Pandora papers reveal legislative limits of preventing tax dodging

Synopsis: Pandora Papers reveal complex issues associated with offshore investments.

Introduction

Pandora Papers consist of as many as 12 million documents belonging to 14 global corporate services firms, which set up about 29,000 off-the-shelf companies and private trusts in obscure tax jurisdictions.

What are the global challenges in curbing illegal offshore investments?

Many countries have not adopted common reporting standards: The OECD introduced the common reporting standard, using which countries could partner better to exchange the financial information of their residents. Today, 110 jurisdictions are signatories to the standard.

But many countries have not signed up for this framework. For example, the United States (it employs the Foreign Account Tax Compliance Act or FATCA to receive information), the Philippines, Thailand and Vietnam.

So, the tax authorities may not be able to procure substantive evidence if a country is not obligated to exchange such information.

Financial secrecy laws: The latest information from the OECD on country-by-country operations by select multinational companies reports that more than 40% of the entities are located in the British Virgin Islands, the Isle of Man, Bermuda and Mauritius due to their financial secrecy.

Financial secrecy laws are not only present in some island nations alone, but also in countries like the US. For example, The Tax Justice Network reports that the US ranked second in the world, before Switzerland and after the Cayman Islands, in financial secrecy. States such as Delaware and South Dakota are hotbeds for offshoring.

Proof of burden on Tax administrators: Corporate entities are treated as an entity separate from the shareholders by various tax-havens. This places the burden of proof on tax administrators to prove the transaction details. But, there are limits to traceability due to non-cooperative jurisdictions. So, it is often challenging to unveil their transactions.

What can be done?

The scale of the offshore leaks reaffirms the sense of inequality in taxation. So, holistic and all-around attack from within and outside the country is the need of the hour. Internally, for a tax system to be truly reformed, socially unacceptable tax avoidance must be made legally impermissible.

Source: This post is based on the article “Pandora papers reveal legislative limits of preventing tax dodging” published in Indian Express on 11th Oct 2021.