How do people and companies avoid paying taxes?

THE LATEST mega-leak of documents to the International Consortium of Investigative Journalists (ICIJ) made a splash on October 3rd, when media around the world began running stories on what they have dubbed the Pandora Papers. (Revelations are promised throughout the week.) The exposé lifts the lid on the financial affairs of dozens of world leaders, other public officials and billionaires in 91 countries. The focus of this leak, as with the ICIJ’s past ones, such as the Panama Papers in 2016 and the Paradise Papers a year later, is the offshore dealings of the global elite. The use of an offshore company to move money or buy property is not necessarily dodgy; a billionaire may mask a purchase made with legitimate wealth for privacy reasons. But shell companies registered in palm-fringed offshore centres (the British Virgin Islands is a favourite) are often used to avoid or evade tax, or to launder ill-gotten gains.

Individuals have various ways to avoid tax legally by using structured tax shelters or changing their place of residence. Tax evasion is a different matter, treated as a criminal offence in many countries (though famously dealt with more leniently in Switzerland). The smartest evaders use a combination of bank accounts, shell companies, trusts and foundations—often fronted by nominees—in one or more offshore financial centres. Corporate tax avoidance is a greyer legal area. Companies naturally push the envelope, often betting that the authorities will have neither the wit nor the resources to confront them over their tax-minimisation strategies—or that governments will accept less tax in return for investment by “mobile capital”.

Denis Healey, a former British chancellor of the exchequer, once described the difference between tax evasion and avoidance as “the thickness of a prison wall”. Both grew in line with financial globalisation in the late 20th century. Evasion became easier with the explosion of tax havens, which was tacitly approved by rich countries (especially Britain) that saw them as useful adjuncts to their own financial centres. Today the world has as many as 50 tax havens, some of them more accurately described as “secrecy jurisdictions”. Not all are offshore: American states such as South Dakota and Nevada peddle secrecy through the trusts they offer (which have featured in several of the Pandora Papers stories published this week). Multinationals, meanwhile, have found ingenious ways to exploit loopholes in cross-border tax rules, which were designed for an earlier age. International and bilateral tax agreements that were designed to avoid double taxation can be gamed to produce double non-taxation.

The pushback against such ruses began in the late 1990s, when the Organisation for Economic Co-operation and Development (OECD), a rich-country forum, declared war on “harmful tax competition”. It has waxed and waned since then, reaching a new level of intensity since 2008 as cash-strapped countries, both rich and poor, have fought harder to claw back lost tax revenues—witness America’s assault on Swiss banks. Tax havens have, under intense pressure, agreed to exchange more information on clients with their home countries. The world is moving towards a system of automatic exchange of data, even as some countries grumble that this clashes with their privacy laws. Others complain that they are being bullied into providing data without a guarantee of reciprocation from America and other large economies. Still, life has become a lot harder over the past few years for individuals looking to dodge their tax obligations, and is likely to get tougher still.

Reform of the international rules for companies has proved trickier, but consensus on a way forward does at last appear to be forming. Some 140 countries and territories, including all of the big economies, are close to a deal that would see taxation more closely aligned with where sales are made, and a minimum global tax rate of 15%. However, it is too much to expect the closure of all the loopholes, and new ones are sure to open up. Rich-world governments have long tacitly encouraged certain types of avoidance for fear of otherwise being branded uncompetitive and turning off big investors. They may be less keen on billionaires dodging tax in personal property deals, but also reluctant to target plutocrats who make generous political donations. The Pandora Papers won’t be the last in the series.

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