A seven-year effort to crack down on tax evasion using offshore accounts has yielded results, but Panama still remains an outlier when it comes to hiding money from tax and law enforcement, says the Organization for Economic Cooperation and Development.
The OECD stepped up its efforts following the 2008 global financial crisis, and today 132 jurisdictions commit to exchange financial information “on request,” the organization said in a statement released April 7.
That’s still below the goal of automatic information exchange, which 96 countries have agreed to introduce in the next two years.
“The problem with these tax information agreements is that first of all, they generally only involve information exchange the standard is ‘foreseeably relevant’ to the administration with the enforcement of taxes,” said David Duff, a professor at the University of British Columbia who specializes in tax law.
“Canada has to sort of know what it’s looking for in order to go out and look for it, but how do you know what you’re looking for? The increasing standard for information exchange around the world is what’s called spontaneous or automatic information exchange, where the tax agencies just share data.”
For example, that kind of agreement is in place between Canada Revenue Agency and the United States’ Internal Revenue Agency. It has not yet become the standard for tax haven jurisdictions such as Panama, Barbados, the Cayman Islands and many others around the world, Duff said.
The OECD has made inroads in reducing the use of bearer share companies, which figure prominently in many of the Panama Papers stories reported by the International Consortium of Investigative Journalists and their media partners. Bearer shares are registered without names, and bearer share companies are owned by whoever holds the bearer certificates. Bearer shares can be use to hide the ownership of companies and have been targeted because of their potential to hide money laundering or tax evasion.
But Panama continues to be a problem for the OECD, which describes the country as “the last holdout that continues to allow funds to be hidden offshore from tax and law enforcement authorities.” Panama has recently reversed commitments it had made to adopt automatic exchange of financial account information.
The OECD is calling on Panama to immediately implement the automatic exchange standard.
While Canada’s government recently committed $444 million over five years to the CRA to target tax evasion, it’s a problem Canada can’t solve alone, Duff said. But he also believes the tax advising industry of lawyers and accountants also has a part to play: Canadian companies routinely use foreign subsidiaries in tax haven countries to reduce the amount of tax they pay. Canadians are more likely to use Barbados and the Cayman Islands, not Panama, to locate offshore accounts and companies.
“There are lots of data that show multinational enterprises pay a lot less tax than a domestic enterprise,” he said. “Industries have developed around facilitating tax avoidance and tax evasion.”
The difference between tax avoidance and evasion is subtle, Duff said, characterizing avoidance as “the stuff corporations do: that’s often trying to avoid detection too, so you hope not to be audited but if you are audited you have a defensible position.”
The term tax avoidance didn’t exist until the 1920s; getting caught avoiding tax generally means you pay penalties and outstanding tax, not serve jail time.
“Before that people talked about tax evasion,” Duff said. “It was a creation of the tax advisors to invent the concept of tax avoidance.”
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