This blog was last updated on June 27, 2021
There has been a wealth of discussion in recent years regarding the elimination of tax havens. Consumers and taxpayers all over the world have recognized efforts made by financial institutions and governments to put an end to those individuals and businesses being silent or creative in how they maneuver their assets.
However, tax avoidance is a separate issue from tax evasion. And while cut-and-dry attempts to eliminate evaders of taxes are being implemented all over the globe, there are some industry professionals who feel that not enough is being done about tax avoidance.
But what is the difference? For an international organization, wouldn’t placing assets in parts of the world where tax laws are the most lenient be the same as exploiting loopholes in tax laws? The answer is no. Tax avoidance is legal, as assets are still accounted for and tax reporting is still done. And this is where the term tax haven is also often confusing to some taxpayers. Tax havens don’t necessarily mean illegal and secret locations for assets, simply a location in which the taxpayer sees a greater benefit, and in turn profit.
Tax avoidance happens all the time
By definition, tax avoidance is when an organization or individual arranges financial affairs in such a way to minimize tax liability within the law. This type of activity happens all the time, and while it may be frustrating to governments who feel like they are being cheated out of tax dollars, there is little that can be done.
“Tax avoidance is legal, as assets are still accounted for and tax reporting is still done.”
For example, The Guardian highlighted a few examples of tax avoidance in recent years, most of which are by huge corporations. Usually this is done by creating a shell company, or an offshore corporation, with no ties to a specific resident. In 2013, Sen. Carl Levin called Apple’s financial scheme the “holy grail” of tax avoidance. The iPhone maker established an offshore corporation in Ireland with a counterpart in the U.S., shifting $74 billion between them from 2009 to 2012, enabling the company to only pay 2 percent tax on it.
Another example is Google, who in 2011 shuffled four-fifths of its profits through a subsidiary in Bermuda. This allowed the company to cut its worldwide tax rate in half and its tax rate in some countries to almost zero. But this maneuver was totally legal, as Google owned and claimed the subsidiaries as its own. In fact, Eric Schmidt, Google executive chairman, said in 2012 he was “very proud of the structure that we set up…it’s called capitalism.”
So the situation, especially as governments crack down on tax laws, begs to question how long countries and financial institutions are going to accept this behavior. An even bigger question is how would they prevent it?
Governments seeking to make a change – but too timid to do so
While many companies or individuals try to evade paying their taxes, it is difficult to find reasons to come down on those who are avoiding taxes simply by finding pathways that are less restrictive. Even so, the conversations are in the works.
Another article by The Guardian highlighted attempts that are underway to crack down on global tax avoidance. While there were certainly concerns about it before, world leaders began taking steps in 2013 at the G8 talks in Northern Ireland. At that event, member countries agreed to modify international tax rules to prevent multinationals from taking part in cross-border tax avoidance. The G20 world leaders endorsed the action in the St. Petersburg Declaration of September 2013, which in turn commissioned the Organization for Economic Cooperation and Development to create proposals for these new rules. These rules, in their final form, are due to the G20 finance ministers on Oct. 8, 2015.
Governments of the world are making a fuss about tax avoidance, but do they really want it to go away?
And yet, even with these new regulations being created, governments seem hesitant to level the playing field. For example, the UK recently modified rules to its Controlled Foreign Corporations policy, which enable tax advantages for a company deciding to locate its headquarters in the UK. While the U.S. has said that this type of activity prevents cooperation regarding tax avoidance from continuing, the UK has defended its action. In fact, the country has announced it will focus on tax competition, as it was in the country’s best interest.
The Sydney Morning Herald reported Rod Houng-Lee, former head of tax in Asia Pacific for accounting firm PricewaterhouseCoopers, said this act by the UK is no surprise at all, and the governments of the world should expect more of this type of action.
“There is no solution in which all countries win.”
“More taxes collected by foreign governments must mean less tax collected at home,” Houng-Lee said. “This means that the biggest loser from an effective multilateral crackdown on tax avoidance by MNCs [multinational corporations] would probably be the U.S – home to most of the world’s largest companies doing business globally.”
Houng-Lee added, “Is it any wonder that actual action lags behind the political rhetoric on tax avoidance?”
He noted that any multilateral approach to address tax avoidance by the G20 and OECD was destined to fail because there is no possible solution in which all countries win.
It is a time where the governments of the world are focusing on tax issues and trying to eliminate criminal behavior, but will they go far enough to a point where home-profits are at risk?
