Milain Fayulu - G20 - Corporate Tax Evasion

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Information about Milain Fayulu - G20 - Corporate Tax Evasion
Economy & Finance

Published on May 7, 2014

Author: MilainFayulu

Source: slideshare.net

WIRC 2014 Brief by | Milain David Fayulu with Helene Combes G20 CORPORATE TAX EVASION

G20|CORPORATE TAX EVASION 2 “It is more important now than ever that taxpayers pay the right amount of tax at the right time and in the right place.” Masatsugu Asakawa,Chair of the OECD Committee on Fiscal Affairsand Deputy Vice-Minister of Finance for International Affairs, Japan in World Commerce Review, June 2012 OVERVIEW Taxes are the main source of income for governments as well as a powerful political tool worldwide. Globalization however has progressively opened the business transaction flows, regardless of borders or state lines. As such taxation on international corporations has become increasingly complex to regulate. The G20 will have to weigh the advantages and problems caused by corporations which seek banking abroad in order to avoid taxation. Corporate tax evasion has seen a growth in the past decade with the spread of profit shifting. The OECD’s Base Erosion and Profit Shifting Project1 has exposed, international corporations use more and more creative ways to use tax competition to their advantage by shifting their profits and assets to different tax jurisdictions. The current challenge is to create a level tax playing field worldwide and create a harmonized taxation system which would counteract the spread of tax evasion. The G20 has had difficulty reaching a long lasting agreement on the Corporate Tax Evasion issue because of the double standards some countries utilize to ignore incriminating practices in their own jurisdictions. The abundance of existing bilateral tax treaties have also made any resolution more complex because of the legal intricacies they have created. The international community’s previous attempts to solve the global tax dilemma have lead to more legislation that has merely exacerbated the problem. As the G20 has pledged to find a durable solution to the global tax problem, this committee will attempt to tackle this issue of the globalized world. 1 OECD (2013), Addressing Base Erosion and Profit Shifting, OECD Publishing, Paris

G20|CORPORATE TAX EVASION 3 KEY ACTORS AND INTERESTS Globally, the equivalent of more than 5.1 percent of global gross domestic product never reaches the coffers of 145 national governments in the form of taxes, according to a report by The Tax Justice Network2 , an independent group that promotes financial transparency. The OECD underlines the increasing imbalance between increasing corporate revenue in the national GDPs and a decrease in tax payments from these same corporations.3 The issue of tax avoidance is very complex because it conflicts most with moral principles rather then legal ones and differs from tax evasion in that tax evasion is illegal as well as morally reprehensible. Although most states and non-states actors have different views on the issue, the ministerial level of the OECD council released a Declaration on the status of tax evasion and the possible means to repress tax evasion.4 The countries that rely heavily on their status as tax havens use their status to maintain their competitive advantage and dread the forthcoming regulations. Definitions A tax jurisdiction is the land authority to which any company or individual will pay taxes for living or working in the area of the jurisdiction. A tax haven is a state, country or territory with a tax jurisdiction where certain taxes are levied at a low rate or are absent. Different jurisdictions tend to be havens for different types of taxes and for different categories of companies. We can distinguish between the following broad categories: No tax havens, No tax on foreign income havens, low tax havens and special tax havens.5 2 "The Cost of Tax Evasion Worldwide." www.taxjustice.net. Tax Justice Network, 23 Nov. 2011. Web. 23 Sept. 2013. 3 OECD, Addressing Base Erosion and Profit Shifting, OECD Publishing, Paris, 2013 chap. 2. 4 OECD Concil, Ministerial Level. Declaration on Base Erosion and Profit Sharing. May 29 th 2013. Paris 5 Orlov, Mykola. "The Concept Of Tax Havens." Asterlaw.com. N.p., n.d. Web. 02 Dec. 2013.

