Offshore Tax Evasion Research Articles

Counteracting offshore tax evasion: Evidence from the foreign account tax compliance act

This paper aims to investigate the effect of the Foreign Account Tax Compliance Act (FATCA) on the deposits held by US global banks through their branches located around the world. Using an unpublished dataset on deposits held by branches of US banks on a geographically unconsolidated basis, we find that the FATCA led to a reduction in deposits held in branches located in tax havens. We find that this effect is more severe in those jurisdictions signing a reciprocal exchange of information agreement. We also advance evidence in support of deposit shifting within the US banking system towards locations without a reciprocal intergovernmental agreement.

Offshore tax evasion and wealth inequality: Evidence from a tax amnesty in the Netherlands

Exploiting unique datasets covering over 29,000 tax evaders in the Netherlands, we investigate the distribution of tax evasion and its implications for the measurement of wealth inequality. Tax evasion is concentrated at the top of the wealth distribution with over 10% of the wealthiest 0.01% of households – the “super rich” – evading taxes. At the top, households evade around 8% of their true tax liability. The “merely rich” (P90-P99.9) own 67% of hidden wealth, while the “super rich” account for only 7%. Consequently, the correction for offshore wealth has a modest effect on top wealth shares. We describe a number of explanations for the distribution of tax evasion by Dutch households: low-cost tax evasion opportunities in neighbouring countries for the “merely rich”, sophisticated forms of tax evasion for, low effective tax rates on and migration to low tax jurisdictions by the “super rich”. Taken together, these explanations suggest that the distribution of tax evasion strongly depends on a country’s geographical and institutional settings.

Different From You and Me: Tax Enforcement and Sophisticated Tax Evasion by the Wealthy

This paper reviews recent research on tax evasion by high-income, high-wealth individuals and attempts to draw out some lessons for policymaking. We review the key concepts around tax evasion, and we summarize the key insights from economic studies of tax evasion in the full population. We contrast the understanding of tax evasion that emerges from such prior work with the findings of recent studies on high-income, high-wealth taxpayers specifically, which highlights the relative sophistication of the evasive strategies favoured by wealthy taxpayers. Finally, we characterize the key steps in the tax enforcement process as they pertain to the high-wealth population, and describe how these steps have played out in specific areas like the fight against offshore tax evasion (JEL H24, H26, K34).

새정부에 있어서 조세분야의 부패방지방안

Although tax evasion due to tax investigation (including tax violation investigation), tax fraud and other misconduct is strictly punished by the Tax Criminal Punishment Act, tax corruption has not been reduced. Moreover, by avoiding tax in order to reduce the tax burden under the tax law, fair taxation among taxpayers is overshadowed. In particular, in the area of ​​tax law, due to the expertise, specificity, and complexity of the tax law, taxpayers secretly and unreasonably reduce their tax burden, which is becoming a social issue. Therefore, when the new government seeks anti-corruption measures in the field of tax law, it reviews the anti-corruption system under the current tax law, and as a legal task, it stipulates the tax avoidance system, introduces the self-information disclosure system for delinquents, introduces the offshore tax evasion prevention law, and prevents tax evasion. We present improvement points by considering the introduction of a tax investigation system using artificial intelligence and measures to strengthen tax evasion suppression through rationalization of administrative penalties such as tax evasion.

So close and yet so far: The ability of mandatory disclosure rules to crack down on offshore tax evasion

So close and yet so far: The ability of mandatory disclosure rules to crack down on offshore tax evasion

Addressing Offshore Tax Evasion Challenges in the Rising of Digitalization Economy

Countries worldwide have lost billions of dollars in tax revenue due to tax evasion on income from offshore bank accounts. The increasing challenge in a rising digital economy, has brought about significant economic and social disruption, necessitating advanced measures to combat offshore tax evasion. Hence, this paper aims to provide an overview and critical analysis of the digital approaches taken globally to curb offshore tax evasion strategies used by individual and multinational corporations. This paper employs library-based doctrinal study and comparative legal analysis in a descriptive, analytic provision, and prescriptive manner. Keywords: Offshore Asset, Tax Evasion, Digital Economy, Law Reform eISSN: 2398-4287© 2021. The Authors. Published for AMER ABRA cE-Bs by e-International Publishing House, Ltd., UK. This is an open access article under the CC BYNC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/). Peer–review under responsibility of AMER (Association of Malaysian Environment-Behaviour Researchers), ABRA (Association of Behavioural Researchers on Asians/Africans/Arabians) and cE-Bs (Centre for Environment-Behaviour Studies), Faculty of Architecture, Planning & Surveying, Universiti Teknologi MARA, Malaysia. DOI: https://doi.org/10.21834/ebpj.v6i18.3019

