Essay on the Offshoring of Income to Hide It From Taxation

Published: 2021-08-15 07:32:37
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Vanderbilt University
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The provision of public infrastructure and government services is an essential factor for economic development (Chusseau et al. 185). Many developing countries lack an adequate public service provision which slows down economic and growth rates in the said countries. Living standards of the population of the developing countries have been recorded to be below the standard levels due to the lack of an efficient public service provision (Chusseau et al. 199). Some factors influence the failure of the developing countries to provide sufficient public services. These include; corruption, laxity of states officers, lack of infrastructural support, nepotism, weak accountability systems, unappreciative and non-recognition systems, lack of strategic plans, non-security of tenure, insufficient and irrelevant training and lack of tax revenue. In 2005, the average tax revenue to GDP ratio in the developed world was approximately 35%. Developing counties had the average tax revenue to GDP ratio of 15% while the most impoverished countries were estimated to 12%. The gap between the developed, developed and the developing countries can be attributed to the fact that demand for public services increases more than proportionally as the total National income rises. Also, the gap can be interpreted to show the failure of poor and developing countries in raising revenue which is required for the adequate provision of public services to the population. In the United States, according to estimates by financial analysts loses close to $70 billion in a year of tax revenue. This is close to twenty percent of the total corporate tax revenue collected in the country in a year.

Different scholars have attributed the failure of developing countries to provide sufficient public services for tax evasion and tax avoidance (Urry 225). Economists argue that this tax avoidance and evasion can be attributed to the shadow economy. Shadow economy is defined the unreported income from the production of legal services and commodities which would initially contribute to the total tax revenue collected in a country. However, these products are note legally reported to the tax authorities, and thus the states end up losing the tax income. This results in the negative correlation that exists between GDP and tax revenue. Shadows economies cause tax revenues to decrease. The concept of shadow economies is however controversial with critics presenting some arguments against. First, they argue that many activities are summarized under shadow economy are not all linked to tax evasion, second, empirical research studies conducted on the relationship that exists between the estimated size of the shadow economy and tax revenues leads to different conclusions.

The Panama papers, The New York Times and further leaks revealed that money laundering and tax evasion are crucial issues which are often underestimated by governments. A high number of publications have related the tax revenue loss experienced by developed countries as well as the developing countries due to tax avoidance and tax evasion in developing countries to the financial support that the said countries receive through development aid ( Offshore centers are relied upon by international corporations to provide secrecy. Illegal activities, criminal identity as well as criminal ownership of assets are easily concealed in these offshore centers. Through money laundering, criminal activities, i.e., drug trafficking, terrorism, illegal immigration and human trafficking proceeds are brought back into the legal, financial circuit. The focus on money laundering began late in the twentieth century and initially the term was only used to refer to drug money. However, through the years, the term, money laundering, has been expanded to cover proceeds from other predicate crimes, I.e., corruption, fraud, weapon and human trafficking, terrorism, and bribery. The term has been further developed recently to include tax income. Offshore activities of large international corporations conceal criminal proceeds of bribery, corruption as well as other crimes. Also, the offshore centers hide money from evaded taxes by organizations conducting legal business activities. An example of corporations which have been identified to participate in offshore activities is Google corporations (Anon).

The Paradise papers also provided a large number of confidential electronic documents relating to offshoring of income my individuals and multinational organizations ( This information was shared with the International Consortium of Investigative Journalists and the information made public. The documents contained information about over 120,000 individuals as well as organizations that relied on offshore centers to evade from tax systems in their countries ( The most prominent individuals mentioned in the paradise papers and alleged to participate in offshoring of income are; Queen Elizabeth II, the United States secretary of Commerce Wilbur Roses, Juan Manuel Santos the president of Colombia and Prince Charles among others (

Organizations which wish to hide their activities can do so legally within the law of the land. The offshore centers provide such organizations with a means by which international corporations can evade tax by concentrating on the loopholes that exist in the laws of the parent countries, i.e., the organizations are based primarily (Urry 222). In history, offshore centers came into the limelight in the twentieth century 1920ies when criminal businesspeople transferred their proceeds from their legal businesses in their states to states which had more lenient laws. An example is Al Capone whom during the American prohibition (`1920-1933), transferred proceeds from his alcohol business to states in the United States which didnt prohibit the sale of alcohol. After some time the government became aware of the criminal acts of this businessman, and he was convicted for tax evasion. After World War II, offshore centers were used by corporations in countries such as Germany and Austria as an avenue for conducting business in the international market. In 1975, offshore centers were relied on by multinational oil corporations with an aim to circumvent the oil regulations formulated by countries such as the United States and the European Union during the oil shock. Bahrain was used as an offshore center to invest proceeds from the sixteen times higher prices in OPEC countries which occurred during this period. The profits could not be reinvested in Europe or the United States because the federal banks of these countries had imposed regulations aimed at curbing the high oil prices which were already crippling world economies.

