Tax evasion » Tax Research UK

Tax evasion in football through offshore, WAGs and trusts? Surely not?

Jan 132012

Sporting Intelligence reports this morning that:

Leading football clubs are being heavily targeted by HMRC over perks afforded to players and WAGs – partially because the taxman has already received information and tip-offs relating to major financial discrepancies at at least one top Premier League club, Sportingintelligence can reveal.

The finance directors at all Premier League were recently sent a questionnaire containing 181 questions looking closely into the financial affairs of the clubs and players, specifically the issue of perks, as HMRC looks to crack down on blatant abuses of the system.

And as they also note:

The sheer scale of the questionnaire has surprised even tax experts.

Sportingintelligence can exclusively reveal the questions from the questionnaire, including:

4.14 Are any payments made into trusts or sub-trusts, whether in the UK or abroad, for which employees or family members are, or are potentially, the beneficiaries?

1.2 Are any expenses paid, or benefits provided, to players’ or other employees’ spouses, partners or other family members, whether in the UK or abroad?

11.6 Has the club paid any expenses relating to an employee’s private holiday costs? If so please provide details.

11.7 Are there any circumstances where the cost of spouse travel will be paid for by the Company? If so please provide details.

22.1 Are complimentary tickets, use of a box, etc. provided for employees? If so please provide full details.

Sportingintelligence also understands the tax affairs of foreign players will come under greater scrutiny. In some cases players have been found not to have paid National Insurance contributions (NIC). Other questions asked:

5.3 How does the club treat payments to foreign players for payroll purposes?

4.2 What controls are in place to ensure that any amounts which are paid out are treated correctly for tax and NI purposes?

Quite right too.

Rumour has it there’s not just smoke in this case, but a fire too. And tackling such issues in such a high profile way is wholly appropriate.

And there’s much more in the article than the bits I’ve noted.

IRS finds U.S. tax evasion $385 billion per year, suggesting Tax Justice Network numbers are right

Tax avoidance, Tax evasion, Tax gap, USA 2 Responses »

Jan 102012

One of the US readers of this blog, Kenneth Thomas, who writes the Middle Class Political Economist blog, wrote the following and I reproduce it with his permission as it is very apposite here:

On Friday, the IRS released a new report on tax evasion in the U.S. (via Demos’ Policy Shop and h/t to @BlogWood). Using data for 2006 (its previous tax gap report used 2001 data), it found a gross tax gap (income tax due but not paid on time) of $450 billion and a net tax gap (factoring in tax paid late) of $385 billion for 2006, versus $345 billion gross and $290 billion net in 2001. This was due almost entirely to higher income and tax liability, not an increased percentage of cheating. As Policy Shop points out, over 10 years, this will get us to well over $3 trillion in lost taxes.

As I reported last month, the Tax Justice Network estimated that global tax evasion was over $3 trillion annually. TJN’s estimate for the U.S. was $337 billion for 2010, less than the IRS figure of $385 billion for 2006 even though GDP was higher in 2010 than 2006. Thus, the IRS figures confirm the validity of the TJN estimates. Indeed, it is quite possible that Richard Murphy’s estimate in the TJN report actually understates the amount of tax evasion globally.

There are a number of eye-popping numbers in the IRS report, beyond simply the magnitude of tax evasion. Most evasion takes the form of underreporting and underpayment, not non-filing. The amount of dollars lost to underreporting rose by 32% between 2001 and 2006; one-third of that increase came in the corporate income tax.As another sign of growing inequality in the U.S., between 2001 and 2006 corporate income tax due doubled (meaning that profits approximately doubled), while individual income only rose by 15%.

Not surprising, but still striking, is what the report says about who cheats on their taxes. People subject to both information and withholding requirements only underreport 1% of their income; people or businesses subject to information reporting but not withholding misreport 8%, but entities subject to neither information or reporting requirement, “such as business income” [on the individual, not corporate, income tax] has a 56% misreporting ratio. Since middle class taxpayers mainly fall in the first group, it is obvious that most of the opportunities for cheating belong to the wealthy.

