Tax havens may soon lose their charm

MOHAN R. LAVI | Updated on March 09, 2018 Published on June 20, 2013

If the G-8 gets serious, there could be a crackdown on offshore tax destinations.

It seems to be the time for sportsmen to be in the news for non-sporting reasons. The news that has stunned the world is Lionel Messi defrauding the Spanish government of €4.16 million ($5.53 million) in unpaid taxes on income from companies that used his image to promote themselves.

The prosecutor’s lawsuit said that Messi, who plays for FC Barcelona, had arranged for €10.17 million, earned from image rights between 2007 and 2009, to be paid directly to shell companies in Belize and Uruguay. The suit alleged that Messi later received the money through British and Swiss channels, but failed to declare it as income.

The footballer said that his tax consultants would handle the situation, and there has been no tax fraud. Messi’s name is the latest addition to the list of names — Apple, Starbucks, Google, Amazon and the President of Bayern Munich, Uli Hoeness — being circulated for tax evasion. Irrespective of whether his consultants bail him out of this or not, his iconic image will certainly ensure that the case is resolved by him paying up the dues.

Deadly duo

One of the interesting definitions of a shell company is that it is a non-trading firm formed and often listed on a stock exchange to raise funds before starting operations, attempting a takeover, going public, or as a front for illegal business. It is apparent that the last possibility is most popular among shell companies. A tax haven is a country that offers foreign individuals and businesses little or no tax liability in a politically and economically stable environment. Tax havens also provide little or no financial information to foreign tax authorities.

Individuals and businesses that do not reside in a tax haven can take advantage of these countries' tax regimes to avoid paying taxes in their home countries. Tax havens do not require an individual to reside in, or a business to operate out of that country to benefit from its tax policies. Shell companies and tax havens are killer combinations. Past attempts by Governments to crackdown on tax havens have been weak-kneed and largely unsuccessful. No one can force a nation or an island not to be a tax haven; this is a matter of choice. The only hope the taxman has is that information on accounts in these tax havens would be shared.

Hope from G-8

The meeting of the G-8 this week in Northern Ireland focussed on cracking down on tax dodging. Germany, France, Britain, Italy and Spain are likely to develop a system that will make it easier to clamp down on tax evaders by automatically exchanging information among them.

The five countries said the mechanism was inspired by US’ Foreign Account Tax Compliance Act (FATCA), under which foreign banks must inform the US when Americans open accounts and transfer money into their branches. It could serve as a template for a wider multilateral agreement.

Luxembourg, home to one of the world's largest investment-fund industries with $3.2 trillion under management, said that it would start exchanging information with the rest of the EU about European bank-account holders in the Grand Duchy starting 2015.

Not content with being a mere spectator, India has approached over half a dozen foreign jurisdictions, including Singapore and some tax havens, for banking and other financial details of more than 500 individuals and entities that might have secret offshore accounts at those places.

Plan B

The names and listed addresses of as many as 505 India-linked entities, including businessmen and companies from the country, have been made public after a global expose on secret offshore accounts by US-based rights group, the International Consortium of Investigative Journalists (ICIJ).

Considering all these developments, tax havens may lose their charm sooner than later.

Entities and their consultants should already be going back to the drawing board to devise a Plan B strategy in case the combination of shell companies and tax havens lose their USP.

Lionel Messi is probably a case in point.

(The author is Director-Finance, Ellucian.)

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Published on June 20, 2013
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