G20|CORPORATE TAX EVASION 4 No–tax havens are countries that have no income, capital gains, or wealth capital taxes, and in which you can incorporate and form a trust. Primary examples are Bermuda, Bahamas and Cayman Islands. No-tax on foreign income havens are countries that impose income taxes, both on individuals and corporations, but only on locally derived income. They exempt from tax any income that is earned from foreign sources. Panama, Jersey and the Isle of Man are the best examples. Low Tax Havens are countries that impose some taxes on all corporate income, wherever earned. However, most have double taxation agreements with high taxation countries that may reduce the withholding tax imposed on income derived from the tax countries. The British Virgin Islands is a good example. Special tax havens are countries that impose most taxes but exempt companies in specific fields to pay taxes. Liechtenstein is a tax haven that specializes in trusts structures for companies. All these tax havens will be affected differently by different regulations and none of them is willing to fully relinquish its status. Therefore, there needs to be an organism that mitigates all the parties’ interests. Actors The Organization for Economic Co-operation and Development (OECD) is a body of 34 developed countries founded in 1961 to stimulate economic progress and world trade. In response to public outcry in several nations that multinational corporations are using tax havens to effectively avoid paying taxes in the countries where they do business the OECD is spearheading three initiatives that are aimed directly at this objective. The first initiative is the creation of a Global Forum on Transparency and Exchange of Information for Tax Purposes. Secondly, as mentioned before, the OECD’s is committed to tackle what they label “Base Erosion and Profit Shifting”, namely the booking of revenues in jurisdiction where a company has limited or no operations. In line with the report presented to G20 Finance Ministers in

G20|CORPORATE TAX EVASION 5 February 20136 , the OECD has developed an action plan to respond to BEPS. The OECD together with the G20 countries is developing a global model for automatic exchange of information as the new standard and plans to have this work completed by 2014.7 This latter initiative is controversial because certain financial institutions could incur a loss of clientele if the exchange of information is implemented.8 The OECD provides a forum in which member states can work together to solve common problems. Consequently, the policies promoted by the organization are a reflection of negotiations between members. The United States government has agreed with the G20 plan to curb tax evasion worldwide as well as with the OECD BEPS framework. One of the federal government’s interests is to gain a better hold over the complex web of overseas tax havens and subsidiaries used by America’s largest corporations. However, the U.S’ position is not that simple due to the fact that recent tax initiatives in a number of foreign countries, including several of its G20 partners, appear to be primarily targeting American companies with global operations.9 This could potentially harm both the US companies’ competitive position and subsequently the US Treasury. That is why the current position of the administration is ambiguous. While the US government concedes that the rules need to be updated and changed to some extent, they are pushing for moderate change because they are committed to the success of their local companies who appear to be very involved in the issue. 6 Gurria, Angel. "SG Report to G20 Leaders." Oecd.org. Organisation For Economic Cooperation and Development, n.d. Web. 01 Dec. 2013. 7 OECD (2013), Action Plan on Base Erosion and Profit Shifting, OECD Publishing. 7 http://dx.doi.org/10.1787/9789264202719-en 8 Guria, Angel. "OECD SECRETARY-GENERAL REPORT TO THE G20 FINANCE MINISTERS AND CENTRAL BANK GOVERNORS." Oecd.org. Organisation For Economic Cooperation and Development, 20 July 2013. Web. 01 Nov. 2013. 9 Norris, Floyd. "G-20 Backs Plan to Curb Tax Avoidance by Large Corporations."Nytimes.com. New York Times, 19 July 2013. Web. 15` Oct. 2013.

G20|CORPORATE TAX EVASION 6 European Union officials believe “tax fraud and firms' aggressive cross-border schemes to avoid taxes, cost the bloc's governments an estimated 1 trillion Euros ($1.3 trillion) a year”.10 Similarly to the United States, tax evasion limits the capacity of EU member states to raise money and implement their economic and social policies. That could mean cuts in public services and a slower economy. While many within the EU argue for a level playing field, many countries like Ireland and Belgium are unhappy with the current push for more regulation due their status of tax havens.11 Their interests collide with countries like France and Germany who have relatively high tax rates and see their richest residents flee to more tax friendly jurisdiction within the EU. A good illustration of the situation is the recent attempt by France’s richest man, Bernard Arnault, to acquire Belgian citizenship to avoid paying taxes in France.12 Paradoxically, when the European finance ministers met in Vilnius,Lithuania on the 14th of September 2013 to discuss the issue of tax avoidance, Jeroen Djisselbloem the Dutch finance minister, declared: “the meeting consisted of cannon shots going back and forth”.13 This declaration is symptomatic of the current atmosphere within the union regarding the issue of taxation. There is a common consensus around the necessity to take actions but countries like Luxembourg, Ireland or Belgium that have built their reputation as destinations for foreign assets are not willing to sacrifice their competitive advantage beyond a certain limit. Additionally, the city of London, which is the backbone of the largest network of tax havens in the world and operates as a government within the United Kingdom, makes it very difficult to agree on issues pertaining to tax evasion and avoidance.14 10 Chalabi, Mona. "Tax Evasion: How Much Does It Cost?" Theguardian.com. Guardian News and Media, 27 Sept. 2013. Web. 04 Dec. 2013. 11 "Ireland Pledges to Close Apple Tax Loophole." Financial Times. N.p., 12 Apr. 2010. Web. 04 Dec. 2013. 12 Masidlover, Nadia. "LVMH's Arnault Withdraws Belgian Citizenship Bid." Wsj.com. Wall Street Journal, 10 Apr. 2013. Web. 01 Dec. 2013. 13 "EU Finance Ministers Seek Ways to Combat Tax Evasion." CTVNews. Canada TeleVision, 23 Sept. 2013. Web. 04 Dec. 2013. 14 Shaxon, Nicholas. "The Tax Haven in the Heart of Britain." The Tax Haven in the Heart of Britain. News Statesmen, 24 Feb. 2011. Web. 04 Dec. 2013.