To put this in dollar terms, of the $450 billion gross tax gap, $376 billion of it comes from underreporting income. $235 billion is on individual income tax, of which $122 billion is business income (in addition, there is another $57 billion in self-employment tax that is underreported). Finally, $67 billion of corporate income tax due was underreported. (And this is only illegal tax evasion. Abusive corporate tax avoidance, some of which will be declared illegal retroactively, would add many billions more.)

What rich individuals and corporations don’t pay in taxes, shows up as higher taxes on the middle class, bigger budget deficits, program cuts, or some combination of the three. 2006′s $385 billion in net evasion of federal taxes would cover about 1/4 of the FY 2011 budget deficit (and, as Policy Shop notes, it exceeded the $248 billion budget deficit of 2006). As Policy Shop says, the case for giving the IRS further resources for enforcement is a strong one, but Republicans in Congress are actually trying to reduce enforcement resources.

That opposition needs to be overcome.

Time and again people tell me and the Tax Justice Network we get things wrong and time and again we’re proven to be right. I hope H M Revenue & Customs here take note: their claim that the UK tax gap is just £35 billion and is tax lost on 7% of the economy is ludicrous in the light of this US data. My own estimates of £70 billion of evasion and £25 billion of avoidance are the ones they, and government, should be working with, and even then they’re running at a rate little different from the US findings.

Swiss bankers may not be honest?

Banking, Corruption, Switzerland, Tax evasion 3 Responses »

Jan 052012

The Guardian reports this morning that:

Switzerland’s central bank was embroiled in an insider trading scandal after bank chief Philipp Hildebrand was accused of speculating on currency transactions only weeks before he instituted dramatic policy changes that shifted prices in his favour.

The accusations, which have rocked the Swiss banking industry, were made by Swiss weekly newspaper Die Weltwoche.

First it has to be said these are allegations, and from a source with an axe to grind. But what really amused me is not the substance of the issue, but the fact that a Swiss banker may be dishonest has “rocked the Swiss banking industry”. The whole Swiss banking sector is built on the basis of dishonesty. Indeed, much of the Swiss economy is built on dishonesty. As I noted in 2009:

Tax havens handle stolen property. This is not by accident, this is by design. The tale of the creation of Swiss banking secrecy says it all. As noted in a letter in the Financial Times today, Swiss secrecy laws date back to 1934. They were not created to protect German Jews and trade unionists from the Nazis as the Swiss like to claim.This is a big myth.

The reason bank secrecy was strengthened in 1934 was a scandal two years earlier, when the Basler Handelsbank was caught in flagrante by the French tax authorities facilitating tax evasion by members of French high society, among them two bishops, several generals, and the owners of Le Figaro and Le Matin newspapers.

Rather than risk their clients being found to be breaking the law again the Swiss introduced banking secrecy and the notorious numbered bank account system to ensure that customers of Swiss banks could evade their tax at will.

Tax evaded funds are money claimed by fraudulent means. they are stolen property. tax havens have, following in the wake of Switzerland, set out to handle that stolen property.

In March 2009 a Swiss banker quoted in the Financial Times said he believed that half of all funds deposited in that country would leave if bank secrecy was abolished – implying they must be tainted by tax evasion – and that the bankers know it.

This is what Swiss banking is all about. So why be surprised that a Swiss banker might be dishonest?

There’s more on Swiss banking secrecy and its creation here.

UK tax deal with Switzerland is already being renegotiated – another Hartnett debacle

Switzerland, Tax evasion 58 Responses »

Dec 282011

I have commented often on the UK – Swiss tax deal that Dave Hartnett negotiated and which was initialled by both parties in October. My objections to the deal are numerous, some being summarised here and others here.

Now Bloomberg has noted:

Switzerland is discussing “technical adjustments” to tax agreements with the U.K. and Germany, SonntagsZeitung reported, citing Andre Simonazzi, a spokesman for the Swiss Federal Council.

The changes aim to counter criticisms of the accords from the European Union, the Zurich-based newspaper reported. The talks are on revisions to distinguish between the EU-Swiss tax on interest and a separate withholding tax, Simonazzi was cited as saying.

Similar stories have appeared in the Swiss press.

