Payday and no taxes, isn’t that a dream every one of us is sharing? All the way 1970 – 90, we heard all the time about offshore paradises, especially from the Hollywood movies. However, the movies offshore paradises are real and the real companies all around the world using offshore to escape. Those of you who live in Finland may have heard this year´s news about Mehiläinen and its attempt to avoid taxpaying in Finland. The company the profit of which is worth billions of euros has paid only 1,5 % taxes, which is ridiculous if you think about the profit that company is getting all the time. Mehiläinen is just one of the thousand examples around the Europe. Mehiläin got so called so bad attention from the press.
So, what is this all about? We understand that the offshore means tax evasion. Tax evasion is the term for the efforts by individuals, corporations, trusts and others entities to evade taxes by illegal means. Tax evasion often entails taxpayers deliberately misrepresenting the true state of their affairs to the tax authorities to reduce their tax liability and includes dishonest tax reporting, such as declaring less income, profits or gains that the amounts actually earned, or overstating deductions. Tax evasion is an activity commonly associated with the informal economy. One measure of the extent of tax evasion is the amount of unreported income, which is the difference between the amount of income that should be reported to the tax authorities and actual amount reported.
In 1968, Nobel laureate economist Gary Becker first theorized the economics of crime on the basis of which authors M.G. Allingham and A. Sadomo produced, in 1972, an economic model of tax evasion. This model deals with the evasion of income tax, the main source of tax revenue in the developed countries. According to the authors, the level of evasion of income tax depends on the level of punishment provided by law.
Tax evasion is a crime in almost all developed countries, and the guilty party is liable to fines and/or imprisonment. However for example in Switzerland, many acts that would amount to criminal tax evasion in other country are treated as civil matters. This means dishonestly misreporting income in a tax return is not necessarily considered a crime. Such matters are handled in the Swiss tax courts, not the criminal courts. Tax evasion is defined in the U.S. as: Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.
Despite all the attempts to escape taxes governments around Europe has started the war against offshore companies. For example on December 11 the government of Great Britain published draft legislation outlining new taxes and charges which will have to be paid by offshore companies which own property in the UK. The main features of the proposed legislation will affect properties which are valued at more than £2 million and which are owned by “non-natural persons”.
Previously many foreign buyers of UK property have chosen to register their properties in the name of an offshore company in order to eradicate UK inheritance tax (IHT), which would otherwise be charged at 40 per cent on the whole value of the property, after allowances, upon the death of the owner. Offshore company ownership also facilitated the avoidance of stamp duty (SDLT), as any subsequent sale of the property could be affected by a transfer of the shares in the company, leaving the title to the property in the UK unaltered.
However all that is about to change. Offshore companies which own property worth over £2 million will now be faced with:
- An annual charge of a minimum of £15,000 and a maximum of £140,000 depending on value. The new tax is called Annual Residential Property Tax (ARPT).
- Capital Gains Tax (CGT), which was previously not paid by non-UK resident sellers, be they individuals or companies, will be charged on resale at a rate of 28 per cent.
New offshore company purchasers will also pay stamp duty at 15 per cent, whereas natural persons will pay stamp duty at the bargain rate of only 7 per cent.
The good news is that there are exemptions from the above taxes. The main one of these is that corporate trustees are not subject to them. For most people, transferring property already owned by an offshore company to an offshore trust will be the most cost effective way forward. For new purchasers, making the purchase via an offshore trust will be best.
There is also an exemption for bona fide business assets owned by companies. This would apply where the property is rented out exclusively and entirely to third parties. The problem here is that even a single day of occupation by anyone connected with the company at any time when that company owned the property would cause the exemption to be lost, so this is somewhat inflexible and inherently risky.
So at the end I would like to say that tax evasion is terrible thing to do, especially when the professionals do it. It is very unfair for everyone who pays taxes. Legally it is a crime and violation of constitution which says that no one should put in an unequal position. (Constitution of Finland 6 §) There must be no more tax evasion and tax paradises. All the countries must fight against and there must be tougher penalties for the tax evasion.
- Allingham, M. G. and A. Sandmo, 1972, Income Tax evasion: A Theoretical Analysis, Journal of Public Economics
- Becker Gary, Crime and Punishment: An Economic Approach. The Journal of Political Economy
- Bilton Howard, publication in the Telegraph: http://www.telegraph.co.uk/finance/personalfinance/expat-money/9760320/How-to-escape-the-offshore-property-tax-trap.html
- Golombek Jamie, Tax evaders finding fewer places to hide, http://business.financialpost.com/2013/04/05/its-getting-harder-to-hide-foreign-income-from-the-taxman/
- Internal Revenue Code section 7201 http://www.law.cornell.edu/uscode/text/26/7201
- Walton Timothy, Offshore Avoidance of U.S. Income Taxation, 1996, http://www.netatty.com/articles/tax.html