SECRETS OF THE PANAMA PAPERS: HOW TAX HAVENS EXACERBATE INCOME INEQUALITY


 
 
 Data leaks like the Panama Papers show how tax havens provide a secret offshore financial system that privileges three main actors: malefactors, millionaires, and multinational corporations. Such leaks have provided millions of documents detailing how certain taxpayers benefit from tax haven services. Wealthy criminals use the offshore world to anonymize their financial misdeeds and, in low-income countries, drain governments of valuable resources while citizens remain in dire circumstances. High-income taxpayers exploit the offshore world to legally reduce their tax bills, deploying techniques that are not available to ordinary-income taxpayers. The leaks also show how the wealthiest members of society—the top 0.01%—are more likely to engage in the criminal offense of offshore tax evasion by hiding their fortunes in tax havens. Finally, multinational corporations set up related corporations in tax havens to reduce global tax liabilities legally, providing higher returns for wealthier shareholders. By privileging the interests of criminals, millionaires, and corporations, the offshore world is exacerbating the growing income inequality found in much of the world. This Article considers legal and policy reforms to address this challenge.
 
 

Brains or Muscles? A Political Economy of Tax Evasion

An influential citizen wants to get away with tax evasion, a risky practice that can trigger audits resulting in sanctions. To reduce the chances of being audited, he can invest in the complexity of his evasion scheme —which we call brains. The probability that an audit results in a sanction depends on the effort exerted by an investigator. To reduce the effort that she exerts, the citizen can commit to delivering punishments —which we call muscles. We show that there exists a threshold in the quality of institutions below which muscles and brains are complements and above which they are substitutes. The citizen's equilibrium strategies yield a testable prediction: estimates of offshore tax evasion display an inverted U-shape along the quality of institutions. We provide evidence of this finding by building a panel dataset of estimated offshore wealth by individuals for 37 countries between 2002 to 2016.

THE IMPLEMENTATION OF AUTOMATIC EXCHANGE OF INFORMATION AS A TOOL TO TACKLE OFFSHORE TAX EVASION: AN EXPERIENCE FROM INDONESIA

Cross-border tax evasion has been a central issue in international taxation in recent years. The use of Offshore Financial Centres (OFCs) and low tax jurisdictions to facilitate the wealth of high net worth individuals has led to offshore tax evasion and has eroded the tax bases of countries. Meanwhile, international tax cooperation is emerging with the aim of enhancing tax transparency. One way to reach tax transparency is with the implementation of the exchange of information for tax purposes. The tax authorities have already implemented the exchange of information on request; however, this method is ineffective to fight against offshore tax evasion. The tax authorities must already obtain the evidence of their suspicion over the taxpayers; otherwise, their request may be denied as a ‘fishing expedition’. The demand for offshore financial information is obvious since it will enable tax authorities to oversee the level of offshore tax compliance. This study considers the importance of the Automatic Exchange of Information (AEOI) as a tool to access the resident’s financial information of residents who kept their financial assets in other jurisdictions with a case study in Indonesia. The financial information from other jurisdictions is fundamental for Indonesia because it can be used for analysis and law enforcement of taxpayers, especially those who previously saved money abroad and have not reported or paid the correct amount of tax. This paper recognizes that despite the benefits of the AEOI, the implementation of the AEOI in Indonesia is still facing challenges, although it has been two years since its first implementation. This study will follow a qualitative methodological approach with a detailed literature review and real experience in Indonesia. Finally, this article explores the current stage of implementing the AEOI in Indonesia and the challenges faced by Indonesia with some proposed solutions for the Directorate General of Taxes for the effective implementation of the AEOI in Indonesia.

Transparency and Tax Evasion: Evidence from the Foreign Account Tax Compliance Act (FATCA)

ABSTRACTWe examine how U.S. individuals respond to regulation intended to reduce offshore tax evasion. The Foreign Account Tax Compliance Act (FATCA) requires foreign financial institutions to report information to the U.S. government regarding U.S. account holders. We first document an average $7.8 billion to $15.3 billion decrease in equity foreign portfolio investment to the United States from tax‐haven countries after FATCA implementation, consistent with a decrease in “round‐tripping” investments attributable to U.S. investors’ offshore tax evasion. When testing total worldwide investment out of financial accounts in tax havens post‐FATCA, we find an average decline of $56.6 billion to $78.0 billion. We next provide evidence of other important consequences of this regulation, including increased expatriations of U.S. citizens and greater investment in alternative assets not subject to FATCA reporting, such as residential real estate and artwork. Our study contributes to both the academic literature and policy analysis on regulation, tax evasion, and crime.

