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Harmful Tax Practices

OECD defines harmful tax practices as follows:

OECD seeks to encourage an environment in which fair competition can take place. In the tax area this means promoting principles that enable each country to apply its own tax laws without interference of practices that undermine the fairness and integrity of each country’s tax system. The OECD does not seek to dictate to any country what its tax rate should be, or how its tax system should be structured. Instead, it works to build support for fair competition so as to minimise tax induced distortions and to increase taxpayer confidence in the even handed application of tax rules.

Basically, from Tax Justice Network's point of view, harmful tax practices mean jurisdictions, laws and practices that enable or promote tax avoidance, tax evasion and tax competition. Below you can find short representations on these topics. For comprehensive representations, see for example Tax Us If You Can or More Taxes - Promoting Strategies for Global Taxation

Aggressive tax avoidance is "legal tax evasion" carried out with various methods. Its legality is based only on impossibility to be able to discover any economic crime or identities of criminals. Tax avoidance as such is based on possibilities to choose loopholes among different tax jurisdictions. So to speak, it is aggressive tax planning based on national differencies and loopholes.

Cross-border tax avoidance is harmful for three reasons. First of all, equal treatment of citizens is at stake. Only the big firms, the rich and the tax experts are able to use loopholes which often require (besides knowledge) some activities in the grey area of the law. Usually these kind of tax haven acitivities also include giving outsiders tax advantages domestic people and firms cannot have. Second, it causes huge tax losses nationally. These losses can be described in various ways. In Finland tax avoidance is the cause of over 40 % of tax losses arising from grey economy. In United States 61 % of corporations didn't pay any federal taxes in the end of 1990's. Tax losses suffered by the United Kingdom may be at least 120 billion pounds annually. Third, tax avoidance creates huge business and social risks. Enron-like crashes and thus also stock market crashes are made possible by aggressive tax planning.

Tax evasion is a crime in for example all Nordic countries. Harmful tax practices such as bank secrecies combined with general reluctance to exchange of information enables various criminals to hide their assets and conceal their identities. Drug and human trafficking, illegal weapons trade, organised economic crimes and terrorism are essentially helped by various tax haven jurisdictions that try to lure investment capital with possibilities to avoid or evade taxes elsewhere. Usually this is an accepted by-product of tax haven activities which is irresponsible and unacceptable for democracy. Often such jurisdictions can be found at small islands and such tax havens, but there are such practices for example even in Finland.

Tax competition between states means that states compete of the location of private assets with national taxation policies. Tax competition is harmful because

  • - it sets limits to policy choices and thus limits the scope of democracy
  • - it shifts taxation to so-called static tax base, including taxes on consumption, which increases the total tax rates paid by low and medium-income households
  • - it encourages unproductive economic activities such as portfolio investment instead of productive economic action

Tax competition in its most harmful forms is not conducted with tax rates but with tax exemptions and holidays not available to actual residents or citizens. This withdraws the actual economic and social obligations of elites and threatens principles of democracy. Harmful tax competition increases income disparities within and between nation states.

Sometimes tax competition is considered necessary so that authorities would not abuse their monopoly positions. Modern tax competition is, however, exactly states abusing their sovereignty in luring dubious investments while benefits of these aren't enjoyed by the citizens. This kind of tax competition leads into a race to the bottom in which legitimate public goods are being withdrawed.

The price of Offshore

Tax Justice Network's research suggests that:

  • approximately US$11.5 trillion of assets are held offshore by high net-worth individuals;
  • the annual income that these assets might earn amounts to US$860 billion annually;
  • the tax not paid as a result of these funds being held offshore might exceed US$255 billion each year.

    Read more!

    In Finnish: Varjotalouden hinta

  • Structures of offshore finance

    Tax havens

    » About 70 havens around the world
    » High secrecy laws, zero or low taxation, insufficient regulation
    » Used by wealthy individuals, transnational corporations and international crime

    Offshore financial centres (OFCs)

    » London, New York, Singapore, Tokyo etc.
    » Tax havens that are located within nations
    » Unregulated trade of stocks, bonds and currencies

    Export processing zones (EPZs)

    » More than 3,000 areas within nations around the world
    » They offer tax redemptions and low levels of regulation for industrial production
    » Majority in developing countries

    Flags of convenience (FOCs)

    » Tax haven services for commercial vessels
    » They help tax avoidance, facilitate international crime and lead to environmental catastrophes
    » Many ship registers (i.e. Mongolia, Liberia) have been privatized for Western businessmen

    Facilitators and users

    Transnational corporations

    » More than half of the world trade is multinational corporations' intra-firm trade
    » Increasing proportion of world trade consists of trade in services, rights, royalties etc.
    » These developments have, together with general trends of financial globalisation, created easy possibilities for fictitious transactions whose goal is to avoid or evade taxes

    Finance sector firms

    » Banks, accounting firms and other finance service providers accelerate tax avoidance by tailoring services for multinational corporations and wealthy individuals
    » The same mechanisms can benefit organised crime as well
    » Major accounting firms such as KPMG have been accused of marketing tax avoidance vehicles

    Wealthy individuals

    » According to Tax Justice Network's research, the world's super-rich have deposited as much as US$11,5 billion to tax haven accounts
    » The tax gap resulting from these savings rises at least to US$255 dollars
    » Major banks and finance sector firms assist in managing these offshore savings

    Organised crime

    » International criminal networks benefit from same mechanisms used by wealthy individuals and corporations
    » Tax havens are used for conceiling the true identity of investors, thus making authorities' work difficult
    » If tax havens and other offshore structures would not exist, money laundering and the operations of organised criminals would become much more difficult