After making it harder for U.S. companies to avoid taxes through foreign merger, the Obama administration is preparing to unveil a new plan that will expose people using cover of shell companies to hide wealth and evade tax,
Tax dodgers have for years exploited a loophole in American banking system to deprive the government of billions of dollars in taxes by using shell companies and offshore accounts to shift profits outside the United States.
A congressional research group report issued in January last year estimated the U.S. government was losing around $100 billion in taxes due to shifting of income and profits by companies and U.S. citizens into low-tax countries. The revenue losses on account of tax avoidance by wealthy individuals and large multinational corporations can reflect both legal and illegal actions.
New rules which, according to the New York Times, will be released soon will make it mandatory for banks to know and reveal identities of owners and operators of shell companies who until now are protected from federal scrutiny.
Earlier this month, U.S. drugs-maker Pfizer and its Irish counterpart Allergan scraped a $150 billion planned merger after the U.S. Treasury enforced new measures, changing methods of calculating ownership percentage of the foreign company in a bid to prevent tax avoidance using a strategy known as “inversion”.
Through this legal financial maneuver, a U.S. company can merge with a foreign company and relocate its legal tax residence to another country with a lower tax rate, thus reducing its tax bill but depriving its home country of its due share of taxes.
Introduction of new measures and reports of impending rules to crack down on tax evaders and avoiders come amid reports based on a massive document leak from a law firm in Panama which allegedly helped world politicians and officials keep and hide their wealth through offshore industry.
The report by the International Consortium of Investigative Journalists is based on more than 11 million documents, emails, and client reports from the firm Mossack Fonseca. The law firm said the information published about it was false.
The Prime Minister of Iceland, Sigurdur Ingi Jóhannsson, became the first casualty as he resigned under pressure after disclosure of his offshore investments. British newspapers also reported this week that British Prime Minister David Cameron has admitted to have benefitted from the offshore investment.
Pakistan’s Prime Minister Nawaz Sharif is facing mounting pressure to launch a probe after leaks showed 9 offshore companies connected to his family name. According to ValueWalk news site, those involved from Sharif’s family include his two sons and a daughter. Names of many Pakistani politicians and businessmen are also on the list of those connected to offshore companies.
A report by USA Today said names of more than 200 people with U.S. addresses have been revealed in the so-called Panama Papers involved with shell companies. The list includes a “handful” of U.S. businessmen accused or convicted by U.S. authorities for ties to financial crimes and Ponzi schemes.
A shell company, by definition, is a corporation without active business operations or significant assets which is not necessarily illegal but can act as a vehicle for tax avoidance for legitimate businesses.
While banks with American branches are required to “know their customers”, they do not have to do so about clients with accounts in names of shell companies, thus effectively enabling them to hide their wealth.
The banks with branches in America, under the new rule, will ascertain the identities of people having 25 percent or more stakes in corporate entities that open accounts, according to the New York Times. Those exercising control over such entities will also be covered under the new rule.
Tax Justice Network, a UK-based group which tracks movement of wealth for tax avoidance, estimates between $21 trillion and $32 trillions of private financial wealth was located in secrecy jurisdictions, or safe havens, worldwide in 2015 which were either untaxed or lightly taxed.
An estimated amount of $1-6 trillion illegal financial flows cross borders every year compared with approximately $135 billion in global foreign aid, TJN says.
Switzerland is the top destination in the 2015 Financial Secrecy Index by the TJN which quoted the Swiss Bankers’ Association as reporting in September, 2015 that banks in Switzerland held $6.5 trillion in assets under management, of which it said 51 percent originated from abroad.
Estimates by Deloitte reveal Switzerland was also the global leader with $2.04 trillion in assets under management in 2014. The U.K. and the U.S. followed with $1.65 trillion and $1.43 trillion respectively.