Voluntary disclosure schemes for offshore tax evasion

Tax authorities worldwide are implementing voluntary disclosure schemes to recover tax on offshore investments. The US and UK, in particular, have implemented such schemes in response to bulk acquisitions of information on offshore holdings, recent examples of which are the “Paradise” and “Panama” papers. Schemes offer affected investors the opportunity to make a voluntary disclosure, with reduced fine rates for truthful disclosure. Might such incentives, once anticipated by investors, simply encourage evasion in the first place? We characterize the investor/tax authority game with and without a scheme, allowing for the possibility that some offshore investment has legitimate economic motives. We show that a scheme increases net expected tax revenue, decreases illegal offshore investment and increases onshore investment, but could either increase or decrease legal offshore investment. The optimal disclosure scheme offers maximal incentives for truthful disclosure by imposing the minimum allowable rate of fine.

Offshore Tax Evasion and Wealth Inequality: Evidence from a Tax Amnesty in the Netherlands

Exploiting unique datasets covering over 28,000 tax evaders in the Netherlands, we investigate the distribution of tax evasion and its implications for the measurement of wealth inequality. In contrast to Alstadsaeter, Johannesen and Zucman (2019), the correction for offshore wealth has only a modest effect on top wealth shares. We show that the distributional pattern of tax evasion depends on the type of tax evasion, e.g. it depends on the offshore country of choice. We explore a number of explanations to account for the differences in results and caution against projecting distributional patterns of detected tax evasion onto still undetected evasion. We also study the dynamic compliance behavior of tax amnesty participants and document large and sustained increases in reported wealth of around 60% following amnesty participation. Combined with evidence of only a modest increase in the adoption of tax avoidance strategies, this suggests that amnesty participation can lead to substantial public revenue gains.

Tax Evasion and Market Efficiency: Evidence from the FATCA and Offshore Mutual Funds

Using the Foreign Account Tax Compliance Act (FATCA) as an exogenous shock that reduces the tax advantages of offshore funds sold to U.S. investors, we document that affected funds significantly enhance their performance as a response. This effect is stronger for funds domiciled in tax havens and for skilled funds with low flow volatility. Moreover, in generating additional performance, FATCA-affected funds also increase the price efficiency of their invested stocks. Our analysis has important normative implications in showing that curbing offshore tax evasion could help improve efficiency in both the global asset management industry and the security market

Sharing Tax Information in the 21st Century: Big Data Flows and Taxpayers as Data Subjects

In the last 10 years, governments have initiated several reforms to automatically exchange bulk taxpayer information with other governments (mainly via the Foreign Account Tax Compliance Act, the common reporting standard, and country-by-country reporting). This enhanced sharing of tax information has been encouraged both by technological change, including digitization, big data, and data analytics; and by political trends, including governments' efforts to reduce offshore tax evasion and aggressive international tax avoidance. In some cases, however, legal protections for taxpayer privacy and other interests are insufficiently robust for this emerging international sharing framework. Conceptually, taxpayers should be seen as "data subjects" whose rights are proactively protected by data protection laws and policies, including fair information practices. An optimal regime, which would balance the interests of taxpayers against those of tax authorities, should include a multilateral taxpayer bill of rights, a cross-border withholding tax that could be imposed in lieu of information exchange, and a global financial registry that would allow governments to identify the beneficial owners of business and legal entities.

Tax Evasion and Inequality

Drawing on a unique dataset of leaked customer lists from offshore financial institutions matched to administrative wealth records in Scandinavia, we show that offshore tax evasion is highly concentrated among the rich. The skewed distribution of offshore wealth implies high rates of tax evasion at the top: we find that the 0.01 percent richest households evade about 25 percent of their taxes. By contrast, tax evasion detected in stratified random tax audits is less than 5 percent throughout the distribution. Top wealth shares increase substantially when accounting for unreported assets, highlighting the importance of factoring in tax evasion to properly measure inequality. (JEL D31, H24, H26, K34)

How Countries Should Share Tax Information

There are increasing policy concerns that aggressive international tax avoidance and offshore tax evasion significantly reduce government revenues. In particular, for some low income countries the amount of capital flight (where elites move and hide monies offshore in tax havens) exceeds foreign aid. Governments struggle to enforce their tax laws to constrain these actions, but are inhibited by a lack of information concerning international capital flows. The main international policy response to these developments has been to promote global financial transparency through heightened cross-border exchanges of tax information. The paper discusses elements of optimal cross-border tax information exchange laws and policies by focusing on three key challenges: information quality, taxpayer privacy, and enforcement. Relatedly, the paper discusses how the exchange of automatic ‘big tax data’ combined with data analytics can help address the challenges.

