In 2015, a global team of journalists released a report on a massive tax evasion scheme among more than 100,000 clients of HSBC Private Bank Switzerland, based on complete internal records extracted by a former employee. They called it the “Swiss Leaks.” The next year, another published leak called the “Panama Papers” revealed the identities of the shareholders of shell corporations created by the Panamanian law firm Mossack Fonseca Now, a team of economists have used data in the leaks and compared it to official tax records, income reports and audits to dig a bit deeper – and find the problem is perhaps larger than previously estimated.
The study found that tax evasion is largely practiced by the wealthiest, and not equally represented across income levels. The study in many ways confirms what they’ve estimated all along – high levels of criminal evasion among the wealthiest.
The top 0.01 percent in Scandinavia – households with more than $40 million in net wealth – evades about 30 percent of personal taxes, compared to 3 percent on average. Among the individuals revealed in the Swiss Leaks who the authors of the study were able to match to a tax return, about 95 percent did not report their Swiss bank account.
Tax evasion fuels wealth concentration, the authors contend, and this form of wealth inequality also motivates banks to only supply tax evasion services to the wealthiest. The more clients Swiss banks serve, the higher their chance of being caught if they assist in tax evasion. Therefore, the researchers say, banks try to limit their risk by limiting tax avoidance services just to those at the top. About 10% of the world's offshore wealth, or $2.5 trillion, is held in Switzerland, Zucman has estimated. In studying Scandinavia's wealthiest 0.01% — 520 households — the researchers found 1% of them were using HSBC's Swiss private banking services alone. The researchers found a similar trend after studying the shell companies created by Panamanian law firm Mossack Fonseca, and matching as many as possible to their ultimate owners. Over 1% of Scandinavia's wealthiest households owns a shell company created by Mossack Fonseca, they found.
But because this study only looked deeply at this practice in Norway, Sweden and Denmark – three countries that are consistently near top of rankings on tax compliance, social capital, social trust and strong tax administrations – the analysis should be expanded to other countries to determine the extent of the problem.
“If we’re looking at 30 percent evasion at the top end of the distribution in these countries, your expectations – all other things being equal – is that it’s even higher in countries where tax administration capacity is lower and/or where social capital, tax compliance, tax morale is lower,” Alex Cobham with Tax Justice Network. “That suggests even higher levels of offshore asset loss than the $10 trillion to $30 trillion range that you normally think about between our estimates and Zucman’s.”
The study similarly noted that most Latin American and many Asian and European economies have much more wealth offshore than Norway.
“The limitations are clear: We’re viewing data from one Swiss bank and one Panamanian law firm,” Cobham said. “However, to the extent that both HSBC Switzerland and Mossack Fonseca were highly integrated parts of a global structure of evasion and avoidance, it’s reasonable to think that this isn’t going to be completely unrepresentative in terms of behavior.”
If behavior in this system of tax evasion is consistent, then another behavioral finding in the study should be carefully considered as well: “After voluntarily reducing [criminal]tax evasion, tax evaders do not legally avoid taxes more, despite ample opportunities to do so,” the report said. However, it is the wider tax evasion that remains unaddressed. Regulation is one thing, but enforcement is another and corruption affects both. Transparency regulations are weakly and sporadically enforced International tax evasion by large corporations usually involves transfer pricing. For example, A sells items costing it $5 million in Britain to customers in the European Union at profit of $3 million, which should be taxed at 25% in Britain.
A uses invoices from its British Virgin Islands (BVI) office for every major customer or has that office charge the British company $5 million in management fees, commissions or consultancy.
A pays no tax at all in the BVI because the entire business was conducted outside the BVI. The British tax office cannot prove the BVI invoices are empty shells and cannot set them aside.
In group C, company A is in a high tax country and B is in a tax haven. A eliminates its taxable profits by receiving a loan from B, the interest on which equals the amount of the profit. But the loan is only on paper, not a real cash transfer.
A shows no profit, B shows income from interest but, being in a tax haven, it pays no tax on it. Group C’s international profits are artificially raised by tax avoidance which is illegal in Australia but not in most other countries.
Still in group C, A sells product to D for distribution and sale to countries round the world. A produces accounting entries that show only small profits from the sales to D, by appearing to sell at cost plus a tiny margin. D makes a large actual profit on its sales accordingly but it is in a low tax country so it leaves the figures alone.
Money laundering consists of disguising and rendering untraceable the sources of bank deposits. It is now widely used for tax evasion by the rich and by multinational corporations. Any tightening of rules in one jurisdiction causes a flight of capital into looser regimes of which BVI and Nauru are currently the loosest of all.
Small countries compete to make their banks as attractive as possible to high-wealth people and firms with negligible taxes and easy secrecy around assets.