Taxes are the main source of income for governments as well as a powerful political tool worldwide. Globalization however has progressively opened the business transaction flows, regardless of borders or state lines. As such taxation on international corporations has become increasingly complex to regulate. The G20 will have to weigh the advantages and problems caused by corporations which seek banking abroad in order to avoid taxation. Written by Milain Fayulu and Helen Combes

1. WIRC 2014
Brief by | Milain David Fayulu with Helene Combes
G20 CORPORATE TAX EVASION

2. G20|CORPORATE TAX EVASION 2
“It is more important now than ever that taxpayers pay the right amount of tax at
the right time and in the right place.”
Masatsugu Asakawa,Chair of the OECD Committee on Fiscal Affairsand Deputy Vice-Minister of Finance for International Affairs, Japan in World
Commerce Review, June 2012
OVERVIEW
Taxes are the main source of income for governments as well as a powerful political tool
worldwide. Globalization however has progressively opened the business transaction flows,
regardless of borders or state lines. As such taxation on international corporations has become
increasingly complex to regulate. The G20 will have to weigh the advantages and problems
caused by corporations which seek banking abroad in order to avoid taxation.
Corporate tax evasion has seen a growth in the past decade with the spread of profit
shifting. The OECD’s Base Erosion and Profit Shifting Project1
has exposed, international
corporations use more and more creative ways to use tax competition to their advantage by
shifting their profits and assets to different tax jurisdictions. The current challenge is to create a
level tax playing field worldwide and create a harmonized taxation system which would
counteract the spread of tax evasion. The G20 has had difficulty reaching a long lasting
agreement on the Corporate Tax Evasion issue because of the double standards some
countries utilize to ignore incriminating practices in their own jurisdictions. The abundance of
existing bilateral tax treaties have also made any resolution more complex because of the legal
intricacies they have created.
The international community’s previous attempts to solve the global tax dilemma have
lead to more legislation that has merely exacerbated the problem. As the G20 has pledged to
find a durable solution to the global tax problem, this committee will attempt to tackle this issue
of the globalized world.
1
OECD (2013), Addressing Base Erosion and Profit Shifting, OECD Publishing, Paris

3. G20|CORPORATE TAX EVASION 3
KEY ACTORS AND INTERESTS
Globally, the equivalent of more than 5.1 percent of global gross domestic product never
reaches the coffers of 145 national governments in the form of taxes, according to a report by
The Tax Justice Network2
, an independent group that promotes financial transparency. The
OECD underlines the increasing imbalance between increasing corporate revenue in the
national GDPs and a decrease in tax payments from these same corporations.3
The issue of tax avoidance is very complex because it conflicts most with moral
principles rather then legal ones and differs from tax evasion in that tax evasion is illegal as well
as morally reprehensible. Although most states and non-states actors have different views on
the issue, the ministerial level of the OECD council released a Declaration on the status of tax
evasion and the possible means to repress tax evasion.4
The countries that rely heavily on their
status as tax havens use their status to maintain their competitive advantage and dread the
forthcoming regulations.
Definitions
A tax jurisdiction is the land authority to which any company or individual will pay taxes
for living or working in the area of the jurisdiction.
A tax haven is a state, country or territory with a tax jurisdiction where certain taxes are
levied at a low rate or are absent. Different jurisdictions tend to be havens for different types of
taxes and for different categories of companies. We can distinguish between the following broad
categories: No tax havens, No tax on foreign income havens, low tax havens and special tax
havens.5
2 "The Cost of Tax Evasion Worldwide." www.taxjustice.net. Tax Justice Network, 23 Nov. 2011. Web. 23 Sept. 2013.
3 OECD, Addressing Base Erosion and Profit Shifting, OECD Publishing, Paris, 2013 chap. 2.
4
OECD Concil, Ministerial Level. Declaration on Base Erosion and Profit Sharing. May 29
th
2013. Paris
5
Orlov, Mykola. "The Concept Of Tax Havens." Asterlaw.com. N.p., n.d. Web. 02 Dec. 2013.

