“There are many academics who defend the existence and use of offshore tax havens, asserting that it encourages healthy tax competition between countries”
Tax avoidance among the world’s most powerful and wealthy has been the topic du jour since the April release of the Panama Papers, a cache of 11.5 million confidential documents detailing information about 214,000 companies set up in various offshore tax havens.
The papers, leaked from a Panamanian law firm, put an unflattering spotlight on a number of state and government leaders – several in Africa – as well as private citizens who use offshore banks and other shell businesses to keep their financial dealings secret.
Despite the global uproar, including the resignation of Iceland’s prime minister, people still are unclear about how offshore tax shelters function. Also, many fail to understand that offshore tax havens and shell companies are not illegal in themselves unless they are purposely being used for tax evasion, money laundering, and other types of fraudulent purposes. Identifying the purpose and intent of an offshore tax arrangement is difficult but is the only way to distinguish its legality.
Simplistically, tax havens are jurisdictions (usually a state or country) where taxes are deliberately levied at a very low rate, and where banks and financial regulators allow and encourage non-resident foreigners (individuals or corporations) to invest their monies without providing detailed information about the source of funds or the identity of the true owners.
Economist Gabriel Zucman, author of the Hidden Wealth of Nations, believes nearly $8 trillion or 8% of all the financial wealth in the world are stashed in offshore tax havens. He also estimates that 30% of Africa’s total wealth is in tax havens, compared to Russia, where it is more than 50%.
There are many academics who defend the existence and use of offshore tax havens, asserting that it encourages healthy tax competition between countries and provides an incentive for politicians and governments to pass sensible tax laws that do not place undue hardships on citizens. They argue that competition between governments for tax revenue is as good for individuals as competition between corporations is for consumers. The former helps to keep taxes low and the latter the price of goods cheap.
There is also a fine line between tax avoidance and tax evasion, though the distinction is often ignored in the noisy debate over tax havens. You could use the analogy of a person who ships a vehicle from the United States to Ghana through Togo to avoid paying high import taxes levied at Tema Harbor versus the person who brings a vehicle to Ghana by smuggling it through Takoradi Harbor. As the Web site Investopedia explains, evading taxes is illegal in most countries but avoiding paying unnecessary tax is one of the keys to building wealth. Again, crossing the line between shrewd tax planning and illegal tax evasion frequently centers on intent.
The opposing arguments that have been made against offshore tax shelters, by economists like Zucman, are that they strangle local governments, and worsen the global gap in wealth and income between the rich and poor. First, it hides vast sums of wealth from taxation that would otherwise be used to develop struggling economies for the benefit of all its citizens. Second; while the rich get richer by harboring their monies overseas, the poor are left to shoulder the tax burden at home, making it harder for them to also get rich.
While there are passionate proponents on both sides of the tax haven debate, there are many more who agree that the global banking system could use greater transparency. The fact is the secrecy which controls certain offshore tax jurisdictions encourages criminal money laundering, which sullies the entire practice of banking offshore for those using legitimately acquired assets. Whether it be a drug cartel seeking to hide drug money or a terrorist organization looking for a vehicle to use to pass funds to operatives around the world, sunlight may be the best disinfectant to prevent illicit financial flow through offshore tax havens.
In 2014, G-20 nations pledged to begin automatic exchange of financial information – where countries can share information on bank accounts, transactions and financial flows on a periodic basis. In the past this proposal has failed to gain traction due to the sheer volume of data that would need be transferred from nation to nation, and concerns over data and privacy. The number of international tax information exchange agreements between countries has grown from 40 in 2008 to 3000.
Still, organizations like the Organization for Economic Co-operation and Development (OECD) and Global Financial Integrity are calling on governments to do more to improve transparency. In particular, they warn that developing countries – particularly in Africa – stand to lose even more if they do not enact policies to detect and deter cross-border tax evasion and anti-money laundering laws and practices.
Ultimately, developing countries owe it to themselves to implement equitable tax laws that encourage citizens to invest and save their hard-earned monies at home, and not overseas.