HagaMUN – 6,7 and 8 March 2020

 Group of 20Combatting the Issue of Tax Evasion6th, 7th and 8th of March 2020Gymnasium Haganum, The HagueForum: Group of 20Issue:Combatting the Issue of Tax EvasionStudent Officer:Mihir SharmaPosition:PresidentIntroductionAmong the many pressing issues of our time, inequality often takes the forefront. The modern financial system is often perceived as the rich getting richer while the poor get poorer. Others say that the rich abide by different rules than the rest of society; that we work hard and don’t reap nearly the rewards that they do. One of the clearest examples of this is the issue of tax evasion. Tax often seems like an unnecessary burden, but it is indeed how governments raise money to provide public services and infrastructure. People however obviously don’t want to give up their money to the government just like that. To keep as much money as possible, they can avoid paying tax. This is often done through the means of shell companies and offshore accounts, as well as cash-based transactions. Only the rich have the capability to do so easily, which is why tax evasion is a question of both legality and inequality. Definition of Key TermsTax EvasionThe act of willingly not paying, or underpaying taxes, usually related to income andinheritance tax. This usually involves misrepresenting accounts to tax authorities, or routing money through shell companies. This is a felony in most countries. Shell CompanyA company which exists only on paper and doesn’t have actual offices or employees. These are often used for tax evasion purposes by listing wealth as company assets for many different shell corporations, registering them in tax havens so as to not pay full tax rates. Offshore AccountA bank account kept in a country other than that of the country of residence of the account keeper, often in a tax haven to avoid paying high tax rates. Tax HavenA country with favourable (very low) tax rates for corporations and private wealth. Offshore accounts and shell corporations are often registered here. Examples include Malta and Panama. Money launderingThe process of “cleaning” money – making illicit profits into legitimate ones by routing them through shell corporations, thus hiding illegal activities from authorities and also reducing tax rates. Background InformationOutlineTax evasion and avoidance are not new crimes – indeed, tax avoidance’s roots can be traced back to the 1700s in The Netherlands, where houses were taxed on the width of their front. To get around this, Dutch people built their houses very narrow but very deep. This is why Dutch cities have the now-iconic architectural style of lots of narrow, deep houses set in a line. This, however, is an example of tax avoidance. Avoidance is not illegal per se, however there are moral and ethical issues with it. This is an issue for a different time however – this forum is concerned with tax evasion. So, what’s the difference?Tax evasion vs avoidanceTax avoidance is simply the process of creating the most favourable conditions for yourself or your company in order to pay the least amount of tax possible. This can be done through many ways – for example, keeping an account in a tax haven like Luxembourg or Panama, or registering your company’s assets in a tax haven. Tax avoidance may be, to some, ethically wrong, but it is not illegal. Tax evasion, on the other hand, very much is. It involves wilfully misrepresenting financial affairs in order to get out of paying tax. This usually means that you state that you made much less money than you did, but it can also be done through means such as shell corporations registered in tax havens. Tax evasion is a serious crime – Al Capone did not go to jail for any of the numerous murders or robberies he committed, but rather for failing to pay tax on his activities. Usual procedure for tax evasionA typical way for someone to avoid tax may be to simply misrepresent their earnings. This, however, is fairly easy to find out if the accounts are digital (cash-based economies have far higher issues with tax avoidance since it’s impossible to keep track of cash). A more sophisticated way would be for an individual to keep his assets in a shell corporation registered in a tax firm. Say you have assets like a private jet, a yacht, and 500,000 dollars. If you keep them where you live (say, the US), you can be taxed on the income and the assets will be highly taxed if you were to sell them to someone else. To get around this, you create a shell company (with a generic name, like International Trading Limited) and register it in a tax haven, like Panama. This corporation only exists on paper, without offices or employees, and only needs a signature to come into existence. You then register all your personal assets as company assets. Because of Panama’s low corporation tax rate, your assets now don’t get taxed to anywhere near the degree they would in the US. Now say you want to sell your plane and yacht. Were you to simply sell them as they are, you would be charged sales tax in the US. To get around this, you can simply sell the whole shell company. The corporation sales tax is very low, and the buyer gets the assets under the guise of buying a whole company. A single wealthy individual could own hundreds of shell corporations, each with different assets. Keeping them small is also better, since they then fall into lower tax brackets. Misrepresenting assets in this way is illegal, however one of the benefits of a tax haven is that they don’t readily share information with foreign tax authorities. Moreover, you can simply register the shell company under a different name, since all that’s needed for the company to exist is a signature – any signature. For all the authorities care, you could get your maid to sign off on the company and be its legal owner. To then sell the company again, all you need is the same signature. Impacts of tax evasionThe reason tax evasion is such a big problem is because it means governments are deprived of the tax income they need to run their countries. Moreover, it highlights the problem of gross inequality, where the rich manage to get richer by simply flouting the rules. The wealthy, of course, would also be the ones who would contribute the most to tax income, since they have the most money to give. Instead, they get away with not paying taxes and leave less wealthy people to pick up the burden of funding the country. Tens of billions of dollars are lost each year to tax evasion, and as such governments lose out on the funding they need to effectively run their countries. Keeping in line with the theme of this year’s conference, we also have to address a particularly immoral facet of tax evasion - environmental tax evasion. Many countries nowadays have increased environmental taxes to combat climate change, such as taxes per thousand kg of Carbon Dioxide released, per acre of trees cut down, or per million litres of water extracted. These taxes can be (and ought to be) high, so