Introduction and the Problem of Offshore Tax Evasion

• Author: David Kerzner, David W. Chodikoff
• Pages: 1-28

1

chapter one

INTRODUCTION AND THE PROBLEM OF

OFFSHORE TAX EVASION

A. INTRODUCTION

1) Picture of the Problem

It is estimated that the of‌fshore banking industry shelters over $7.5 trillion,

which costs governments lost revenues of at least $200 billion a year.1 An-

other estimate puts the amount of money in of‌fshore tax haven accounts in

2010 at $21 trillion (such a f‌igure is comparable to the size of the economies

of the United States and Japan combined).2 A recently announced “big data”

1 See Gerard Ryle et al, “Banking Giant HSBC Sheltered Murky Cash Linked to Dictators and

Arms Dealers” (8 February 2015), online: International Consortium of Investigative Journalists

www.icij.org/project/swiss-leaks/banking-giant-hsbc-sheltered-murky-cash- linked- dictators-

and-arms-dealers.

2 See Janet McFarland & Bill Curry, “Document Leak Reveals Widespread Use of Tax Havens”

Globe and Mail (5 April 2013), online: http://fw.to/CTnJazR. The estimate is from a report

by James S Henry, a former chief economist with the global consulting f‌irm McKinsey &

Company. According to the article in the Globe, ibid, the top f‌ive tax haven destinations for

Canadian dollars in 2011 were Barbados ($53.3 billion), Cayman Islands ($25.8 billion), Ire-

land ($23.5 billion), Luxembourg ($13.8 billion), and Bermuda ($13.2 billion). Not all of these

amounts are attributable to tax evasion. These f‌igures do not specif‌ically break down which

amounts may be attributable to funds held of‌fshore by multinational enterprises, or directly

or indirectly (e.g., through nominee entities) to undeclared accounts of individuals. In 2005,

one estimate of individual tax evasion was $50 billion, based on an estimate of holdings by

high net worth individuals invested outside the United States at $1.5 trillion (using a rate of

return of 10 percent and a tax rate of approximately one-third to arrive at the estimate of $50

billion): see Joseph Guttenberg & Reuven Avi-Yonah, “Closing the International Tax Gap” in

Max B Sawicky, ed, Bridging the Tax Gap: Addressing the Crisis in Federal Tax Administration

(Washington, DC: Economic Policy Institute, 2005), cited in Jane G Gravelle, Tax Havens:

International Tax Avoidance and Evasion (Washington, DC: Congressional Research Service,

2013) at 23. Another estimate by the Tax Justice Network puts the worldwide revenue loss

2 • InternatIonal tax evasIon In the Global InformatIon aGe

leak containing over 2.5 million tax haven documents revealed dealings of

over 70,000 taxpayers and also of over 120,000 of‌fshore corporations and

trusts.3 The big data (which was followed by an even bigger data leak in 2016)

was uncovered by over eighty-six journalists in forty-two countries.4 Com-

menting on the leak as part of his ground-breaking research on big data and

tax haven secrecy, Professor Arthur Cockf‌ield observed, “For the f‌irst time,

the secret world of tax havens was revealed in great detail.”5 He notes that

of‌fshore service providers—such as trust and f‌inance companies—take ad-

vantage of tax haven secrecy to help individuals engage in global f‌inancial

from individual tax evasion for all countries at $255 billion (using a 7.5 percent return and a 30

percent tax rate): see Richard Murphy, John Christensen, & Jenny Kimmis, Tax Us If You Can

(September 2005), online: Tax Justice Network www.taxjustice.net/cms/upload/pdf/ tuiyc_-_

eng_-_web_f‌ile.pdf, cited in Gravelle, ibid. The Tax Justice Network estimated of‌fshore wealth

at $21 trillion to $32 trillion: see James S Henry, The Price of Of‌fshore Revisited (July 2012),

online: Tax Justice Network www.taxjustice.net/cms/upload/pdf/Price_of_Of‌fshore_ Revisited_

120722.pdf, cited in Gravelle, ibid. Ms Gravelle, ibid at 24, observes that the US cost on these

estimates could approach $100 billion. Estimates of unpaid tax since 2006 uncovered by CRA

audits are over $4.5 billion: see David Simms, “Of‌fshore Tax Dodgers Coming under Greater

Pressure” CBC News (21 February 2013, updated 9 March 2013), online: www.cbc.ca/1.1353349.

Estimates of Canadian funds in tax havens in 2013 were $170 billion: see Janet McFarland,

“Canadians’ Of‌fshore Tax-Haven Holdings Rise 10 Per Cent, to $170-Billion” Globe and Mail (2

May 2014), online: http://fw.to/GvMbf7D.

3 In 2013, the International Consortium for Investigative Journalists announced a leak con-

taining over 2.5 million tax haven documents: see Arthur J Cockf‌ield, “Big Data and Tax Haven

Secrecy” (2016) 18 Florida Tax Review 1 at 2. Professor Cockf‌ield, ibid at 47, of‌fers a taxonomy

of of‌fshore tax evasion behaviour around tax haven service providers and their clients. He calls

for a more integrated policy response among the separate government agencies and across

separate but related legal regimes (tax, criminal, banking, antiterrorism) to more ef‌fectively

f‌ight global f‌inancial crime.

4 See ibid. In 2016, an additional leak of more than 11.5 million f‌inancial and legal records

revealing more than 214,000 of‌fshore entities was announced by the International Consor-

tium for Investigative Journalists: see the Panama Papers, online: https://panamapapers.icij.

org/20160403-panama-papers-global-overview.html. The f‌iles that compose the Panama Papers

are from the database of the of‌fshore law f‌irm Mossack Fonseca and were originally obtained

from an anonymous source by the German newspaper Süddeutsche Zeitung: see Luke Harding,

“What Are the Panama Papers? A Guide to History’s Biggest Data Leak” Guardian (5 April 2016),

online: http://gu.com/p/4tvyz/stw. The Panama Papers have prompted investigations into and

crackdowns on tax evasion by tax authorities and governments around the world as well as

new global collaboration on reducing tax evasion and aggressive tax avoidance: see Holly Watt,

“Panama Papers: Global Tax Of‌f‌icials to Launch Unprecedented Inquiry” Guardian (12 April

2016), online: http://gu.com/p/4ta47/stw. The Panama Papers solidify the conclusions of this

book that the OECD has been papering over the challenges posed by exchange of information

and call upon individual countries more than ever to pursue aggressive and innovative home-

grown strategies.

5 Cockf‌ield, above note 3 at 47.