Fixing The Tax Leak

Context: The recent leak of Pandora papers reveals the legislative limits of preventing tax dodging across world.

Legislative limits of preventing tax dodging

• Slow and limited tax reforms: 16 out of 88 countries identified in the Panama papers undertook at least one substantive reform by 2019.
  • Individuals and corporations seek complex structures such as companies and trusts to hold assets in or operate via low-tax jurisdictions.
  • Continuing profit booking without real activity: More than 40 per cent of entities located in British Virgin Islands, Isle of Man, Bermuda and Mauritius, essentially performed passive function of holding shares or equity instruments.
  • Many of these countries have adopted a lax regulatory framework to remain economically relevant.
• Major absentees in common reporting standards for exchange of financial information: 110 nations signed OECD common reporting standard, yet,
  • US, Philippines, Thailand and Vietnam are the few countries that not signed up the framework, which make tax authorities unable to probe siphoning of money among countries to procure.
• Thriving financial secrecy: As per report of Tax Justice Network, US ranked second globally, before Switzerland and after Cayman Islands in financial secrecy.
  • It shows lack of confidence in sharing tax information with other nations, which would reduce transparency in tax sharing information.
• Blurring distinction between tax avoidance and tax evasion: Both may be socially unacceptable but legally, parties to the former can only be reprimanded where it is established that the intent is to undermine tax law.
• Continuing investment flows from tax havens: India’s FDI statistics hint at oblique investments through jurisdictions such as Mauritius and Singapore.
• Legal complexities in tackling tax avoidance: It is often challenging to unveil transactions separate from the shareholders as
  • It places burden of proof on tax administrators if the structure so adopted is solely to avoid taxes.
  • Layering: Often the company facilitating tax avoidance/evasion and the individuals associated with it are disassociated using layers of entities across countries.

Conclusion: Despite initiatives to improve tax transparency, these leaks point to the opaque structures. The scale of the offshore leaks reaffirms the sense of inequality in taxation.