By Nicolaos Giannopoulos
(Published in ‘Campus & Beyond’, a weekly column written by Swinburne academics in the Borneo Post newspaper)
Internet businesses are everywhere: banks provide us the convenience of e-banking, Air Asia is giving us e-travel and of course we all know e-Bay.
For businesses, the internet revolution has allowed them to directly market and sell their products to any home and business customer anywhere in the world. Today, as long as we have a computer and access to the internet, we can do business.
While the internet has been a panacea for the global expansion of businesses, it has been anything but for tax authorities. Internet businesses conducted through tax havens have weakened the core foundations of tax authorities to identify and tax individuals and companies in their country that may be conducting business and generating income in a tax haven.
What is a tax haven? Simply, it is a country whose laws can be used by taxpayers to avoid paying taxes in their country of residence. This usually means tax laws which entail no or very low taxes. These laws are inevitably allied with clandestine secretive banking laws which protect the personal information of their non-resident ‘holidaying customers’. Such laws are designed to prevent tax authorities from gaining access to the financial arrangements of their residents. There are currently over 30 countries around the world considered to be tax havens.
Problems arise when a country’s tax and banking laws are secretive. For example, when tax authorities begin an audit, access to electronic business records is vital. When business banking accounts have been established in tax havens, access to this information becomes a problem. Internet businesses can make things further complicated for tax authorities by setting up multiple web servers in multiple tax haven jurisdictions, making access to source information and auditing extremely difficult.
How large is this problem? A majority of the world’s multinational corporations have subsidiaries and affiliate companies operating in tax haven countries. Conservative estimates put the number of shell companies in the tax haven of the British Virgin Islands alone at over 300,000.
Organizations such as the Organisation for Economic Cooperation and Development estimate that capital held offshore in the tax haven of the Cayman Islands to be US$1.4 trillion. In fact, the Cayman Islands is the world’s fifth largest banking center. Estimates of tax revenues lost annually by governments around the world to tax havens range up to US$250 billion. Obviously governments are not happy.
And the problem is growing. Individual entrepreneurs and small businesses around the world are catching on. The fact is that through the internet anyone can simply establish a company in a tax haven and conduct international business via the internet.
Before the internet, people could conceal income by simply setting up a bank account in a tax haven. Undeclared income could be accumulated and concealed offshore in the tax haven bank account to evade tax.
Now, the internet takes things a step further. Today, anyone can set up a business bank account and internet business with their web server in a tax haven. Over the internet customers from anywhere in the world can place their orders for your goods with a credit card payment. With web servers in tax havens such as the Cayman Islands or Bermuda it would be impossible for tax authorities to gain access to any business records.
This would not be possible if a Malaysian business established its web server in a country like Australia. Under their respective double tax agreement, both Malaysian and Australian tax authorities are bound to exchange information on residents of each country. As tax havens wisely don’t engage in double tax agreements, they have no such conscience.
Subsequent profits generated through the website can automatically be transferred and deposited into a bank account in a tax haven country with secretive banking laws such as a Liechtenstein or Switzerland. And these accumulated, untaxed funds could be accessed easily with a debit card attached to the account. All tax-free, and even more importantly, without any detection.
In some instances, even determining who owns the business can be difficult. Clever tax planners are turning to tax havens such as Panama to establish bearer companies. Unlike normal company registrations where your name and other details are recorded, with bearer companies the owner of the company is the person who holds the certificate of ownership. No name is recorded anywhere. To track who owns the business you have to find who holds the certificate of ownership. And amongst the six billion odd people who inhabit the earth, that’s akin to the proverbial needle in a hay stack.
The problem for tax authorities is that such international arrangements are no longer the domain of large multinational corporations. Today, the internet makes it possible for individuals and small business to easily establish such international business arrangements.
The illegitimate use of tax havens and banking secrecy laws to conceal income and assets and avoid tax obligations cannot be condoned. This act merely shifts a greater tax burden onto the rest of us. However, as more and more taxpayers are doing business electronically, setting up websites and bank accounts in tax havens countries, tax avoidance is increasing and the challenges for tax authorities around the world to stem the level of tax avoidance are immense. The thought of an internet business in paradise is heavenly for some. For others, it’s a nightmare.