The term is used in two ways. First, the term is used to refer to banking centers which do not necessarily have to be in remote islands but can also include inland countries which attract capital from non-residents. The non-residents are offered incentives such as low taxes, secrecy, confidentiality and low regulation. The main aim of these incentives is to attract the individuals and corporations to invest their capital which is relied upon by the offshore centers to develop their economies. Secondly, the term offshore center excludes banking centers in the definition. Instead, it defines offshore centers as jurisdictions which have structured there laws and regulations such that they attract registration of investment vehicles from foreign investors. The number of offshore centers in the world depends on the definition of chosen. For example, according to IMF 2014 definition, there are 20 offshore centers, while according to IMF definition 2000 there are 69 offshore centers.

Offshore Centers

According to the Panama papers, the information leak shows that most European countries use offshore jurisdictions to conduct their less transparent businesses. These jurisdictions as mentioned before have lesser regulations as compared to their home countries. Organizations can rely on these jurisdictions to conduct business both legal and illegal since they will be assured of profits. The most common offshore centers and tax havens are the Bahamas and the Bermuda and Cayman Islands. Panama is ranked seventh. However as mentioned previously these ranking depends on the definitions of offshore centers chosen. The various offshore centers relied upon by European countries include the following; France relies on Monaco as its offshore jurisdiction. The United Kingdom uses various offshore centers, i.e., Isle of Man, Bermuda, Guernsey, Alderney, British Virgin Islands, Caicos, Jersey and Sark Island. Portugal uses Madeira while Netherlands relies on Antilles and Aruba. The top list ranked offshore centers in the world are; Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Dominica, Jersey, Mauritius, Panama, New Zealand, Nevis, Malta, Cyprus, Liechtenstein, Switzerland, Ireland, and Luxembourg.

Why Off-shoring Income is an Issue

When the 2008 financial crisis occurred, developed countries, as well as developing countries economies, were at risks of collapsing. The public debt of many countries in the world increased significantly, and the world economy recorded the high inflation rate. The United States, as well as all European countries, experienced this inflation (Chernykh 118). However, Sweden was the only European country that was excepted from this challenge. To reduce the public debt, many countries opted on the tax revenue side. The idea was to increase public debt through concentration on non-bank expenditures. The world economies were determined to ensure that the inflation rates were reduced. However, the shift of spending from public goods such as infrastructure, education, and housing to the financial sector was immoral. Whistleblowers pointed out this shift. The Panama papers, as well as other internet leaks, showed the abuse of the tax system by corporations and influential personnel in governments. In the United States, for instance, the violation of the tax system was reported in 2011 by a non-profit organization referred to as the Tax Justice Network (Chernykh 117). The organization argued that 3.1 trillion US dollars were lost annually through tax avoidance and tax evasion by multinational corporations and businesses. The organization cited secrecy in the tax system ahs the main reason as to why the organization was able to avoid and evade taxes. According to the Internal Revenue Service, the United States government loses over 458 billion US dollars through tax evasion.

In a study conducted by Zucman (75), 7.6 trillion of the total tax revenue collected in 2015 in the United States was missing as a result of tax evasion and tax avoidance. Zucman (75), argues that the recorded liabilities in most countries balance sheets are a higher than the assets. This, in turn, means that the difference is hidden somewhere. This is so because a countries economy cannot have a deficit of assets. Various researchers have indicated that close to 8% of the total world financial wealth is held in offshore centers. This has led to the loss of tax revenue of close to 190 billion US dollars annually through tax evasion. Tax avoidance, on the other hand, has been estimated by Zucman (75) to be close to 130 billion US dollars. According to this researcher, African countries are the most affected by the offshoring of incomes. This is so because over 30% of the total wealth in the developing continent is held in offshore centers. The hidden taxable income, in turn, results in losses of close to 14 billion US dollars annually.

The Panama papers in April 2015 revealed a list of names of organizations and individuals who avoid tax by hiding it in offshore accounts. The information was leaked from law firms in Panama which...

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