Pandora’s letters show we can’t enforce tax compliance

The latest set of leaks is the largest ever for the International Consortium of Investigative Journalists. After shifting the data, media organizations have named [several well-known figures] In respect of offshore deposit assets. For all the revelations about the shadow global financial system for wealthy individuals and businesses since the ICIJ’s first disclosure in 2013, however, it is surprising how little has changed.

The measures to withdraw this system appear to be ineffective at best. Eight years have passed since governments promised coordinated action to reduce corporate taxes and crack down on the use of offshore structures for revenue-hungry states, but if anything the movement has been in the opposite direction. So much money now moves through the world’s offshore financial centers that such paper transactions are now responsible for much of the inflow of capital any country receives from actual foreign investment. The royalties and license fees that underlie these structures are growing faster than trading in physical goods and traditional services.

Far from taking a big chunk, most developed countries have faced leakage of taxable profits by cutting their corporate tax rates over the past decade, a tacit acknowledgment that enforcement has failed. There has been no real difference from the mandatory disclosure rules introduced in 2014 to curb the use of tax havens by European banks, according to a report by the European Union Tax Observatory last month.

Why have all these worthy efforts achieved so little?

One interpretation suggested by the list of powerful figures named in the latest leak, called the Pandora Papers, is simply that the people writing the laws and treaties that curtail international capital flows have much to gain from the current set-up. . As long as unreasonable amounts of money and power are concentrated in the hands of a few individuals and businesses, they will seek ways to move assets to places where they have been promised the most generous treatment. The consultants will aim to profit from the aid of this business, and in the process, become experts in plugging loopholes, accelerating the concentration of funds and erosion of the tax base.

In the US, there is a revolving door between senior roles at major legal and accounting firms and government jobs, as The New York Times reported last month, with a similar situation in the UK around secondment. As a result, firms interested in reducing their customers’ tax bills often have a role in developing policies that will dictate how much similar customers will have to pay.

However, there is a deeper issue. Those tax laws and treaties are, by their nature, lengthy and complicated. When split between the world’s 320 national and sub-national jurisdictions with the famous ‘Double Irish Dutch Sandwich’ tax avoidance structure, crossing five different countries, the possibilities of exploiting the loopholes are virtually limitless. .

Any attempt to control them is like a game of Whac-A-Mole. It also applies to efforts by the Organization for Economic Co-operation and Development, which seeks to reset the world’s tax rules through an agreement between 130 jurisdictions to be finalized this month. The focus of the proposal, a 15% global minimum tax rate that can be unilaterally implemented by governments that feel they are missing out, is likely to end up as a global maximum tax over time. The Biden administration’s efforts to restore cut rates to 21% under Donald Trump will stop at 26%, instead of the 28% originally sought or the 35% that existed before. At the bottom, the odds of the end of the four-decade-long race are slim.

Ultimately, the problem lies with the uncontrolled capital flows that have moved around the world since the collapse of the Bretton Woods system in the 1970s. While capital can move across borders without any restrictions, a small portion of that money will always be available to those who wish to keep their assets out of the hands of legal or tax authorities.

The world’s financial structure is only tentatively beginning to consider whether opening capital accounts – and the loss of monetary independence or exchange-rate stability that inevitably results – is a good deal or a devil’s deal. . If governments want to address tax avoidance instead of imposing endless band-aids on symptoms, that decision should eventually be revisited.

David Fickling is a Bloomberg Opinion columnist covering commodities as well as industrial and consumer companies.