4. G20|CORPORATE TAX EVASION 4
No–tax havens are countries that have no income, capital gains, or wealth capital taxes,
and in which you can incorporate and form a trust. Primary examples are Bermuda, Bahamas
and Cayman Islands.
No-tax on foreign income havens are countries that impose income taxes, both on
individuals and corporations, but only on locally derived income. They exempt from tax any
income that is earned from foreign sources. Panama, Jersey and the Isle of Man are the best
examples.
Low Tax Havens are countries that impose some taxes on all corporate income,
wherever earned. However, most have double taxation agreements with high taxation countries
that may reduce the withholding tax imposed on income derived from the tax countries. The
British Virgin Islands is a good example.
Special tax havens are countries that impose most taxes but exempt companies in
specific fields to pay taxes. Liechtenstein is a tax haven that specializes in trusts structures for
companies. All these tax havens will be affected differently by different regulations and none of
them is willing to fully relinquish its status. Therefore, there needs to be an organism that
mitigates all the parties’ interests.
Actors
The Organization for Economic Co-operation and Development (OECD) is a body of 34
developed countries founded in 1961 to stimulate economic progress and world trade. In
response to public outcry in several nations that multinational corporations are using tax havens
to effectively avoid paying taxes in the countries where they do business the OECD is
spearheading three initiatives that are aimed directly at this objective. The first initiative is the
creation of a Global Forum on Transparency and Exchange of Information for Tax Purposes.
Secondly, as mentioned before, the OECD’s is committed to tackle what they label “Base
Erosion and Profit Shifting”, namely the booking of revenues in jurisdiction where a company
has limited or no operations. In line with the report presented to G20 Finance Ministers in

5. G20|CORPORATE TAX EVASION 5
February 20136
, the OECD has developed an action plan to respond to BEPS. The OECD
together with the G20 countries is developing a global model for automatic exchange of
information as the new standard and plans to have this work completed by 2014.7
This latter
initiative is controversial because certain financial institutions could incur a loss of clientele if the
exchange of information is implemented.8
The OECD provides a forum in which member states
can work together to solve common problems. Consequently, the policies promoted by the
organization are a reflection of negotiations between members.
The United States government has agreed with the G20 plan to curb tax evasion
worldwide as well as with the OECD BEPS framework. One of the federal government’s
interests is to gain a better hold over the complex web of overseas tax havens and subsidiaries
used by America’s largest corporations. However, the U.S’ position is not that simple due to the
fact that recent tax initiatives in a number of foreign countries, including several of its G20
partners, appear to be primarily targeting American companies with global operations.9
This
could potentially harm both the US companies’ competitive position and subsequently the US
Treasury. That is why the current position of the administration is ambiguous. While the US
government concedes that the rules need to be updated and changed to some extent, they are
pushing for moderate change because they are committed to the success of their local
companies who appear to be very involved in the issue.
6
Gurria, Angel. "SG Report to G20 Leaders." Oecd.org. Organisation For Economic Cooperation and Development,
n.d. Web. 01 Dec. 2013.
7
OECD (2013), Action Plan on Base Erosion and Profit Shifting, OECD Publishing.
7
http://dx.doi.org/10.1787/9789264202719-en
8
Guria, Angel. "OECD SECRETARY-GENERAL REPORT TO THE G20 FINANCE MINISTERS AND CENTRAL
BANK GOVERNORS." Oecd.org. Organisation For Economic Cooperation and Development, 20 July 2013. Web. 01
Nov. 2013.
9
Norris, Floyd. "G-20 Backs Plan to Curb Tax Avoidance by Large Corporations."Nytimes.com. New York Times, 19
July 2013. Web. 15` Oct. 2013.