that corporations pay the price of the environmental harm they do. By registering themselves in tax havens, however, they can often avoid these taxes. It’s harder to avoid them in the places where the damage is being done, but since these are often developing countries, corruption means that authorities turn a blind eye to activities such as illegal logging and mining. Major Countries and Organizations InvolvedUnited StatesThe United States has one of the most effective anti-tax evasion systems in the world simply because US citizens always have to pay US tax - no matter where they live. This thus means that offshore accounts are effectively useless since the depositor would still have to pay US tax anyway, on top of the taxation rate of the haven. The Internal Revenue Service (IRS) is also one of the more strict tax authorities when it comes to tax evasion, which is a felony in the US which carries a heavy prison sentence and fine. Group of 20Our committee, the G20, is one of the main policymaking forums for financial decisions. The G20 deals with issues ranging from Brexit to global trade policy. With so many powerful nations, like the US, UK, and China, the G20 is able to shape global ideas strongly - this allows it to put effective measures in place to combat tax evasion. SwitzerlandSwitzerland is famous for its offshore account holdings and infamous for its unwillingness to cooperate with global financial institutions or to share information with foreign tax authorities. It has strong financial secrecy laws, and its position in Europe means many individuals and firms keep accounts there to avoid uncomfortable questions from domestic tax authorities. PanamaPanama is one of the main offshore tax havens used for keeping accounts and registering shell companies. The infamous “Panama Papers” leak of 2014 showed thousands of high-profile individuals who used the country’s near-zero capital gains and corporation taxes to keep assets and wealth in shell companies.LatviaLatvia ranks first as the country with the highest tax evasion prevalence in Europe with 38.8%.United KingdomThe UK has many facets to it that could almost indicate a tax haven. London has a corporation tax of only 20% and has many multinational banks, not all of which are particularly open with their information. This means that tax evaders can often put their money in British banks. The island of Jersey, as well, is a well-known tax haven. Its banks are famously secretive, refusing to share information with authorities, and the whole island operates under its own financial system, different to that of the rest of the UK. It is said that in Jersey, for every square mile there is $5 billion of private wealth. Timeline of EventsDateDescription of event1998Vienna ConventionDec. 14th 2005UN Convention against CorruptionOct. 13th 2014Global Forum in Berlin on TransparencyApril 2015Panama Papers leakRelevant UN Treaties and EventsUnited Nations code of conduct on cooperation in combating international tax evasion, 30th June 2017 (E/RES/2017/3)Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPSPrevious Attempts to solve the IssueThe main solutions to tax evasion up to this point have been related to the sharing of information - as more countries share tax and account information, there is less chance of an individual or corporation getting away with misrepresenting finances, and higher capabilities for following money through shell corporations. The Organisation for Economic Co-operation and Development (OECD) established the MLI (Multilateral Instrument) designed to create a framework for how countries should move forward with stopping tax evasion. There have also been solutions such as simply increasing prison sentences for tax evasion, and applying that to many countries’ criminal justice systems was relatively effective. Under the auspices of the OECD, a Global Forum for Transparency and Exchange of Information for Tax Purposes (the Global Forum) was created, which is affiliated with the UN. This body has many guidelines, but all pertain to the free exchange of taxation information between countries. This includes information such as banking records, company ownership documents, and accounting records. The framework is based on voluntary reciprocity, meaning countries have to opt-in, and that if they do, they’re then obliged to share information with fellow parties. This framework has been effective in sharing information, meaning that tax authorities in different countries find it easier to track money across borders and prosecute tax evaders. Possible SolutionsThere are a number of solutions to tackle the issue of tax evasion. A big part of it is sharing information. A possible idea could be to expand the mandate of the Global Forum and/or to absorb it into the UN so that it has greater funding and membership. Increasing membership would mean more countries had access to more tax information, making it easier to follow suspicious accounts. Increasing penalties for tax evasion could also work, but it would of course have to be a voluntary, non-binding solution since the UN cannot enforce rules upon a sovereign state’s legal system. However, creating a UN-wide framework for criminal law pertaining to tax evasion could be effective as countries could then opt-in and adopt the framework, thus harmonising offences and penalties across the world. Combatting tax havens is also a way to tackle the problem. Imposing (non-binding) sanctions on tax havens, or countries who don’t share tax information, could work to disincentive them. A task force could also be created to go to tax havens and provide recommendations on ways to improve their financial laws to increase taxation rates on corporations. Bibliography“THE GLOBAL FORUM ON TRANSPARENCY AND EXCHANGE OF INFORMATION FOR TAX PURPOSES.” United Nations , esa/ffd/ffdforum/wp-content/uploads/sites/3/2017/05/Global-Forum_-info-sheet-2017.pdf.Goetz, Lisa. “Why Is Switzerland Considered a Tax Haven?” Investopedia, Investopedia, 18 Nov. 2019, ask/answers/060716/why-switzerland-considered-tax-haven.asp.“International Efforts to Combat Tax Avoidance and Evasion.” United Nations, United Nations, 2017, developmentfinance.international-efforts-combat-tax-avoidance-and-evasion.Kagan, Julia. “Tax Evasion.” Investopedia, Investopedia, 18 Nov. 2019, terms/t/taxevasion.asp.Parietti, Melissa. “The Top 10 European Tax Havens.” Investopedia, Investopedia, 18 Nov. 2019, articles/wealth-management/121515/top-10-european-tax-havens.asp.“Tax Avoidance vs Tax Evasion: What's the Difference?” Tax Avoidance vs Tax Evasion Whats the Difference Comments, 22 Aug. 2019, theaccountancy.co.uk/tax/tax-avoidance-vs-tax-evasion-7612.html.Tsitsiridakis, Evangelos. “ Limiting Money Laundering and Tax Evasion through Enhancing Transparency in the Banking Sector.” Costeas-Geitonas School Model United Nations, 2017, cgsmun.gr/wp-content/uploads/Study%20Guides/12th/GA2_3_ET.pdf. ................
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