G20|CORPORATE TAX EVASION 7 China has agreed to join the global fight against tax evaders by signing on to the G20 agreement. Global Financial Integrity, a financial watchdog group, has estimated that more money flows out of China from illicit financial activity than any other developing country.15 Figures released by China's State Administration of Taxation showed that anti-tax evasion efforts by the Chinese government generated an additional income of some $5.7 billion last year, nearly 30 times the amount in 2008.16 The Chinese position is unclear as the state apparatus and the politburo of the communist party are involved and benefit greatly from failures in the taxation system, notably through flows to the financial hubs of Macau and Hong Kong. Even though the official position is in favor of more regulation, in practice it is highly unlikely that the authorities implement any regulation to its full extent. Multinationals like Apple, Starbucks and Google aggressively put income in countries where the corporate tax rate is extremely low. In some instances these companies employ another pervasive technique, which consist in sourcing the revenues “nowhere at all”. This is referred to as the “stateless income” or “double Irish”.17 The goal for a company is to maximize shareholders profits. Under the current global tax system, companies are obligated to take advantage of tax breaks offered all around the world. The CEO of Google Eric Schmidt raised an important point when he said, “with respect to the current sort of issues, I don’t think a company should decide what tax policies should be, I think governments should.”.18 Multi- National Corporations (MNC) are benefiting from loopholes in order to compete globally. Recently, Apple’s CEO Tim Cook was heard by the senate finance committee concerning 15 Dawson, Stella. "China to Join Global Crackdown on Tax Evasion." Reuters. Thomson Reuters, 21 Aug. 2013. Web. 04 Dec. 2013. 16 Nignzu, Zhu. "China Joins Global Combat Tax Evasion Efforts by Signing Multilateral Tax Convention - Xinhua | English.news.cn." China Joins Global Combat Tax Evasion Efforts by Signing Multilateral Tax Convention - Xinhua | English.news.cn. Xinhua, 27 Aug. 2013. Web. 04 Dec. 2013. 17 Wood, Robert W. "Excuse Me Apple, Google, Starbucks & H-P: IRS Wants To Tax Stateless Income." Forbes. Forbes Magazine, 06 Aug. 2013. Web. 04 Dec. 2013 18 Barker, Alex. "EU Rushes out Corporate Tax Transparency Law." Financial Times. N.p., 23 May 2013. Web. 04 Dec. 2013.

G20|CORPORATE TAX EVASION 8 Apple’s deferral income practices, which consist in recording income generated in Asia, Africa, and Europe in Ireland, as Apple’s subsidiary in that country holds the company’s patents and trademarks for those regions. Because the Irish company is not an operating entity, it pays no taxes to the Irish government on the income it receives from other Apple operating entities.19 Echoing Mr. Schmidt’s comment, Apple is just using the tax system to its advantage. Ironically, shareholders have criticized Apple’s management for not using the same loophole for their Latin American operations (taxed in the U.S). MNCs are currently in favor of the status quo. Banks are central to the issue because the money flows through their channels worldwide. Therefore, they hold crucial information regarding multinational financial activities. Tax authorities in many countries including the United States have pressured governments and financial institutions in countries like Switzerland and Liechtenstein, who abide by the “banking secrecy”, to surrender information. This highlights the double-sided problem of tax evasion. On the one hand banks are competing to attract deposits, on the other they are forced to comply with revenue-damaging regulations. The intrinsic competitive advantage Swiss banks hold has been the fact that they were never required to share information about their clients. The current regulatory framework, proposed by the OECD and adopted by the G20 and if implemented successfully, will result in a loss of competitiveness for the Helvetic banks. CHRONOLOGY Corporate tax evasion is a problem that traces back to the Greek civilization. Empirical evidence even suggests that ever since taxation was introduced, people and organizations alike have been trying to decipher ways to circumvent them. 19 "Summary: Tim Cook’s Senate Grilling on Taxes." Corporate Intelligence RSS. Wall Street Journal, 21 May 2013. Web. 04 Dec. 2013.