6. G20|CORPORATE TAX EVASION 6
European Union officials believe “tax fraud and firms' aggressive cross-border schemes
to avoid taxes, cost the bloc's governments an estimated 1 trillion Euros ($1.3 trillion) a year”.10
Similarly to the United States, tax evasion limits the capacity of EU member states to raise
money and implement their economic and social policies. That could mean cuts in public
services and a slower economy. While many within the EU argue for a level playing field, many
countries like Ireland and Belgium are unhappy with the current push for more regulation due
their status of tax havens.11
Their interests collide with countries like France and Germany who
have relatively high tax rates and see their richest residents flee to more tax friendly jurisdiction
within the EU. A good illustration of the situation is the recent attempt by France’s richest man,
Bernard Arnault, to acquire Belgian citizenship to avoid paying taxes in France.12
Paradoxically,
when the European finance ministers met in Vilnius,Lithuania on the 14th
of September 2013 to
discuss the issue of tax avoidance, Jeroen Djisselbloem the Dutch finance minister, declared:
“the meeting consisted of cannon shots going back and forth”.13
This declaration is symptomatic
of the current atmosphere within the union regarding the issue of taxation. There is a common
consensus around the necessity to take actions but countries like Luxembourg, Ireland or
Belgium that have built their reputation as destinations for foreign assets are not willing to
sacrifice their competitive advantage beyond a certain limit. Additionally, the city of London,
which is the backbone of the largest network of tax havens in the world and operates as a
government within the United Kingdom, makes it very difficult to agree on issues pertaining to
tax evasion and avoidance.14
10
Chalabi, Mona. "Tax Evasion: How Much Does It Cost?" Theguardian.com. Guardian News and Media, 27 Sept.
2013. Web. 04 Dec. 2013.
11
"Ireland Pledges to Close Apple Tax Loophole." Financial Times. N.p., 12 Apr. 2010. Web. 04 Dec. 2013.
12
Masidlover, Nadia. "LVMH's Arnault Withdraws Belgian Citizenship Bid." Wsj.com. Wall Street Journal, 10 Apr.
2013. Web. 01 Dec. 2013.
13
"EU Finance Ministers Seek Ways to Combat Tax Evasion." CTVNews. Canada TeleVision, 23 Sept. 2013. Web.
04 Dec. 2013.
14
Shaxon, Nicholas. "The Tax Haven in the Heart of Britain." The Tax Haven in the Heart of Britain. News Statesmen,
24 Feb. 2011. Web. 04 Dec. 2013.

7. G20|CORPORATE TAX EVASION 7
China has agreed to join the global fight against tax evaders by signing on to the G20
agreement. Global Financial Integrity, a financial watchdog group, has estimated that more
money flows out of China from illicit financial activity than any other developing country.15
Figures released by China's State Administration of Taxation showed that anti-tax evasion
efforts by the Chinese government generated an additional income of some $5.7 billion last year,
nearly 30 times the amount in 2008.16
The Chinese position is unclear as the state apparatus
and the politburo of the communist party are involved and benefit greatly from failures in the
taxation system, notably through flows to the financial hubs of Macau and Hong Kong. Even
though the official position is in favor of more regulation, in practice it is highly unlikely that the
authorities implement any regulation to its full extent.
Multinationals like Apple, Starbucks and Google aggressively put income in countries
where the corporate tax rate is extremely low. In some instances these companies employ
another pervasive technique, which consist in sourcing the revenues “nowhere at all”. This is
referred to as the “stateless income” or “double Irish”.17
The goal for a company is to maximize
shareholders profits. Under the current global tax system, companies are obligated to take
advantage of tax breaks offered all around the world. The CEO of Google Eric Schmidt raised
an important point when he said, “with respect to the current sort of issues, I don’t think a
company should decide what tax policies should be, I think governments should.”.18
Multi-
National Corporations (MNC) are benefiting from loopholes in order to compete globally.
Recently, Apple’s CEO Tim Cook was heard by the senate finance committee concerning
15
Dawson, Stella. "China to Join Global Crackdown on Tax Evasion." Reuters. Thomson Reuters, 21 Aug. 2013.
Web. 04 Dec. 2013.
16
Nignzu, Zhu. "China Joins Global Combat Tax Evasion Efforts by Signing Multilateral Tax Convention - Xinhua |
English.news.cn." China Joins Global Combat Tax Evasion Efforts by Signing Multilateral Tax Convention - Xinhua |
English.news.cn. Xinhua, 27 Aug. 2013. Web. 04 Dec. 2013.
17
Wood, Robert W. "Excuse Me Apple, Google, Starbucks & H-P: IRS Wants To Tax Stateless Income." Forbes.
Forbes Magazine, 06 Aug. 2013. Web. 04 Dec. 2013
18
Barker, Alex. "EU Rushes out Corporate Tax Transparency Law." Financial Times. N.p., 23 May 2013. Web. 04
Dec. 2013.

