Can “harmonization” antidote tax avoidance and other financial crimes globally?
| Pages | 187-209 |
| Date | 02 January 2018 |
| DOI | https://doi.org/10.1108/JFC-06-2016-0045 |
| Published date | 02 January 2018 |
| Author | Norman Mugarura |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
Can “harmonization”antidote tax
avoidance and other financial
crimes globally?
Norman Mugarura
Department of Research, Global Action Research and
Development Initiative Limited, Barking, UK
Abstract
Purpose –The purpose of this research paper is to underscore that harmonization of laws, much as it
might not offer a lasting cure of tax avoidance and other forms of financial crimes, can enhance the fight
against it and subsequently help to forestall it. Tax avoidance has remained an intractable challenge
and costs governments astronomical sums of money, largely because taxation isasensitiveissueinthe
realm of sovereign national jurisdictions. The firstpartofthispaperinvolvesareviewofempiricaldata
on tax avoidance to create a context for evaluating theoretical issues on tax avoidance and how they are
manifested in practice. It draws examples in a cross-jurisdictional perspective given the global
character of tax avoidance and evasion as financial crimes. The last part of this paper discusses possible
recommendations that could be implemented to tackle tax avoidance and its attendant challenges on
economies.
Design/methodology/approach –The author has carried out a scoping review of the literature on
tax avoidance and myriad of ways used to commit it globally. There was a wealth of data on tax
avoidance, evasion, money laundering and harmonization of laws, which was reviewed and applied in
undertaking this study. These data were sourced from published academic books, journal articles and
online data sources/websites. This paper reflects on and internalizes most recent empirical data on tax
avoidance and evasion such as unprecedented leak of millions of files from the database of the world’s
fourth biggest offshore law firm, Mossack Fonseca –the so-called “Panama papers”, which has revealed
the extent of tax avoidance globally. It also goes an extra length (literally speaking) to underscore
important measures that ought to be introduced to address tax avoidance, evasion and money
laundering once and for all.
Findings –The findings of this paper confirm that while harmonization of law has its inherent
shortcomings, it is necessary to enhance individual state’s ability to deal with overlapping interstate
challenges such as tax avoidance. This paper proffers a thorough analysis of tax avoidance, the varied
contextin which it is manifestedwith a view to evaluate measures that could be adopted by states to minimize
or forestallit globally.
Research limitations/implications –This paper has used data on tax avoidance and cognate areas in
underscoring inherent challengesin current measures against tax avoidance globally. There werenot many
studies carried out on the roleof harmonization in bolstering states’efforts against tax avoidanceand other
financialcrimes.
Practical implications –Paying taxes or avoidingpaying it has a direct bearing on people, societies and
national governments.It is therefore important that states adopt measures to curtail tax avoidance–because
it costs governmentsa lot of revenue.
Originality/value –Though studies have beenconducted on tax avoidance and cognate areas, this paper
articulates that harmonizationcould greatly enhance the fight against it globally. This paper will appealto
tax authorities, banks, governments, policy makers, oversight financial institutions and those who have a
vested interestin regulation of financial crimes globally.
Keywords Tax avoidance, Tax evasion, Harmonization
Paper type Research paper
Tax avoidance
and other
financial
crimes
187
Journalof Financial Crime
Vol.25 No. 1, 2018
pp. 187-209
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-06-2016-0045
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1359-0790.htm
1. Introduction
This paper seeks to examine the complexities of tax avoidance and the measures that states
need to undertake to address it. Panama Papers (an unprecedented leak of millions of files
from the database of the world’s fourth biggest offshore law firm, Mossack Fonseca)
revealed the magnitude and complexities of tax avoidance globally[1]. Apparently, these
records were obtained from an anonymous source by the German newspaper Süddeutsche
Zeitung, which shared them with the International Consortium of Investigative
Journalists[1]. Panama papers also revealed a myriad of ways through which the rich and
top politicians exploit offshore tax jurisdictions. For example, 12 national leaders were
found to be among the 143 politicians who have been siphoning ill-gotten wealth through
offshore tax havens[2]. Mossack Fonseca is a Panama-based law firm whose services
include incorporating companiesin offshore jurisdictions such as the British Virgin Islands,
and it has worldwide operations. It administers offshore firms for a yearly fee[3]. In this
paper, we contend that much as Panama papers were significant in terms of revealing the
extent of tax avoidance and its complexities, and they were just a snapshot of it as a global
problem. There is a difference between tax avoidance and tax evasion. While the former is
committed throughlegal means such as exploiting loopholes in the domestic taxsystem and
tax structures using accountants to avoid paying the right amount of tax, tax evasion is
committed throughcriminal schemes to evade paying taxes owed to nationaltax authorities.
Thus, tax avoidanceis not a criminal offence (though morally reprehensible)but tax evasion
is. The Financial Action Task Force (FATF)has recommended that tax evasion be brought
within the definition of money laundering predicate offences[4]. The FATF recommends
that serious tax offences in matters of direct and indirect taxation constitute money
laundering predicateoffences[5].
Many regional markets such as the EuropeanUnion (EU) have tapped the advantages of
harmonization of laws to overcome inherent limitations in unilateral states measures to
pursue issues of shared interests. Harmonization of international tax laws can potentially
enhance international efforts againsttax avoidance—a serious issue, which causes national
economies huge sums of lost revenue. This has never been important in today’s global
regulatory landscape, where countries cannot act in isolation of what happens in other
countries or regions. The instrumentalities of globalization have been exploited not only to
move stolen wealth to offshore financialcentres but also to induce loss of tax sovereignty of
individual countries. With the dramatic reduction in trade barriers over the past decade,
taxes have become a more important factor for businesses in making their strategic plans.
The Organisation for Economic Cooperationand Development (OECD) and other developed
countries have recently agreed on a wide range of measures to curtail tax avoidance and
evasion globally. These include requesting countries to exchange information to mitigate
information asymmetries between national tax authorities. The downside is that
the proposed OECD reformson tax avoidance were in the form of declarations whichdespite
having a legal status in international law are not easily enforceable. In view of these
shortcomings, it has become necessary for countries to adopt common global strategies to
deal with global challengessuch as conflict of laws, different legal systems and approaches.
With globalization, there has been an uptakein tax competition for portfolio investment,
free movement of qualified workers, financial services, business headquartered in other
countries and the flow of foreign direct investment (FDI). Taxes have a direct bearing on
economic developmentof countries and individuals, and thus, different tax regimes operated
by countries creates disparities(and countries stand to lose or gain often depending on their
tax structure). Differences in tax regimes operated by different countries act as a
disincentive for FDI because it will cause not only free riding but also outflow of capital to
JFC
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