G20|CORPORATE TAX EVASION 9 1920s/30s: The technical use of the words evasion/avoidance in the modern sense originated in the USA where it was well established by the 1920’s, as multinational companies began to emerge as forces in world markets. The 1920’s were an interesting era because it led to one of the biggest financial crisis in the history of the world, the Great Depression. After America was hit by the 1929 stock market crash, President Roosevelt decided to tax American businesses heavily in order to finance the reconstruction of the country. During his tenure as President he went as far as proposing a 100% marginal tax rate on the rich. During this time rich Americans and corporations began strategizing about ways to hide some of their profits. The issue was brought to national attention during the Bullen v. Wisconsin case20 where lines were officially drawn between tax evasion and avoidance. 1930s: Most of Europe was facing some combination of political instability, powerful labor movements, and strong political pressures to raise public revenues to placate those movements. Switzerland began to provide a convenient and secure tax haven when the world was in dire need for it in the 1920s. Although England had the larger economy, Switzerland held a key advantage because of the legal leeway Swiss bankers possessed through the highly decentralized state. In contrast, the UK’s policy involved balancing the temptations to become a tax haven against the pressures of raising money for urgent public purposes. The deregulation of the 1970s:The trend of deregulation was particularly pronounced in America and Britain. Ronald Reagan campaigned by touting tax cuts as a means to rescue the American economy from stagnation. According to data from the economist, during his administration, top marginal tax rates dropped in steps from 70% to 28%. In Britain Margaret 20 "Bullen v. Wisconsin - 240 U.S. 625 (1916)." Justia US Supreme Court Center. N.p., n.d. Web. 07 Dec. 2013.

G20|CORPORATE TAX EVASION 10 Thatcher slashed the top marginal income tax rate from 83% to 40% between 1979 and 1988.21 As the financial liberalization pushed by Reagan and Thatcher began having an effect, it increasingly allowed companies to “shop” around for jurisdictions to escape tax and circumvent regulations. These measures were designed to strengthen the economy, but the easy flow of capital worldwide that resulted from this era of deregulation encouraged many companies and rich individuals to move more money around and participate in tax evasion In August 2007: The IRS issued the first round of guidance on the Foreign Account Tax Compliance Act (FATCA) which is a law aimed at foreign financial institutions and other financial intermediaries, to prevent tax evasion by US citizens and corporations through the use of offshore accounts. The first round of guidance was published with two models of intergovernmental agreements. In the first, financial institutions in the partner country would report information about U.S. accounts to the tax authority of the partner country either with reciprocal information (Model 1A) or without (Model 1B). In the other (Model 2) where partner country financial institutions reported directly to the U.S. Internal Revenue Service, and the partner country agrees to lower any legal barriers to that reporting.22 FATCA implementation faces legal hurdles because it may be illegal in foreign jurisdictions for financial institutions to disclose the required account information. There is a controversy regarding the appropriateness of intergovernmental agreements to solve any of these problems. 2 April 2009: The G20 gathered in London to discuss the financial outlook and discuss policy changes aimed at stabilizing the ailing global economy.23 Some of the changes brought forward included growth, jobs, repairing the financial system to restore lending and strengthening financial regulation to rebuild trust. This summit marked the awakening of the international 21 GI. "How Mrs Thatcher Smashed the Keynesian Consensus." The Economist. The Economist Newspaper, 09 Apr. 2013. Web. 01 Dec. 2013. 22 http://www.irs.gov/Businesses/Corporations/Foreign-Account-Tax-Compliance-Act-(FATCA) 23 http://www.imf.org/external/np/sec/pr/2009/pdf/g20_040209.pdf