I think three observations follow. The first s that those who said the opinion of the EU on this issue did not matter are clearly wrong: it does, very much.

Second, this renegotiation seems to confirm that others will not go down this route and the hopes of Luxembourg that they might use the deal as a mechanisms to shatter the upgrade to the European Union Savings Tax Directive – a hope, I suspect shared by George Osborne in support of UK tax havens – look like they may be shattered.

Last, yet again we see the gross incompetence of Dave Hartnett at work - seemingly doing deals irrespective of their legality to keep his political masters happy, whatever the cost. I just wish I had the confidence he was being replaced by someone better.

Tax evasion is a case where the threat of prison works

Tax evasion, Uncategorized, USA 11 Responses »

Dec 162011

Reuter’s Purlitzer prize winning journalist David Cay Johnston has written on my work for the Tax Justice Network on worldwide tax evasion. That work estimated a total loss to tax evasion of US$3.1 trillion world wide. The review included an excellent graphic of the top-10 countries by amount of tax evasion, set up against the size of their informal economies:

As David Cay Johnston writes:

A new report from London and President Barack Obama’s statements to “60 Minutes” show financial crimes spreading like wildfire and governments failing to stop them.

Tax evasion equals 18 percent of global tax collections, a new report by British accountant Richard Murphy shows. His report for the Tax Justice Network cleverly lined up a World Bank Report on the size of shadow economies with a Heritage Foundation report on average tax burdens by country to reach that figure.

Murphy’s $3 trillion estimate, 5 percent of the global economy, shows how a combination of weak rules on accounting and disclosure combined with inadequate budgets to enforce tax laws impose a terrible cost on honest taxpayers and the beneficiaries of government service.

This graph demonstrates quite well that developed countries are not insulated from the harms of tax evasion. They are losing important revenue right up alongside the largest developing economies.

But the sting was in the tail of the piece, and refers to comparisons between these figures and banking fraud in the USA:

Financial theft is a growth industry because of government failures that I would attribute to excessive reliance on the financier class for advice, campaign donations and absurdly well paid jobs for officials between their government jobs.

Will the next journalist who interviews President Obama please press the issue: where are the banking fraud prosecutions, Mr. President? And don’t let up until the president picks up the phone and tells Attorney General Eric Holder he wants a 1,000 or more major felony indictments in the next nine months.

I think that demand appropriate.

But it would be as appropriate to call for more tax fraud prosecutions too. It is the threat of prison that stops tax fraud; nothing much else does, especially with professional advisers. It’s time to get tough.

Despite Global Financial Crisis, Illicit Financial Outflows from Developing World Remain High

Task Force on Financial Integrity and Economic Developm, Tax evasion, Tax Havens 2 Responses »

Dec 152011

Developing countries lost US$903 billion in illicit financial outflows in 2009 despite the massive slowdown in economic activity which rocked world markets in late 2008, finds a new study by Global Financial Integrity (GFI), a Washington-based research and advocacy organization and partner of Tax Research UK in the Task Force on Financial Integrity and Economic Development.

The new report, “Illicit Financial Flows from Developing Countries over the Decade Ending 2009,” is GFI’s annual update on the amount of money flowing out of developing economies via crime, corruption and tax evasion, and it is the first of GFI’s reports to include data for the year 2009.

“This is a breathtakingly large sum at a time when developing and developed countries alike are struggling to make ends meet,” said GFI Director Raymond Baker. “This report should be a wake-up call to world leaders that more must be done to address these harmful outflows.”

While US$903 billion marks a drop from the US$1.55 trillion¹ that illicitly flowed out of the developing world in 2008, the study finds the decrease is almost entirely attributable to the global financial crisis rather than any governance improvements or economic reforms.

