Recently, there has been an increasing level of attention towards tax avoidance and tax evasion schemes. Although easily confused, the two concepts are not equal. While tax evasion is a violation of the law, tax avoidance remains within boundaries of the law. In fact, some governments can even encourage the use of tax avoidance schemes. One example is Individual Savings Account, which provides an entirely legal tool to avoid income tax on the earned interest. So it is quite possible for the government to pass relevant regulations and promote certain tax avoidance possibilities. (Chu, 2016)

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As the recent Panama Papers scandal vividly demonstrates, the issue gets more completed when foreign jurisdictions come into play to enable both tax avoidance and tax evasion. Tax havens are typical for various genuine business operations. However, the abuse of tax havens is one of the most powerful tools for a large-scale tax evasion and other financial crimes. The Panama Papers received so much attention from a wider public because the reports established the involvement of public figures and key politicians in the schemes designed to move their assets to offshore jurisdictions. Regardless of the legality of their actions, heads of government ranging from Iceland’s prime minister to David Cameron suffer political losses. (Mauldin & Saunders, 2016)

Panama is a jurisdiction typically used as a tax haven for offshore businesses. However, it is naïve to consider it much different from many other countries whereby the regulatory framework, especially bank secrecy laws, enables tax evasion and gives rise to suspicious transactions on a comparable scale. Switzerland is a prominent example in the US context. (Mauldin & Saunders, 2016)

At the same time, the recent journalist investigations do not reflect the general tendency of a declining use of offshore accounts. The important reason is an improved enforcement of fiscal and banking regulations. The IRS has been taking a tougher stance on transactions by international banks and imposed larger fines. Moreover, it is not just a unilateral US policy: the international community is working to design better tools for transferring financial data and exposing undeclared accounts. Fortunately, the Panama Papers have strengthened these processes from the inside. The issue of tax evasion schemes has moved to the top political agenda of numerous governments around the globe. The media attention has encouraged investigations and, possibly, new policies that would make it more difficult to abuse tax havens. (Mauldin & Saunders, 2016)

The Panama Papers leak is far from being the unique incident of shedding light on tax evasion practices. Another recent example is the investigation of Credit Suisse operations. The US Justice Department revealed that Credit Suisse has been involved in numerous schemes that made it possible for thousands of Americans to conceal “assets and income from the IRS”. The case became a milestone in the field of tax evasion, because the bank admitted to massive violations and paid a significant fine. The issue was that Credit Suisse did not just turn a blind eye on the operations of their clients – the Swiss bank wilfully and actively assisted in making it more difficult for the IRS to find the assets. (Grossman et al., 2014)

The decline in the use of offshore bank accounts has led to some fascinating incidental results. Stashing luxurious goods in so-called ‘freeports’ has been a particularly noteworthy development. This new tax haven format is used for deposits of fine arts, precious metals, rare wines, and even classic cars. Freeports have mushroomed in typical tax havens: Luxembourg, Geneva, and Singapore. The storage facilities for luxury goods often impress by their size. For instance, Geneva’s occupies a space equal to 22 football pitches. It is important to note that the rise of freeports has received a powerful push from the distrust in offshore bank accounts and an increased level of scrutiny by financial institutions and regulatory bodies. (Herring, 2013)

In response to sophisticated tax evasion schemes, the IRS and other enforcement bodies, such as the Department of Justice, continue to employ new tools for investigation and prevention of illegal financial operations. In this context, whistleblowers become valuable assets for the government. Whistleblowers get significant compensation for their testimonies and cooperation with the investigators. However, the genuine character of their contribution does preclude prosecution and penalties. In fact, even convicted felons can get whistleblower awards. The crackdown on tax evasion benefits immensely from the input of whistleblowers. Quite often, only bank employees can reveal information on the peculiarities of suspicious transactions and help discover large-scale evasion schemes. (Sidel, 2012)

