July 19, 2024

Advancing Business Journey

Empowering Business Excellence

Yes, We Can Tackle International Tax Evasion, if We Really Try

5 min read

From the revelations contained in the Panama Papers to Paul Manafort’s conviction for hiding money in foreign bank accounts, we’ve become all too familiar with the vast scale of international tax evasion and the challenges of countering it effectively. In 2015, the Boston Consulting Group estimated that some eleven trillion dollars of wealth was parked in offshore locales, much of it out of reach of the tax authorities. But, at the start of this week, the EU Tax Observatory, an independent research laboratory based at the Paris School of Economics, released a new report on global tax evasion, which contained some positive news. “We estimate that offshore tax evasion has declined by a factor of about three over the last 10 years,” the report says. “This success shows that rapid progress can be made against tax evasion if there is the political will to do so.”

Despite this finding, the total amount of wealth held in tax havens hasn’t changed much, the report noted. What’s different now is that, because of banking transparency laws that the United States pioneered during the Obama Administration, much of this offshore wealth is visible to the tax authorities of its holders’ home countries. And, since most countries tax worldwide income in some form, the income these accounts generate is subject to tax. “Today there is still the equivalent of 10% of world GDP in offshore household financial wealth, but in our central scenario only about 25% of it evades taxation,” the report says. That’s a big change from ten or fifteen years ago, when studies suggested that ninety to ninety-five per cent of offshore financial wealth went unreported to tax authorities.

The big policy breakthrough was the March, 2010, passage of the Foreign Account Tax Compliance Act (FATCA), which came after a Senate investigation estimated that international tax evasion was costing the U.S. Treasury up to a hundred billion dollars a year. Before FATCA was enacted, rich Americans could transfer large sums of money to Switzerland and other tax havens secure in the knowledge that the banks receiving the money would never inform the Internal Revenue Service. FATCA required U.S. taxpayers to disclose foreign bank accounts, and, just as important, it required overseas banks, including those located in tax havens, to report the holdings of U.S. taxpayers to U.S. authorities. “This provision will make it far more difficult for tax dodgers to conceal assets and income in foreign banks,” the Democratic senator Carl Levin, who led the subcommittee that helped reveal the scale of the problem, said at the time. “As more banks set up systems to disclose U.S. account holders, bank secrecy will become increasingly difficult to maintain.”

Levin was right. FATCA not only gave the I.R.S. much more information about wealth held overseas but also served as a model for other countries. In 2014, the same year that FATCA went into effect, dozens of nations, including all thirty-eight members of the Organization for Economic Cooperation and Development, agreed to adopt a Common Reporting Standard (C.R.S.), which would require banks to share information on accounts opened by foreign residents, including the names and taxpayer identification numbers of the account holders, and the account balances.

This agreement effectively set up a global system of exchanging private banking information. As of October of 2022, the new report notes, more than a hundred tax jurisdictions, including many offshore tax havens, have applied the new rules, and countries have reached nearly five thousand bilateral agreements to exchange financial information: “This revolutionary development shows that new forms of international cooperation, long deemed utopian, can emerge in a relatively short period of time.”

In an era when global problems, such as climate change and mass migration, often seem politically intractable, the success in curbing international tax evasion sends a hopeful message to multilateralists everywhere. It suggests that, if the public keeps up the pressure, and if politicians and policymakers put in the hard work, meaningful international agreements can be reached and enforced. “Fifteen years ago, few people believed that such a global automatic exchange of bank information could ever exist,” the report reminds us. Today, this system is making it harder for wealthy scofflaws to hide their financial assets. That’s progress.

To be sure, it doesn’t mean that international tax evasion is no longer an issue. After hailing the advances that have been made in sharing information, the report highlights how the system is still plagued by noncompliance and loopholes. As long as there are unscrupulous people with large chunks of wealth that they’d like to obscure, there will be equally unscrupulous financiers and lawyers eager to enable them to get around the rules. In one notorious case, bankers from Credit Suisse continued to help clients keep their overseas accounts secret even after the bank had reached a plea deal with the U.S. government.

Wealthy people are still using shell companies and other administrative maneuvers to evade the tax authorities, the report notes, and are also investing in overseas real estate, which isn’t covered by FATCA or the C.R.S.—both measures only apply to financial assets. The report highlights an estimated five hundred billion dollars’ worth of property owned by foreigners in places like London, Paris, and Dubai. “Beyond real estate, cryptocurrency is the next frontier,” the report goes on. These points complement warnings from other experts about the lack of transparency that remains in some offshore tax havens, including the Cayman Islands and the U.S. Virgin Islands. Even closer to home, the United States, despite the leadership role it exercised in introducing FATCA, isn’t a party to the C.R.S., which potentially enables foreigners to use this country as a tax haven.

The report also highlights two more ongoing tax issues: multinational corporations shifting profits to low-tax countries, and huge fortunes going largely untaxed, even if they aren’t shifted offshore. In 2021, more than a hundred countries, including the United States, agreed to introduce a minimum corporate tax rate of fifteen per cent, which, in principle, was a landmark development. “But since the political agreement of 2021, the global minimum has been dramatically weakened by a growing list of loopholes,” the report says. As things stand, it “would generate only a fraction of the tax revenue that could be expected from it based on the principles laid out in 2021.”

This chipping away at the original agreement provides one powerful reminder of the enduring influence of political lobbying in the United States and elsewhere. The lack of an effective domestic wealth tax is another. Sometimes, the struggle between wealthy interests and ordinary taxpayers can seem so one-sided as to be hardly a contest at all. But the lesson of FATCA and the C.R.S. is that meaningful reforms are still possible. Or, as the new report puts it, tax evasion is not a law of nature but a policy choice.” ♦


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