The study, which was co-authored by GFI Lead Economist Dev Kar and GFI Economist Sarah Freitas, tracks the amount of illegal capital flowing out of 157 different developing countries over the 10-year period from 2000 through 2009, and it ranks the countries by magnitude of illicit outflows. According to the report, the 20 biggest victims of illicit financial flows over the decade are:

China ………………………………………$2.74 trillion
Mexico ……………………………………..$504 billion
Russia ……………………………………..$501 billion
Saudi Arabia ……………………………$380 billion
Malaysia ………………………………….$350 billion
United Arab Emirates………………$296 billion
Kuwait ……………………………………..$271 billion
Nigeria …………………………………….$182 billion
Venezuela ……………………………….$179 billion
Qatar ……………………………………….$175 billion
Poland ……………………………………..$162 billion
Indonesia …………………………………$145 billion
Philippines ………………………………$142 billion
Kazakhstan ……………………………..$131 billion
India ………………………………………..$128 billion
Chile ………………………………………. $97.5 billion
Ukraine …………………………………..$95.8 billion
Argentina ………………………………..$95.8 billion
South Africa …………………………….$85.5 billion
Turkey……………………………………..$79.1 billion

For a complete ranking of average annual illicit financial outflows by country, please refer to Table 5 of the report’s appendix.

Could Britain’s tax collectors save the day?

Tax avoidance, Tax evasion 4 Responses »

Dec 112011

There’s a good article under the above title in the Telegraph today, and not just because I’m quoted.

As they say:

Tax collectors, according to more than one person interviewed for this article, are heroes. After all, the people they are targeting – tax avoiders (people who legally exploit loopholes) and tax evaders (those who commit tax fraud) — are not exactly popular in the current climate, when the majority of the population is having to endure tax rises and wage freezes to help the country balance its books.

And I agree.

In New Zealand there’s a choice: sell off state assets or beat tax evasion.

Tax evasion, Uncategorized 3 Responses »

Dec 052011

I rather hope that the Dominion Post, a New Zealand paper that’s not featured here before, will forgive me borrowing the following editorial, but I did the research on which it is based so I hope there’s a quid pro quo in this:

There is nothing wrong with tradespeople and other small businesses offering discounts in return for cash payments, provided they are doing so to make life easier for themselves and their customers. There is, however, something very wrong with them systematically discounting work for cash so they can hide the true amount they earn and avoid paying their full share of tax.

New Zealand has a long history of cash jobs, and reducing prices for cash payments can make good business sense. Unlike cheques, credit cards and bank transfers, cash costs nothing to process and the money is immediately available to pay suppliers or other bills – an important factor for single and small operators when times are tough, as they are now.

There is a big difference between that, however, and the level of systemic rip-offs uncovered by the international Tax Justice Network’s research into New Zealand. It found a shadow economy worth an estimated $20 billion a year, the equivalent of one-eighth of the country’s total annual economic output. According to its figures, the lost revenue from this hidden market is in the region of $7b a year, most of it thought to be due to tradespeople who do not declare their true earnings.

The huge sums involved should give pause to those who would not normally hesitate to agree to paying cash for heavily discounted prices in the knowledge – or at least the very real suspicion – that the reason is so the person doing the work, offering the service or making the sale can cheat on their taxes.

Just as taxpayers rightly condemn beneficiaries who commit welfare fraud, big corporations that try to get out of paying the tax they owe and others who arrange their affairs to pay less than they should, so, too, they should condemn tradespeople and small businesses who are also ripping off the system.

New Zealanders need only look to the example of Greece to see what happens when large-scale tax cheating occurs. While the level of tax avoidance here is nowhere near as bad as that which has effectively bankrupted Greece, mainly due to much more robust income tax systems, the $7b lost through the shadow economy is significant.

It is enough to fund almost half the cost of the public health system, or the full cost of all the Roads of National Significance presently under consideration. Put another way, it is the same amount this Government hopes to raise from the partial sale of state-owned energy companies and its stake in Air New Zealand.

Cracking down on those who engage in under-the-table dealing on a regular basis is not easy. They are often hard to detect, and the ingrained nature of the mates’ rates, cash jobs and payments-in-kind culture only makes the task all the more difficult.

The Inland Revenue Department has been given extra funding to go after tax cheats, however, and is signalling that tradespeople and small businesses operating under the radar will be high on the list. So they should. They are in effect stealing from all taxpayers, and should be targeted with the same zeal as others who are ripping off the system.

First the logic of this impeccable.

Second, it’s great to see the comparison: New Zealand sells off major state assets that might provide a continuing income or can tackle tax evasion to achieve the goal. Put like that the choice is pretyy obvious, isn’t it.