G20|CORPORATE TAX EVASION 11 community to the catastrophic consequences of the global crisis of 2008. As a result of this awakening, financial regulation worldwide was put at the forefront of the legislative agendas. 18 March 2010: FATCA is signed into law in the United States. FATCA will have a far-reaching impact on US-based companies as well as foreign companies with US assets or clients. Under the new provisions, a Foreign Financial Institution (FFI) may enter into an agreement with US tax authorities (IRS) requiring it, among other things, to report information on the foreign institution’s US accounts. A FFI that enters into such an agreement becomes a "participating FFI”.24 According to the law, if a FFI does not enter into an agreement with the IRS, all relevant US-sourced payments, such as dividends and interest paid by US corporations, will be subject to a 30% withholding tax. The same 30% withholding tax will also apply to gross sale proceeds from the sale of relevant US property. All FFIs must comply with FATCA or be subject to withholding. Given the significant lead times large companies may need to comply with FATCA requirements particularly for it system changes. May-November 2011: Protest Movements. Worldwide protests rose to challenge social and economic inequality, greed, corruption and the perceived undue influence of corporation on governments particularly from the financial services sector. Movements such as the Spanish Indignados or Occupy Wall Street used direct democracy to emphasize direct action. These Movements and the subsequent ones lead governments worldwide to act more aggressively on issues such as tax evasion, a subset of the many inequalities highlighted by the protesters. September 11 2012: Bradley Birkenfeld a former UBS banker transmitted crucial information to the IRS about schemes used by Swiss banks to help clients evade money. The disclosure of 24 "FATCA Knowledge Center." Foreign Account Tax Compliance Act (FATCA) Resources. Ernst & Young, n.d. Web. 29 Nov. 2013.

G20|CORPORATE TAX EVASION 12 Swiss banking information, which caused a fierce political debate in Switzerland before winning approval from the country’s Parliament set off such a panic among wealthy Americans that more than 14,000 of them joined a tax amnesty program. I.R.S. officials say the amnesty program has helped recover more than $5 billion in unpaid taxes.25 April 2013: Offshore leaks. A cache of 2.5 million files revealed the secrets of more than 120,000 offshore companies and trusts, exposing hidden dealings of politicians and wealthy individuals. The secret records obtained by the International Consortium of Investigative Journalists exposed the names behind covert companies and private trusts in the British Virgin Islands, the Cook Islands and other tax havens. The leaks are said to include information about various major corporations and their dealings in fiscal paradise as well as high net worth individuals26 . The leaked files provide facts and figures, cash transfers, incorporation dates, links between companies and individuals that illustrate how offshore financial secrecy has spread aggressively around the globe. May 2013: England cracks down on ownership secrecy. David Cameron announced plans to crack down on UK accountants, lawyers and business figures who use shell companies to hide the identity of ultimate beneficiaries. Firms registered in Britain will come under a legal obligation to obtain and hold adequate, accurate and current information on the ultimate owner who benefits from the company and be required to place the information on a central register that would be maintained by Companies House. In a speech to the Open Government 25 Kocienwiski, David. "Whistleblower Awarded $104 Million by I.R.S." Nytimes.com. New York Times, 11 Sept. 2011. Web. 04 Dec. 2013. 26 Ryle, Gerard. "Center for Public Integrity." Center for Public Integrity. N.p., 20 Nov. 2013. Web. 24 Oct. 2013.

G20|CORPORATE TAX EVASION 13 Partnership Summit in London Cameron surprised some business leaders by insisting the register must be open to the public as well as officials.27 June 2013: G8 Summit. G8 leaders gathered in Lough Erne in Northern Ireland to agree to further transparency on the sharing of tax information and bring the international tax rules into the modern age. As the summit closed the G8 leaders’ communiqué announced that they will move to establish the automatic exchange of information between tax authorities as the new global standard. The G8 leaders stated their support for the OECD’s work to tackle tax avoidance by multinational companies, and announced that they will draw up a template for global corporations to report to tax authorities where they make their profits and pay taxes around the world. This would give governments a new tool against tax avoidance by multinationals and would be particularly helpful to the governments of developing countries. Under the agreement reached the G8 seek to provide support to developing countries to collect the tax they are owed. ROOT CAUSES Human Nature The main origin of tax avoidance is simply human nature. Individuals will do whatever it takes to maintain and strengthen any form of superiority they hold. Hence they act in their own best interest when it comes to giving up wealth. The basic theory28 used in nearly all compliance research builds on the economics-of-crime model, in which an individual “maximizes the expected utility of the tax evasion gamble, balancing the benefits of successful cheating against the risky prospect of detection and punishment”. This approach asserts that compliance 27 Wintour, Patrick. "Register Revealing Firms' True Owners Will Be Open to Public, Says Cameron." The Guardian. Guardian News and Media, 31 Oct. 2013. Web. 02 Dec. 2013. 28 [1] Alm, J. "Tax Compliance and Administration." In Handbook on Taxation, edited by W. B. Hildreth and J. A. Richardson (741-68). New York: Marcel Dekker, Inc., 2000. 28 28

