negotiation). For some, it may also involve the lack of a criminal extradition treaty with the United States.
Swiss banking secrecy – shared with several Asian venues and with nations that consider themselves enemies of the United States – has made the headlines over the last few years. But inroads into limiting criminal secrecy have eroded some of these seemingly safe harbors. However, nothing brought home this world of secret accounts like the leak of the “Panama Papers” in 2015, naming important political and corporate officials in some amazingly embarrassing disclosures.
“The Panama Papers are 11.5 million leaked documents that detail financial and attorney–client information for more than 214,488 offshore entities. The documents, which belonged to the Panamanian law firm and corporate service provider Mossack Fonseca, were leaked in 2015 by an anonymous source, some dating back to the 1970s.
“The leaked documents contain personal financial information about wealthy individuals and public officials that had previously been kept private. While offshore business entities are legal, reporters found that some [read: a lot] of the Mossack Fonseca shell corporations were used for illegal purposes, including fraud, tax evasion, and evading international sanctions.” Wikipedia.
While we know that the effective federal corporate tax rate is 35%, for U.S. corporations with $10 million or more in annual revenues, that actual average rate paid – given statutorily-permitted loopholes – is more like 12.6%. For larger corporations with multinational operations, that legal tax “avoidance” (versus “evasion”) is often structured through the use of offshore deposits, corporate affiliates and designated overseas operations. Some of our biggest, Fortune 100, companies have managed to avoid paying any federal corporate tax for years… many others making what would appear to nothing more than token payments to the IRS. How is this remotely possible?
First, understand that statutes that legally permit income from U.S. companies to avoid taxes, by keeping properly-structured monies offshore, anticipate that this is simply a deferral of taxes, that such monies would be brought onshore and taxed at some time in the future. But somehow, that deferral begins to look “perpetual” absent some statutory amendments to the contrary.
Second, such offshore sheltering also requires overseas cooperation, licit and illicit, from governments around the world. The United States is not the only country concerned with watching its multinationals and wealthy citizens avoiding taxes. And where countries, subject to economic treaty obligations, carve out special-treatment-exceptionally-low-tax-rates, they often raise the ire of their treaty partners. This is, for example, the legal battle ensuing within the European Union over Ireland’s purporting granting Apple an income tax rate that has been reported as being 1% or less, giving Ireland an unfair advantage, the EU maintains, in attracting business over other EU nations.
Without some form of global cooperation, a pledge to take steps to prevent nationals and corporations from other countries to avoid the tax obligations of their home country, tax avoiders will forum-shop until they find some country somewhere willing to bend the rules and provide the requisite structures, licit for most but illicit for a few, to allow them to shelter revenues from taxation. The taxing authorities of most developed nations, particularly where they are aware of their multinationals’ availing themselves of tax havens, have long argued that there had to be a formal structure among nations to eliminate or at least limit such tax havens, global cooperation, if you will – from reporting to making sure that they themselves do not propagate such favorable loopholes.
This has been a particularly hot topic among the member nations of the Organisation for Economic-Cooperation and Development, of which the United States was one of its earliest member signatories (April 1961). The Obama Administration was one of the loudest protestors against the “suborning tax havens” by other countries. It was heavily involved in the negotiation of a treaty that directly addressed this abusive practice practices by certain countries attracting corporate business with a “wink wink” litany of relevant tax-related “benefits.” Even the Trump Administration has suggested that we need to close enabling U.S. loopholes.
But then the United States elected a president who is the owner and economic beneficiary of a series of multinational corporations, deriving significant income from those overseas investments, a candidate and then a president who refuses publicly to release his federal tax returns. So when the resulting OECD treaty (“Better Policies for Better Lives”) – designed to be a first step towards stemming tax-avoidance forum shopping – was signed by 76 nations on June 8th, one critical signature was missing: that of the United States of America… even though the Trump Administration itself has suggested that we need to close enabling U.S. loopholes.
“[The signatories] formally expressed their intention to sign an innovative multilateral convention that will swiftly implement a series of tax treaty measures to update the existing network of bilateral tax treaties and reduce opportunities for tax avoidance by multinational enterprises. The new convention will also strengthen provisions to resolve treaty disputes, including through mandatory binding arbitration, thereby reducing double taxation and increasing tax certainty…
“The OECD/G20 BEPS Project [the researched basis of the treaty; BEPS = “base erosion and profits shifting”] delivers solutions for governments to close the gaps in existing international rules that allow corporate profits to « disappear » or be artificially shifted to low or no tax environments, where companies have little or no economic activity. Revenue losses from BEPS are conservatively estimated at USD 100-240 billion annually, or the equivalent of 4-10% of global corporate income tax revenues. Almost 100 countries and jurisdictions are currently working in the Inclusive Framework on BEPS to implement BEPS measures in their domestic legislation and bilateral tax treaties. The sheer number of bilateral treaties makes updates to the treaty network on a bilateral basis burdensome and time-consuming.” Paul Caron, writing for the TaxProf Blog, June 8th.
Given Mr. Trump’s and his family’s significant economic interest in maximizing revenues and net worth from these overseas operations, regardless of his purported “transfer of corporate controls” to his sons, putting it mildly, this not only stinks from a conflict-of-interest perspective but clearly shows a strong and inherently pro-wealth bias (against the interests of most Americans) of his economic direction for the country. The Trump administration is sticking to traditional conventions regarding how multinational profits are allocated. Most GOP proposals maximize the ability of companies to allocate earnings to cheaper tax venues. I wonder why?
I’m Peter Dekom, and as we are overwhelmed by the bumpy road within the Trump administration – from the Senate hearings, his tweet-storms, the withdrawal from the Paris climate accord and the debacle we call his healthcare initiative, to name just a few – it is easy to miss other equally important problems created by a rule-avoiding, American autocrat.