Forum: G20 Issue: Reducing International Tax

Forum: G20

Issue: Reducing International Tax Avoidance Through the Use of Loopholes

Student Officer: Alexi Reich

Position: Board of Directors Academics Committee ______

Introduction

Taxation dates all the way back to 3000 BC, a system believed to be implemented by the ancient Egyptians. Taxation, although distance from its original biblically driven barter system roots, is still a cornerstone element of today's economy. Taxation allows for a nation to source a variety of different public expenditures.

Taxation has been altered and reincarnated into different systems since the beginning of its existence. Due to the complexity of taxation countries have yet to find a system that can not be evaded. Individuals and corporations can avoid paying their taxes through a multitude of different methods including the different methods tax evasion and tax avoidance, tax sheltering, and the usage of tax havens.

General Overview

Bearing in mind that some of these methods of tax not compliants are illegal, leaving the people and corporations employing those methods at the risk of legal prosecution, many of these methods are "legal loopholes". "Legal loopholes" can't currently be regulated because, as the name suggests, they are technically within the boundaries of the laws of whichever country the infringement is taking place in.

The United Nations and the G20 have both done work up to this point in order to try and limit, and ultimately stop, tax avoidance. The G20 has recently mandated that the Organisation for Economic Cooperation and Development (OECD) create a system of automatic information exchange that can be used on a global scale to aid countries in the location of any offshore money belonging to the respective country's tax paying citizens. The data garnered from this operation is expected to become available in 2017.

Even though work has and is being done by the United Nations, more must be done in order to combat an issue that is so complex.The nationspecific nature of taxation and the ever increasing amount of globalisation present in today's society has made finding suitable prevention methods even more challenging.

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Definitions of Key Terms

Financial Secrecy Index (FSI)

The Tax Justice Network, an advocacy group made up of researchers and activists with concerns surrounding tax avoidance, is a list that ranked 92 countries "according to their secrecy and the scale of their offshore financial activities". (financialsecrecyindex.com, 2016) The FSI was released in 2015 and is supposed to be a nonbiased list quantifying each jurisdiction's "financial secrecy" which can be used to aid us in understanding the intricacies of tax avoidance.

The Organisation for Economic Cooperation and Development (OEDC)

The OEDC is an organisation started in France in 1961 consisting of 34 different countries who have banded together in order to “stimulate economic progress and world trade”.(Wikipedia.com/2016) The OEDC are often in conversation with the G20 committee, most recently releasing a report to G20 regarding the countries that have not yet complied to the tax transparcy regulations proposed by the OEDC, or have stated that he will not oblige to them.

Tax Avoidance

Tax avoidance is title for legal activities used by an individual, business, or trust in order to avoid paying taxes. Although tax avoidance allows for an individual/group of individuals to pay less taxes than are due of them it is done through the usage of various different methods which take advantage of completely legal loopholes.

Tax Evasion

The term for the illegal dodging of taxes. Along with tax avoidance it is considered a form of tax noncompliance. Tax evasion can lead the guilty individual/party suspect to fines, and in some cases, imprisonment.

Tax Gap

The tax gap is a measurement used to represent the amount of money that a government collects through taxes compared to the amount that should theoretically be collected.

Tax Haven

The U.S. National Bureau of Economic Research have estimated 15% of the world's countries are tax havens. Sometimes referred to as secrecy jurisdictions, tax havens are countries that are usually both affluent and small, whose laws allow for money to be held there with high levels of secrecy, usually due to laws allowing for strong levels of bank

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secrecy or secrecy surrounding legal entities. Many tax havens have a low, or even zero, tax rate for nonresidents, making them even more desirable.

Tax Noncompliance

Tax noncompliance is a term that can be used to encompass a variety of different activities that have a negative effect on the tax system of the respective country, regardless of the legality of the acts. Tax avoidance and tax evasion are often both categorised as tax noncompliance methods.

Tax Shelter

A tax shelter is any method of lowering the proportion of your income that is taxable, and thus lowering the amount of money due to tax collecting entities, including governments. The usage of some tax shelters is illegal.

Major Parties Involved and Their Views

United Kingdom

Many of the British branches of some of the world's major companies have been accused of tax avoidance in recent years including: Apple, Microsoft, Uber, Netflix, Kellogg’s, and IBM. The United Kingdom's 2013/2014 pay gap was an estimated £34 billion, £34 billion makes up 6.4% of that year's total tax liabilities. (Wikipedia, 2016) The United Kingdom’s government created a new criminal offence for aiding/or helping an individual/party commit tax evasion in 2013. The United Kingdom have been working hard to prevent tax evasion by allowing Her Majesty’s Revenue and Customs (HMRC), the department responsible for tax collection in the UK, to target people who have offshore bank accounts, leading to the amount

United States

The United States' economy has been consistently affected by tax noncompliance. Economist Edgar L. Feige has estimated that the United States has a $500 billion annual tax gap. It should be noted that some of this estimated debt is accounting for illegal tax noncompliance. The United States have done a lot of work to try and combat tax avoidance. The United States, along with many other more developed countries including New Zealand, Australia, and South Africa, have been implementing laws known as the General AntiAvoidance Rule (GAAR) to curb tax avoidance since 2010.

Switzerland

The world’s most infamous tax haven, boasting an FSI value of 1,466.1, the highest in the world. Switzerland's laws allow for nonresidents to take advantage of low taxrates

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with maximum amounts of secrecy surrounding their money. Switzerland has been operating as a tax haven since around the 1930s and has gained global recognition tied to this title.

Panama

Panama has only recently become the center of the discussion surrounding tax evasion. In April of 2016 eleven million of the Panamanian law firm Mossack Fonesca’s papers were leaked. The documents that were leaked contained information on how the firm helped their clients evade taxes and launder large sums of money. Some of the people detailed in these papers were current or former heads of states. The law firm claims to have been taking part in these operations for fourth years but has not at any point faced charges or convictions surrounding their actions.

Recommended Research Topics: Is your country considered a Tax Haven?