Big money means big taxes. But in the United States alone, $70 to $100 billion is lost each year because of tax loopholes.
One of the most popular loopholes is something called a tax haven. A tax haven is exactly what it sounds like. It is a place that has extremely favourable tax laws compared to the country you are currently in and by putting money in that country you are able to save money on taxes. According to the Organisation for Economic Co-operation and Development, a nation must meet these four criteria to be considered a tax haven:
- ‘The jurisdiction imposes no or only nominal taxes’
- ‘Whether there is a lack of transparency’
- ‘Whether there are laws or administrative practices that prevent the effective exchange of information for tax purposes with other governments on taxpayers benefiting from the no or nominal taxation’.
- ‘Whether there is an absence of a requirement that the activity be substantial’
Currently, it is estimated that about 7.6 trillion US dollars are put into offshore tax havens. It is also estimated that about 1.2 per cent of the world’s population uses tax havens, while the amount of wealth stored in those tax havens is equal to about 26 per cent of the entire globe’s wealth.
If you’ve seen The Wolf of Wall Street, you are bound to remember the scene where Leonardo DiCaprio’s character smuggles millions of dollars to Switzerland in order to deposit the money into an account there and avoid paying taxes on it. That is essentially a scene depicting how a tax haven works.
Switzerland is one of the most, if not the most famous tax haven in the world. What makes Switzerland so appealing is what is known as its bank secrecy laws. These laws essentially allows banks to refuse to turn over personal and account information to authorities. So, if you are trying to hide some money and the feds come after you, they won’t be able to get to your money if it is in Switzerland. About a third of the money that is in offshore accounts, is held in a Swiss offshore account. By 2007, Switzerland was managing $2.7 trillion worth of United States money.
Another popular tax haven is Panama. You may remember that about a year ago, the Panama Papers were released and these documents implicated many high-profile people in opening shell companies in Panama in order to evade taxes. The company, Mossack Fonseca, was helping wealthy individuals create what is known as a shell company. A shell company is a company that does absolutely nothing, it merely exists as a place to put money in order to avoid taxes. Some pretty high profile people got busted in the scandal, like Iceland’s now former Prime Minister Sigmundur David Gunnlaugsson, King Salman bin Abdulaziz Al Saud (King of Saudi Arabia), and Leonard Gotshalk (former football player for the Atlanta Falcons). In total, over 214,000 offshore accounts were uncovered through the leaked documents. These documents also helped lead to numerous arrests on accounts of fraud, tax evasion, and avoiding international sanctions.
So, if having an offshore account can be so dangerous, why do it? Because it is all about the money. A wise man once said, ‘Scared money don’t make no money’. Depending on how much goes into one of these offshore accounts, millions could possibly be saved by avoiding taxes. But it comes at the price of a potential crackdown, one that can result in jail time and a tattered reputation.