So why isn’t more being invested in tackling tax abuse?

Why neoliberalism doesn’t work when it comes to tax crime

Economics, Tax evasion, Uncategorized 9 Responses »

Dec 052011

I have been debate with some right wing commentators on the issue of tax crime, and why they think it should not be tackled. The exchange is here but began as a result of discussion on my work on tax evasion, here.

The argument being rebutted is that of Tim Worstall – that we should not tackle tax evasion because to do so would reduce GDP. He says the existing rate of evasion is optimal and we should not address it as we are at an equilibrium state where we can afford this level of crime.

I utterly reject that argument.

I also reject the argument of those who challenge my rejection - who say there is such an equilibrium rate.

I argue that is absolutely untrue. There is no such equilibria. What there are instead are economists and those influenced by them like Worstall who believe in cost- benefit analyses that suggest there are such equilibria. But because they have believed that for so long they now actually think the equilibria exist and that we should positively promote them. They have made their model into the terrain – when it is at best a very imperfect model to start with. That explains so much of the predicament we are in. We are seeking something that is simply not there. No wonder economics os going in the wrong direction.

I deal with this issue at some length in the Courageous State, so I am not going to do so in depth here. As I explain there, the difference between my attitude and that of neoliberals comes down to a very different peception of the mathematics of the decision making processes used:

To begin, it must be stressed that the difference between this thinking and that of Keynes which gave rise to the previous period of political consensus is really fundamental. The difference is, perhaps, best explained in easily accessible form by Robert Skidelsky in his book ‘Keynes: The Return of the Master’. As he makes clear, neoliberal economics is based upon the belief that everything about the world is measurably probabilistic. What this means is that neoliberal economists believe that, first, we know everything that might happen in the future. Second, they believe that we can attach to each event that might happen in the future a probability that it will occur. So, for example, such economists might say that in 2024 I might move house and the probability of this occurring is 15%. The result is that these economists think that the future is entirely predictable.

However, real life experience shows such a belief is obviously wrong, and Keynes pointed out why. As he argued, the number of circumstances where we can make the predictions neoliberal economists think possible are remarkably limited. He said the future is not probabilistic as they suggest in most cases: it is actually uncertain. That means we simply do not know what might happen, let alone with what probability

To summarise briefly: the difference between the risk which is assumed to underpin all future behaviour in neoclassical economics (including it must be stressed, neo-Keynesian economics) and the uncertainty that is assumed to exist around all future behaviour in truly Keynesian economics is that in neoclassical economics it is assumed that all future possibilities are known. Keynes said that that is wrong: the future is uncertain and we simply cannot predict what might happen.

Which, in other words, means we cannot predict an equilibrium as the destination to wards which we are travelling because no one knows whether there is such a thing or what it looks like.

As a result the argument that there is an equilibrium rate of crime is also wrong.

But worse the claim that we can decide what that is assumes we know all there is to be known and can correctly allocate risk to each component. I say we can’t do that, so we use ethical judgement instead. As a matter of fact that is the case, as I know from witnessing real decision making. The alternative is though that in Worstall’s world he’s decided that having £1 in £8 in the UK economy untaxed due to crime is optimal. And he’s implicitly decided foregoing the services that tax would pay for is optimal. And he’s implicitly decided that the resulting shift in the income distribution to criminals is also optimal.

What a very nasty decision making process.

Now of course, I accept that a decision will be taken to allocate resources to crime that accepts that not all crime will be solved.But quite explicitly it’s not taken for the reason Worstall notes. It recognises there are conflicting goals subject to ethical judgement – plus a certain pragmatism that some crime will effectively remain unknown and unknowable – and therefore insoluble and therefore with present resources be an irreducible problem. This is not a statement of optimality: it is reluctant acceptance of a problem as yet insoluble. But that’s the real significance: this point is reached using a very different decision making process as a result that is explicitly ethical when neoliberalism is not. And recognising the sheer nastiness of the neoliberal decision making process is a first stage to realising how utterly corrupted the neoliberal economic model is, and how important it is that we replace it.