Monday, April 11, 2016

How to Avoid Tax (legally), and Why Smearing UK PM David Cameron May be the Purpose of the Panama Papers

Tax evasion is a crime that tends to be severely punished. But tax avoidance is quite legal. It is the legality that defines it, i.e.:
the arrangement of one's financial affairs to minimize tax liability within the law.
So why the fuss over the Panama papers, which reveal that thousands upon thousands of individuals and companies across the world have used banking and corporate services in Panama to so arrange their affairs as to minimize their tax liability "within the law." Is the existence of these offshore arrangements for tax avoidance a revelation, or what?

No, it is not a revelation. Many years ago, as the owner of a small under-capitalized business selling goods and services in several dozens countries, it was obvious that I could grow the business faster if I could avoid paying approximately half of my income in tax. Naturally, therefore, I inquired of competent, honest (so far as I know), and entirely legitimate lawyers how I might minimize my tax liability "within the law." What I learned, for a fee of around one thousand dollars, was in essence, how to do what UK Prime Minister David Cameron's father was doing at the time, which was as follows.

Set up a corporation in a tax haven and receive income in the tax haven where it would be taxed at a very moderate rate, for example 3% in the Bahamas, which is where David Cameron's father made his tax avoidance arrangements. At the time, the Canadian Federal corporation tax rate was 28% on top of which was a provincial corporation tax, which meant that the Bahamian corporation had the potential to raise my after tax income by around half. Furthermore, if I brought that income back to a Canadian parent corporation, there would be no Canadian corporation tax payable, since Canada had a tax treaty with the Bahamas that precluded double taxation. Thus the tax saved would be available for reinvestment in the business. Neat, hey?

In fact, there are quite a few complications, which as you might expect, make this tax avoidance arrangement unprofitable for small companies, but not for anything much larger than small. For example, the arrangement requires that the management of the offshore company be in the jurisdiction where the company is located. This is not difficult to arrange, but it involves some overhead. Local directors have to be employed. For example, David Cameron's dad is said to have employed a local bishop among others as a director of his Bahamian company. But anyone who is prepared to do exactly what they are told and not steal from their employer will do as a tax haven company director. Some people in tax havens thus gather hundreds if not thousands of directorships for which they earn a few hundred dollars a year from each company.

There are further complications. If you're in London or Toronto and telephoning the guys laying on the beach in the Bahamas and telling them what to do, then the tax authorities will say that the management of the company is not in the Bahamas but in London or Toronto, as the case may be. So that means you or an employee must take a short vacation in the Bahamas every three months or so, and have a meeting with the local "directors," so that an understanding is reached among all concerned as to what the Bahamian company should be doing, which is probably almost nothing.

There are other issues. If you are building bicycles in Mississauga and shipping them in China, you cannot invoice the sale through the Bahamas and treat the entire amount received as income to the Bahamian company, but you could consider some part of that amount income to the Bahamian company, e.g., for the cost of invoicing, say 5%.

None of the above is intended as professional advice and no one should take it as a basis for action without obtaining competent professional advice. What it is intended to provide is clear evidence that what the Panama papers reveal is what has been going on, and what has been known to have been going on, by tax authorities and business people ever since the tax avoidance business got organized in hundreds of tax havens throughout the world, especially in former UK colonies such as the British Virgin Islands, and in the UK Crown Dependencies of the Isle of Man, and the islands of Jersey, Guernsey, Alderney and Sark.

So if the Panama papers reveal nothing that was not well known to all and sundry, why the hue and cry about them? Some have concluded that the revelation, which fingers not a single American citizen, is a CIA op to discredit associates of Vladimir Putin and thus smear the Russian president himself. But why, in that case, smear David Cameron because of the seemingly quite legitimate activities of his late father?

One possibility is that smearing David Cameron is the main point. Cameron is on track to lose the referendum on Britain's EU exit. British withdrawal from the EU could be the first domino to fall in a
continent-wide rebellion against the corrupt, incompetent, anti-democratic, globalist EU. Such a nationalist reaction could free all of Europe from US domination. It may, therefore, make sense in the US view to oust Cameron to make way for a more charismatic leader of the fight to remain within the EU. In exchange for the premiership, perhaps the presently anti-EU Boris Johnson can be turned.

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