Money laundering and tax evasion on a massive scale has been revealed in the leak of more than 11 million documents from Panamanian law firm Mossack Fonseca. The documents show how Mossack Fonseca has helped clients launder money, dodge sanctions and avoid tax.
The documents reveal activities by multi-nationals, current or former heads of state, high wealth individuals and criminal networks. Fake ownership records are used to hide money from authorities.
Mossack Fonseca is but one of the intermediaries used for this kind of activity. It has come to the fore not because its activities are unusual, but because its documents happened to leak.
Is it right to conflate illegal activities such as money laundering with mostly lawful tax avoidance mechanisms such as transfer pricing? The conflation has occurred in part because multi nationals, high wealth individuals and criminal networks are using the same intermediaries to hide money and avoid tax. But more importantly, the conflation has occurred because of the common objectives and ethos: Maximise profit, minimise tax and damn any real sense of obligation to the wider society.
The ideas of capitalism with a human face and of responsible corporate citizenship are taking a battering. Is responsible corporate citizenship the rule, or just an increasingly rare exception? At what point does money laundering and tax avoidance become a competitive necessity, an entrenched feature of the global economic system?
The Tax Justice Network is a USA based independent international network launched in 2003. It conducts high-level research, analysis and advocacy in the area of international tax and the international aspects of financial regulation.
The Tax Justice Network estimates conservatively that there is some $21-32 trillion US in financial assets, sitting offshore, largely untaxed in conditions of secrecy. All that offshore wealth is held by the world’s 10 million wealthiest people: and a large share of that by the wealthiest 100,000. Developing country debts are dwarfed by offshore assets held by their wealthiest citizens.
Transfer pricing is now widely engaged in by multi- nationals.
For example, it might cost a multinational corporation $100 to produce a crate of bananas in Ecuador. It sells that crate to an affiliate in a tax haven for $100, leaving no profits in Ecuador. The tax haven affiliate immediately sells that crate on to an affiliate in Poland for $300, leaving $200 profit in the tax haven. That Polish affiliate sells the crate at the genuine market price of $300 to a supermarket, leaving no profits in Poland.
The multinational has paid no tax in Ecuador, and no tax in Poland – and has shifted $200 in profits to a tax haven, where those profits don’t get taxed!
It is no wonder that Governments the world over are struggling to find the financial resources to properly finance services to their citizens.
Tax justice and the struggle against tax havens must be a central part of any inequality-focused agenda. Tax competition is ‘compressing’ tax systems around the world, with the effect of reducing tax rates on the wealthy and increasing tax rates on those classes, including wage earners and smaller businesses, who do not have transfer pricing, money laundering and other avoidance mechanisms at their disposal.