G20|CORPORATE TAX EVASION 14 depends largely upon audit and fine rates. Indeed, its central conclusion is that an individual pays taxes only because of the fear of being caught and the resulting punishment. However, it is clear that compliance cannot be explained entirely by the level of enforcement. The levels of audit and penalty rates are set at such low levels that most individuals would evade if they were rational simply because it is unlikely to get caught. Although it must be noted that government are drastically changing their behavior in regards to tackling tax evaders due to budget constraints. A Legal Limbo Taxes depend on definitions of legal terms, which are usually vague. For example, the distinction between "business expenses" and "personal expenses" is of much concern for taxpayers and tax authorities, as the proper distinction between the two is not properly defined. As a result, any term of tax law becomes a potential source of tax avoidance As legislators act independently of their constituents on many issues, tax laws do not reflect the interest of the majority of a jurisdiction’s population (poor and middle income). In an article for the Guardian, Joseph Stieglitz noted, “Companies like General Electric lobbied for provisions that enabled them to avoid even more taxes”.29 MNC, like General Electric lobby for, and usually obtained, amnesty provisions that allow them to comply with the letter of law, while avoiding its intent. In the case of tax law, GE can bring their revenue back to the US at a special low rate, on the promise that the money would be invested in the country. The lack of clearly established definitions as well as the exemption and amnesty provisions create a legal limbo which allows for more tax avoidance and evasion. 29 Stiglitz, Joseph. "Globalisation Isn't Just about Profits. It's about Taxes Too." The Guardian. N.p., 23 May 2013. Web. 29 Oct. 2013.

G20|CORPORATE TAX EVASION 15 Tax shelters Tax shelters are investments that allow, a reduction in one's income tax liability. The term "tax shelter" was originally used to describe primarily certain investments made in the form of limited partnerships, some of which were deemed by the U.S. Internal Revenue Service30 to be abusive. These loopholes allow financial engineers and advisors to devise strategies to pay as little tax as possible within the law. In 2003 the Senate's Permanent Subcommittee on Investigations held hearings about tax shelters which are entitled U.S. tax shelter industry: the role of accountants, lawyers, and financial professionals.31 Many of these tax shelters were designed and provided by accountants at the large American accounting firms. Examples of U.S. tax shelters include: Foreign Leveraged Investment Program (FLIP) and Offshore Portfolio Investment Strategy (OPIS). Partners at the accounting firm, KPMG, devised both programs. These tax shelters were also known as "basis shifts". Contrarily to the overall vague legal definitions of taxation, clear laws govern tax shelters. POLICY OPTIONS Governments worldwide generally use two types of tax compliance policies. On the one hand, policy options aimed at coercing tax compliance by increasing risks for practicing tax evasion, and on the other hand a set of policies emphasizing development of supportive tax paying values among citizens via service improvement and informational strategies. Governments’ tax agencies tend to favor coercive policies. The first policy option or strategy is directed at enacting statutes and adopting administrative powers and procedures which coerce compliant behavior. The strategy of taking these actions is what we are witnessing throughout the developed world in these days of budget 30 "Tax Information for Individuals." Tax Information for Individuals. Internal Revenue Services N.p., n.d. Web. 30 Oct. 2013. 31 "Senate Report 109-54 - THE ROLE OF PROFESSIONAL FIRMS IN THE U.S. TAX SHELTER INDUSTRY." Senate Report 109-54 -

