How Global Tax Evasion Strategies Used by the Wealthy Keep Poor Countries Poor

Part of the Panama City skyline is seen on April 7 as revelations about the law firm Mossack Fonseca & Co. continue to play out around the world. (Joe Raedle/Getty Images)
Part of the Panama City skyline is seen on April 7 as revelations about the law firm Mossack Fonseca & Co. continue to play out around the world. (Joe Raedle/Getty Images)

Releases of secret documents, like the whopping 11.5 million Panama Papers, are designed to result in a cascade of scandals. Since Sunday’s revelations, Iceland’s prime minister has stepped down, and Britain’s prime minister, David Cameron, admitted on Thursday that he had profited from his father’s offshore account. Leaders in Russia, China and other parts of the world have come forward to either claim the leak is a conspiracy, censor online speculation, or simply deny any illicit dealings or tax impropriety.

As journalists take a fine comb through the 2.6 terabytes of data obtained from the servers of Mossack Fonseca, the world’s fourth biggest “offshore law” firm, they are sure to uncover more and more of the web of dealings that tie politicians, businesspeople, celebrities and their kin to that tax haven and others.

But what’s so scandalous about the Panama Papers isn’t just that there’s a nexus of rich people, some elected, who make profits by evading taxes. It’s that so much of the money moved through tax havens would otherwise be taxed by some of the world’s poorest, most revenue-hungry governments.

That tax evasion disproportionately affects the poor shouldn’t come as a surprise, and it certainly isn’t a secret. Angel Gurría, the secretary general of the Organization for Economic Cooperation and Development, or OECD, an economic organization consisting of the world’s richest nations, once estimated that developing countries lose three times as much to tax evasion as they receive in foreign aid. The Tax Justice Network, pointing out that data on tax evasion is murky at best, says the real figure may be closer to 10 times.

There’s a vicious cycle at work here. Tax revenue is one of the strongest indicators of an economy’s health. In many developing countries, with poor and/or rural populations, collecting tax is expensive for the government, and unaffordable for the majority of citizens, who may work in the “informal economy” anyway. Therefore, much of the tax revenue is expected to come from commercial transactions and foreign investment. But a report by ActionAid, released in 2013, shows how almost half of all investment in developing countries is funneled through tax havens.

Here’s an example of how it works (pdf, pg. 10): In 2007, Vodafone, one of the world’s biggest telecom providers, moved to buy Hutchison Essar Ltd, an Indian subsidiary of a Hong-Kong based company. But Hutchison Essar, despite only operating in India, was not based there — rather, it was registered as a business in the Cayman and British Virgin Islands, tax havens in the Caribbean, and Mauritius, another, this time in the Indian Ocean. Vodafone bought the company through a subsidiary of its own — registered in the Netherlands, also a tax haven. None of those places levy a capital gains tax, and so India was not able to claim the $2.2 billion it otherwise would’ve earned had tax havens not been an option for the companies. That sum is worth almost the entire annual budget for subsidized meals for school-going children in India.

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SOURCE: Max Bearak 
The Washington Post