The Burden of Tax Evasion
Taxes allow the allocation of much needed economic investments to improve the livelihood of citizens in the form of defence, welfare, education and much more. The loss of such valuable revenue is of great concern to any government that relies on such revenue. Following the 2008 financial crisis, the OECD embarked on two objective agendas to address the issue of BEPS that was identified in the crisis. The OECD's two objectives would seek to address tax avoidance through OECD/G20 BEPS project and promoting transparency and exchange of information between jurisdictions, where G20 is the Group of Twenty. Efforts ensured the inclusion of trust structures based on the attraction of tax efficiency within the structure.
Tax is a necessary enforcement of some governments to ensure ‘financial contribution…to raise revenue, levied on the income or property of persons or organisations, on the production costs or sales prices of goods and services’. The government manages the excessive levying of tax and double taxing. In specific circumstances, the government provides relief from tax or deferral of tax. The taxes are levied in a logical manner towards a specific group in need of such tax reliefs or deferrals. The uses of these tools to avoid tax that would be legally deferred or reduced have unfortunately led to the misuse of financial structures to evade tax obligations or abuse tax avoidance schemes. The governments of tax jurisdictions have rapidly developed and implemented anti-avoidance tax measures to prevent the abuse of tax relief. Further jurisdictions have established means to identify these lawbreakers who slip through the grey portion of the law to avoid or delay paying applicable taxes.
FATF sought to put forward recommendations that would combat the use of money laundering schemes to achieve concealment of funds origination related to financial crimes including tax evasion, thereby ultimately exposing funds which would lead ultimately to cutting off access to funds. Among the recommendations outlined by FATF were transparency and beneficial ownership of legal persons and arrangements. Today, such transparency guidelines include the direction of disclosure of relevant information to appropriate or competent authorities to ensure that at the very least known offenders are captured or that building a case against potential offenders is achievable. The information received by the competent authorities works as a resource in investigations or can be analysed to reveal potential anomalies. Although this requirement has been in place for quite some time now, the collected information is strictly available per jurisdiction. The competent authorities house vast information reported by those obligated to report segmented by countries and confidential information requirements. The exchange of information initiative allows this vast information to be accessible by other authorized jurisdictions in the continued fight against tax evaders.
The appeal of this attack on money launderers spread to other organisations and groups, including the European Union (EU). The EU considered the recommendations put forward by FATF and drafted a set of directives. At the EU level, it has the potential to ensure consistency and buy-in by all its members. These directives were initially imposed with the intent to improve the standards as it relates to the issues and concerns faced by the Member States within the EU. The first anti-money laundering directive (AMLD) is dated in the year 1990, where the EU adopted rules to prevent the misuse of financial institutions from facilitating money laundering activities. It is apparent that this first AMLD was established to enforce the guidelines and recommendations first established by FATF in the late 1980s. Much like FATF, the EU sought to focus efforts on anti-money laundering. Later in 2001, both would also pursue efforts to combat terrorist financing. For simplicity and clarity, money laundering hereafter mentioned is in consideration of efforts to combat terrorist financing unless expressly stated otherwise. The AMLD that was first adopted in 1990 has since evolved from the first directive to the fifth directive with the sixth directive already in contemplation by the EU. The amendments to these directives are in direct response to increased ingenuity on the part of the lawbreakers, the reactive measures of other nations and proactive drafting of the EU itself. By the fourth AMLD, it was completely restated; as opposed to being further amended. In 2015, the European Parliament and Council further amended the fourth AMLD. As such, the fourth and fifth AMLD are read collectively.
The Oxford University Press wrote extensively regarding the Panama Papers, most relevant is the fifth issue of Volume 22:
The Panama Papers highlight the need for all jurisdictions—and the wider international community— to ensure that legal structures of major economic and social value (companies, trusts, and foundations) are not misused. The responsibility of professionals associated with their establishment and operation is of crucial importance here: they are in many ways society's gatekeepers and the provisions of services such as the so-called nominee directors and (in the context of disclosure of beneficial ownership) and should not be countenanced.
The EU acted swiftly from the fallout of this event and amended the fourth AMLD to incorporate the lessons learned. Continuous review and understanding of the event led to the identification of law firms in the UK and complex structuring of asset ownership through offshore corporate service providers. The actions by the lawyers revealed deliberate actions to conspire to defraud the appropriate authorities of revenue owed.
The anti-money laundering and financial regulatory obligations are endlessly emerging through groups that exist to examine and develop guidelines, recommendations and even directives having varying approaches, similar objectives and conflicting repercussions. Naturally, the examination of the Panama Papers led to many attempts to circumvent the use of a legitimate service by those seeking to evade tax obligations or engage in other criminal acts. The first attempt at correcting this abuse was to identify areas in which tax was avoided. Residents and citizens residing outside their country of domicile earning income, obtaining property, producing goods for purchase and resale. These tax crimes often lead to a need for engaging in money laundering ventures to camouflage the origin of the funds, the beneficiary of the funds and the use of the funds. Each category of information collectively allows the government to potentially determine a citizen’s tax obligations while living outside of their own country of residence or citizenship. It is evident that a tax evader would not announce his or her involvement in such a scheme, and the reliance is now placed heavily on various institutions and organisations in a position to monitor financial transactions. Unfortunately the burden is increasingly placed on tax free havens; a title which is unfairly painted negatively.