G20|CORPORATE TAX EVASION 16 constraints. Coercive policies are based on increasing the risks incurred when practicing tax evasion. These policies are improving evasion discovery capabilities32 , increasing evasion penalties and strengthening delinquent tax collections capabilities. Hiring more auditors and supplying them with computer technology improve discovery capabilities.33 Another policy which may be enforced and has been implemented in many European countries, would be to make evasion penalties more stringent by increasing interest rates on delinquent accounts and raising fines, and by elevating tax evasion from misdemeanor to felony status.34 These practices are designed to influence taxpayers' mental calculations in such ways as to induce compliance. Although there is a long list of individual countries with good methods to decrease tax evasion, the problem of the globalized nature of the economic system and the use of other jurisdictions to bypass national laws remains the main cause of the continued issue of tax evasion. The second policy course would be to encourage compliance through a variety of services such as instructing taxpayers about tax regulations, and through installing a firm sense of civic duty and moral obligation among citizens. In opposition to the first strategy, which constructs a threatening environment, the second aims to establish a cooperative relationship between taxpayers and their government. Governments can instill string compliance values so that obedience to tax laws becomes more an automatic or natural act. Values can be reinforced through promotional campaigns and other means that inform citizens of the societal costs of tax evasion and which illustrate the positive externalities a society gains from it. Furthermore, improved service and tax education efforts can empower citizens with the knowledge they need to comply and avoid mistakes in calculating taxes owed, and contribute to removing frustrations 32 " Internal Revenue Manual - 25.1.1 Overview/Definitions." Internal Revenue Manual - 25.1.1 Overview/Definitions. Internal Revenue Services, 16 Dec. 2011. Web. 03 Dec. 2013. 33 Kristof, Kathy. "Obama Budget Surprise: More Tax Audits." Cbsnews.com. Cable News Network, 15 Feb. 2011. Web. 02 Dec. 2013. 34 Wood, Robert W. "Not Even Probation For Stephen Baldwin's Tax Evasion, Jail For Wesley Snipes." Forbes. Forbes Magazine, 02 Apr. 2013. Web. 02 Dec. 2013.

G20|CORPORATE TAX EVASION 17 and the sense of mystery in tax filing. In the UK for instance, the government is working to prevent tax evasion by giving people the opportunity to declare what they owe. They are running campaigns to encourage people to tell HMRC (Tax agency) what they owe. So far HMRC has “raised 547 million dollars from voluntary disclosures and almost 140 million from follow up activity including 20 000 completed investigations”.35 This type of initiative should be expanded. Monitoring tax evasion is a very complex endeavor. Ultimately, there are only two broad course of action possible; one being reactive, meaning acting after the fact to recoup what was lost through fines and penalties, the other being proactive, by developing a set of tools to prevent tax evasion from happening in the first place. Changes in policies and the so-called “fiscal instability” will constantly reshape citizens’ behavior. The emphasis therefore needs to be utilized for improvement to occur. PROJECTIONS The tax evasion issue has increased impact on the global world and could reach new heights. The income inequality gap between the very rich and the rest of the world’s population will widen to levels that will pose serious threats to the market economy. When a system fosters inequalities cracks will start to appear. As a direct consequence of the non-confidence in the system, people that are marginalized economically will take to the street and social unrest will cause many developed nations to implode. We already witnessed this phenomenon in countries like Greece and Spain. In those two countries the potential consequences of prolonged protestation were mitigated by the intervention of the IMF, Germany and the European Central Bank. However, if this was to happen in bigger economies, namely France and/or Italy, the magnitude of the disaster would be extremely hard to combat. 35 "Tell Us What You Think of GOV.UK." Reducing Tax Evasion and Avoidance. Her Majesty Revenue and Customs, 08 Oct. 2013. Web. 03 Dec. 2013.

G20|CORPORATE TAX EVASION 18 Another potential consequence of a failure to reach a long-term agreement would be the unbalancing of the world economy, with risks of destabilization for entire economies due to a possible sudden repatriation of huge amounts of liquidity. As a matter of fact, a recent report commissioned by the tax justice network and written by former McKinsey chief economist James Henry found that wealthy individuals and corporation have accumulated $21 trillion in secretive offshore accounts.36 That’s a sum equal to the gross domestic product of the United States and Japan combined. In the event that this money was to be brought back “on shore”, entire economies would collapse under the pressure caused by the influx of cash. In conclusion, the issue of tax evasion is simply the mirror of the society we have decided to build for ourselves. So long as we believe the system the way we conceived, which is the most adequate to ensure relative stability and prosperity, we will see the issue of tax evasion remain. It is deeply rooted at the core of the free market economy. It is unlikely that there will ever be a full end to tax evasion, but this committee has the chance to take great strides to significantly diminish the problem. 36 Allen, Frederick E. "Super Rich Hide $21 Trillion Offshore, Study Says." Forbes. Forbes Magazine, 23 July 2012. Web. 08 Dec. 2013.

