On this occasion, I want to describe another episode of the French podcast about economics, Splash. Today’s subject is tax havens. The host, Etienne, begins by explaining what tax havens are. Tax paradises are generally nations that allow individuals and large companies to move their money and profits to avoid paying higher taxes in the countries where they provide their services. In other words, it’s like a special pass that allows millionaires to earn and save more money.

Even though this practice is illegal, and governments want to avoid it (although many politicians also do it), it’s a common method for the wealthiest to avoid taxes. Tax haven countries offer many attractive advantages such as reliable laws, along with the bank secrecy and discretion not to share any information about their clients. Therefore, these nations are especially popular for the famous tax optimization.

In this episode, we can learn about the process of tax evasion with a simple and brief example. The two steps are the following:

1. The first step is to create a shell company in the tax haven. But what is a shell company? A shell company usually exists only on paper, with no office or employees, but may have a bank account. The company may serve as a vehicle for business transactions without itself having any significant assets or operations. Typically, these companies are used for tax evasion, money laundering or to create anonymity. This structure creates limited liability and immunizes one part of the company from the risks of another part. For example, in this type of corporation, assets can be transferred from one company to a new one, leaving the liabilities in the old one. Despite all the notoriety, shell companies can have legitimate business purposes.
2. The second step is to send the money to the shell company and pay the requirements that exist in the tax haven (which are the most convenient for those who engage in this practice). In addition, dividends in tax havens are often untaxed, generating more profits for the criminals who carry out this illegal practice. There are more elements involved in successful tax fraud. But with this example, we know the tip of the iceberg and it’s enough to understand how this method is carried out.

But where and when did tax havens appear? The honor goes to Switzerland because in the 1920s it became the world's first and most famous tax haven. Since that decade, little by little more tax havens have been created around the world. They offer an innovative service to the world's wealthiest people, and thus create an interesting and profitable business for tax havens.

In addition, accounting manipulation and bribery are necessary to create successful tax frauds because companies need to pass audits and appear to comply with the law…

Nowadays, after the great technological advances, tax fraud is easier and faster to perform. Consequently, this results in governments and nations not receiving much money. However, we know that some governments wouldn’t use those funds properly anyway. But that potential revenue could be invested in areas where our nations need it; for example, education, healthcare, social services, etc.

There are other forms of tax fraud, and they aren’t related to tax havens. Some of them are non-declaration of income, inaccurate financial declarations, bribes, etc.

In conclusion, this illegal financial mechanism is used by many wealthy individuals and is a good form of income for tax haven nations. However, the possible solutions to this situation are to improve regulations and promote transparency and collaboration between countries. But currently, there is little chance of solving this problem because tax havens are a multi-billion dollar business.

Thank you for reading, and helping me.

Sources:

• Quand est-ce qu'on se débarrasse des paradis fiscaux ?
• Shell Corporation