Certainly, the use of whistleblowers has not been the only counter-measure. From the regulatory point of view, the new Foreign Account Tax Compliance Act (FACTA) has already influenced the landscape of tax evasion. The legislation is specifically targeted at tax non-compliance practices of US taxpayers through the use of foreign bank accounts. In essence, the legal rules include requirements on reporting about such accounts and offshore assets. The key instrument is that both US taxpayers and foreign banks have to comply with reporting requirements. The process is strongly facilitated by the possibility granted to foreign financial institutions to conclude agreements with the IRS to report on the assets and accounts of US taxpayers systematically. In the case of refusal to enter into an agreement, foreign financial institutions become subject to a fiscal scheme whereby any relevant US-sourced payment is levied with a 30% withholding tax. Thus, interestingly, the possibility of tax avoidance encouraged by the US government helps fight foreign tax evasion. (“EY – Foreign Account Tax Compliance Act (FATCA)”, 2016)

Similarly to FACTA, the IRS has designed other regulatory and enforcement mechanisms that provide incentives to an increased level of transparency and oversight in cross-border financial transactions and the use of tax havens. In particular, the IRS Offshore Voluntary Disclosure Program (OVDP) is an illustrative example. This IRS initiative made it possible for taxpayers to disclose foreign accounts in exchange for reducing the risk of possible criminal prosecution. Participants of the program still have to pay a fine for keeping undisclosed income in their offshore accounts; however, the adverse effects are less damaging that the risk of the IRS detection of hidden assets. The IRS reports that the program proved to be very popular among taxpayers and, thus, was renewed several years in a row. (IRS, 2016)

The US is not the only jurisdiction that takes action against the risks of tax evasion. Once untouchable, bank secrecy laws are now being questioned in Switzerland. One should understand this European country has become famous for its iconic tradition of bank secrecy. Switzerland guaranteed a comprehensive data protection policy to its financial institutions at the point of history when it had little to no competition as a tax haven. Following the most recent financial crisis, the international pressure urges Swiss policymakers to reconsider their long-standing regulations. The government seems supportive of the idea of an automatic information exchange with regard to bank accounts. Nonetheless, the implementation of new transparency requirements is not happening very fast, as the reform remains a proposal rather than an enacted piece of legislation. (Shotter, 2015)

All things considered, one could observe a considerable policy change towards tax evasion in the recent years. Regulatory and enforcement efforts have intensified with the aim of boosting transparency in cross-border financial operations and the use of tax havens for illegal purposes.

    References
  • Chu, B. (2016). Why what David Cameron did isn’t illegal, just ‘immoral’. The Independent. Retrieved 6 June 2016, from http://www.independent.co.uk/news/uk/politics/what-difference-between-tax-avoidance-evasion-david-cameron-offshore-panama-papers-a6974791.html
  • EY – Foreign Account Tax Compliance Act (FATCA). (2016). Ey.com. Retrieved 6 June 2016, from http://www.ey.com/GL/en/Industries/Financial-Services/Banking—Capital-Markets/FATCA–resources
  • Grossman, A., Letzing, J., & Barrett, D. (2014). Credit Suisse Pleads Guilty in Criminal Tax Case. WSJ. Retrieved 6 June 2016, from http://www.wsj.com/articles/SB10001424052702304422704579571732769356894
  • Herring, M. (2013). Über-warehouses for the ultra-rich. The Economist. Retrieved 6 June 2016, from http://www.economist.com/news/briefing/21590353-ever-more-wealth-being-parked-fancy-storage-facilities-some-customers-they-are
  • IRS – 2012 Offshore Voluntary Disclosure Program. (2016). Irs.gov. Retrieved 6 June 2016, from https://www.irs.gov/uac/2012-offshore-voluntary-disclosure-program
  • Mauldin, W. & Saunders, L. (2016). The ‘Panama Papers’ Scandal – At A Glance. WSJ. Retrieved 6 June 2016, from http://blogs.wsj.com/briefly/2016/04/05/the-panama-papers-scandal-at-a-glance/
  • Shotter, J. (2015). Switzerland unveils draft laws to dismantle bank secrecy – FT.com. Financial Times. Retrieved 6 June 2016, from http://www.ft.com/cms/s/0/05c2d098-9bed-11e4-b6cc-00144feabdc0.html#axzz4An4lXJPH
  • Sidel, L. (2012). Whistleblower Gets $104 Million. WSJ. Retrieved 6 June 2016, from http://www.wsj.com/articles/SB10000872396390444017504577645412614237708