G20|CORPORATE TAX EVASION 19 Bibliography "Internal Revenue Manual - 25.1.1 Overview/Definitions." Internal Revenue Manual - 25.1.1 Overview/Definitions. Internal Revenue Services, 16 Dec. 2011. Web. 03 Dec. 2013. "Senate Report 109-54 - THE ROLE OF PROFESSIONAL FIRMS IN THE U.S. TAX SHELTER INDUSTRY." Senate Report "Tax Information for Individuals." Tax Information for Individuals. Internal Revenue Services N.p., n.d. Web. 30 Oct. 2013. "Tell Us What You Think of GOV.UK." Reducing Tax Evasion and Avoidance. Her "The United States Senate Committee on Finance.”: Newsroom. U.S Senate, 20 May 2010. Web. 15 Oct. 2013. Allen, Matt. "Tax Evasion Row a Game of Global Intrigue." Swissinfo.ch. N.p., 5 Sept. 2013. Web. 23 Sept. 2013. Alm, J. "Tax Compliance and Administration." In Handbook on Taxation, edited by W. B. Hildreth and J. A. Richardson (741-68). New York: Marcel Dekker, Inc., 2000. Anonymous. "The U.S. Economy in the 1920s." Economic History Services. N.p., 01 Feb. 2010. Web. 15 Oct. 2013.e after admitting to criminal wrongdoing in selling tax-evasion services to wealthy Americans. Argitis, Teophilos, and Scott Rose. "G-20 Nations 'Fully Endorse' OECD Action Plan on Tax Evasion." Business: Washington Post Business Page, Business News. Bloomberg, 20 July 2013. Web. 23 Sept. 2013. BAETZ, JUERGEN. "EU Ministers Seek to Strengthen Tax Evasion Fight." Yahoo! News. Yahoo!, 14 Sept. 2013. Web. 03 Oct. 2013. Bromberg, Neil. "What Is FATCA?" FATCA Overview and Timeline. Ernst & Young, n.d. Web. 15 Oct. 2013.

G20|CORPORATE TAX EVASION 20 De Rugy, Veronique. "Tax and Budget Bulletin." Www.cato.org. Cato Institute, Mar. 2013. Web. 15 Oct. 2013. Friedman, Milton. "Milton Friedman: Why Soaking the Rich Won’t Work." AgainstCronyCapitalismorg. N.p., 23 Apr. 2013. Web. 15 Oct. 2013. Global Shell Games: Testing Money Launderers’ and Terrorist Financiers’ Access to Shell Companies, by Michael Findley, Daniel Nielson and Jason Sharman, 2012. Guria, Angel. "Tax - Organization for Economic Co-operation and Development." Tax - Organization for Economic Co-operation and Development. Organization for Economic Co-operation and Development, 5 Sept. 2013. Web. 23 Sept. 2013. Kristof, Kathy. "Obama Budget Surprise: More Tax Audits." Cbsnews.com. Cable News Network, 15 Feb. 2011. Web. 02 Dec. 2013. Norris, Floyd. "The Corrosive Effect of Apple's Tax Avoidance." Nytimes.com. N.p., 23 May 2013. Web. 23 Sept. 2013. OECD (2013). Addressing Base Erosion and Profit Shifting. OECD Publishing, Paris. Accessed online at http://www.keepeek.com/Digital-Asset-Management/oecd/ OECD Council, Ministerial Level.(2013) Declaration on Base Erosion and Profit Sharing. May 29th 2013. Paris. Accessed online at www.oecd.org/tax/C-MIN(2013)22-FINAL-ENG.pdf Politi, James, and Vanessa Houlder. "G8 Tax Avoidance Drive Alarms US Business." Financial Times. N.p., 4 June 2013. Web. 23 Sept. 2013. Ryle, Gerard, Marina Guevara, and Michael Hudson. "Secret Files Expose Offshore's Global Impact." International Consortium of Investigative Journalists. Center for Public Integrity, 03 Apr. 2013. Web. 15 Oct. 2013.

G20|CORPORATE TAX EVASION 21 Stiglitz, Joseph. "Globalisation Isn't Just about Profits. It's about Taxes Too." The Guardian. N.p., 23 May 2013. Web. 29 Oct. 2013. "The Cost of Tax Evasion Worldwide." Www.taxjustice.net. Tax Justice Network, 23 Nov. 2011. Web. 23 Sept. 2013. Wood, Robert W. "IRS Wants to Tax Stateless Income." Forbes. Forbes Magazine, 06 Aug. 2013. Web. 23 Sept. 2013. Wood, Robert W. "Not Even Probation For Stephen Baldwin's Tax Evasion, Jail For Wesley Snipes." Forbes. Forbes Magazine, 02 Apr. 2013. Web. 02 Dec. 2013. Zembar, Tom. "The Cost of Corporate Tax Avoidance." Www.nea.org. National Education Association, 07 Nov. 2011. Web. 23 Sept. 2013.

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