Information Exchange and Tax Haven Investment in OECD Securities Markets

Curtailing tax evasion is high on the international policy agenda. Still, there is only little empirical evidence about the effects of offshore tax evasion in cross-border portfolio investment and its responsiveness to changes in enforcement. Exploiting rich IMF data on bilateral investments in OECD securities markets, we show that outbound portfolio investment (FPI) from tax haven countries is significantly more responsive to information exchange than outbound FPI from non-havens. This is strong evidence for a tax evasion component in tax haven investment in OECD securities markets. Furthermore, we are able to show that tax havens’ attempts to undermine the OECD transparency initiative pay off. Tax havens that enter into information exchange with other tax havens rather than with non-haven partner countries become more attractive pass-through destinations for tax evaders.

Effective international information exchange as a key element of modern tax systems: promises and pitfalls of the OECD’s common reporting standard

Today’s global economic environment is characterized by the high mobility of capital and labour across national borders. Against the backdrop of a legal framework governing taxation of cross-border income, this may lead to double taxation on the one hand, as well as provide opportunities for tax evasion and tax avoidance on the other. It is well-established that a prerequisite for effective taxation of foreign- sourced income earned by “domestic taxpayers” (i.e. tax residents) is the system of administrative co-operation across national boundaries, mainly in the form of exchange of tax-relevant information between tax authorities. Since the lack of information- exchange mechanisms is linked with tax havens and the proliferation of “harmful tax practices”, the OECD put the issue high on the global political agenda as early as 1998. Further developments strengthened the importance of the exchange of information, leading to the so-called “big bang” of 2009, i.e. to a significant increase in the number of concluded tax information exchange agreements, caused by the growing concern about international tax evasion and avoidance in the post-crisis period. Nowadays the so-called automatic exchange of information (AEOI) between tax authorities has emerged as a new global standard. This is mostly due to the development of specific national and international models, aimed at enhancing intergovernmental cooperation in fighting offshore tax evasion. In this regard special attention should be drawn to the 2014 release of the OECD’s Common Reporting Standard (CRS), which is based on the idea that banks and other financial institutions should play a crucial role in providing information on taxpayer’s income and assets to tax authorities around the globe. The aim of this paper is to explore some of the most important implications of the adoption of the CRS as a global AEOI model. While there are marked advantages of the new standard – mainly related to its potential in curbing large-scale offshore tax evasion – some important concerns arise as to its implementation on a global level. Particular attention will be paid to the issue of coordination of the CRS with the other information exchange models (e.g. FATCA) and to the problem of protecting taxpayers’ rights and information.

Can Territorial Tax Compliance Systems Reduce the Tax Avoidance of Firms with Operations in Tax Havens?

ABSTRACTThe Korean government has recently focused its compliance efforts on offshore tax evasion and has accordingly adopted several tax compliance systems. This article empirically examines the association between the enforcement of those tax compliance systems and firms’ tax avoidance from 1999 to 2014. Firms with foreign operations in tax havens have greater opportunities to decrease their overall tax burdens. Thus, the analysis in this study attempts to determine the differential impact of tax compliance systems between firms with subsidiaries in tax haven countries and firms without operations in such places. It is found that tax compliance systems effectively reduce the tax avoidance of firms without operations in tax havens, but not the tax avoidance of firms with operations in tax havens, as predicted. The results also show that financially distressed firms are likely to engage in aggressive tax planning. Moreover, financially distressed firms with operations in tax havens seem to engage in tax avoidance activities even after the enforcement of tax compliance systems. This article may have some implications with respect to considering mechanisms designed to broaden the tax base and more effectively detect offshore tax evasion.

Automatic Exchange of Information as the New Global Standard: The End of (Offshore Tax Evasion) History?

Automatic exchange of information (AEoI) for tax purposes has become the global standard for international tax cooperation in 2013. As a tool for containing offshore tax evasion, it has encountered opposition in the past and continues to be fraught with challenges. This paper recapitulates the rationale for AEoI, including estimates on the magnitudes of assets held offshore, with a specific focus on Turkish assets held in Germany (chapter 1). Subsequently, chapter 2 summarises the recent history and describes the processes and milestones until breakthrough for global AEoI in 2013. Chapter 3 then discusses three current challenges, including the de facto exclusion of developing countries; how to incentivise recalcitrant jurisdictions to participate, such as the USA; and issues around the implementation of the CRS, including OECD’s Global Forum of Transparency and Exchange of Information, the peer reviews and public statistics. Chapter 4 concludes.