8. G20|CORPORATE TAX EVASION 8
Apple’s deferral income practices, which consist in recording income generated in Asia, Africa,
and Europe in Ireland, as Apple’s subsidiary in that country holds the company’s patents and
trademarks for those regions. Because the Irish company is not an operating entity, it pays no
taxes to the Irish government on the income it receives from other Apple operating entities.19
Echoing Mr. Schmidt’s comment, Apple is just using the tax system to its advantage. Ironically,
shareholders have criticized Apple’s management for not using the same loophole for their Latin
American operations (taxed in the U.S). MNCs are currently in favor of the status quo.
Banks are central to the issue because the money flows through their channels
worldwide. Therefore, they hold crucial information regarding multinational financial activities.
Tax authorities in many countries including the United States have pressured governments and
financial institutions in countries like Switzerland and Liechtenstein, who abide by the “banking
secrecy”, to surrender information. This highlights the double-sided problem of tax evasion. On
the one hand banks are competing to attract deposits, on the other they are forced to comply
with revenue-damaging regulations. The intrinsic competitive advantage Swiss banks hold has
been the fact that they were never required to share information about their clients. The current
regulatory framework, proposed by the OECD and adopted by the G20 and if implemented
successfully, will result in a loss of competitiveness for the Helvetic banks.
CHRONOLOGY
Corporate tax evasion is a problem that traces back to the Greek civilization. Empirical
evidence even suggests that ever since taxation was introduced, people and organizations alike
have been trying to decipher ways to circumvent them.
19
"Summary: Tim Cook’s Senate Grilling on Taxes." Corporate Intelligence RSS. Wall Street Journal, 21 May 2013.
Web. 04 Dec. 2013.

9. G20|CORPORATE TAX EVASION 9
1920s/30s: The technical use of the words evasion/avoidance in the modern sense originated in
the USA where it was well established by the 1920’s, as multinational companies began to
emerge as forces in world markets. The 1920’s were an interesting era because it led to one of
the biggest financial crisis in the history of the world, the Great Depression. After America was
hit by the 1929 stock market crash, President Roosevelt decided to tax American businesses
heavily in order to finance the reconstruction of the country. During his tenure as President he
went as far as proposing a 100% marginal tax rate on the rich. During this time rich Americans
and corporations began strategizing about ways to hide some of their profits. The issue was
brought to national attention during the Bullen v. Wisconsin case20
where lines were officially
drawn between tax evasion and avoidance.
1930s: Most of Europe was facing some combination of political instability, powerful labor
movements, and strong political pressures to raise public revenues to placate those movements.
Switzerland began to provide a convenient and secure tax haven when the world was in dire
need for it in the 1920s. Although England had the larger economy, Switzerland held a key
advantage because of the legal leeway Swiss bankers possessed through the highly
decentralized state. In contrast, the UK’s policy involved balancing the temptations to become a
tax haven against the pressures of raising money for urgent public purposes.
The deregulation of the 1970s:The trend of deregulation was particularly pronounced in
America and Britain. Ronald Reagan campaigned by touting tax cuts as a means to rescue the
American economy from stagnation. According to data from the economist, during his
administration, top marginal tax rates dropped in steps from 70% to 28%. In Britain Margaret
20 "Bullen v. Wisconsin - 240 U.S. 625 (1916)." Justia US Supreme Court Center. N.p., n.d. Web. 07 Dec. 2013.

10. G20|CORPORATE TAX EVASION 10
Thatcher slashed the top marginal income tax rate from 83% to 40% between 1979 and 1988.21
As the financial liberalization pushed by Reagan and Thatcher began having an effect, it
increasingly allowed companies to “shop” around for jurisdictions to escape tax and circumvent
regulations. These measures were designed to strengthen the economy, but the easy flow of
capital worldwide that resulted from this era of deregulation encouraged many companies and
rich individuals to move more money around and participate in tax evasion
In August 2007: The IRS issued the first round of guidance on the Foreign Account Tax
Compliance Act (FATCA) which is a law aimed at foreign financial institutions and other financial
intermediaries, to prevent tax evasion by US citizens and corporations through the use of
offshore accounts. The first round of guidance was published with two models of
intergovernmental agreements. In the first, financial institutions in the partner country would
report information about U.S. accounts to the tax authority of the partner country either with
reciprocal information (Model 1A) or without (Model 1B). In the other (Model 2) where partner
country financial institutions reported directly to the U.S. Internal Revenue Service, and the
partner country agrees to lower any legal barriers to that reporting.22
FATCA implementation
faces legal hurdles because it may be illegal in foreign jurisdictions for financial institutions to
disclose the required account information. There is a controversy regarding the appropriateness
of intergovernmental agreements to solve any of these problems.
2 April 2009: The G20 gathered in London to discuss the financial outlook and discuss policy
changes aimed at stabilizing the ailing global economy.23
Some of the changes brought forward
included growth, jobs, repairing the financial system to restore lending and strengthening
financial regulation to rebuild trust. This summit marked the awakening of the international
21
GI. "How Mrs Thatcher Smashed the Keynesian Consensus." The Economist. The Economist Newspaper, 09 Apr.
2013. Web. 01 Dec. 2013.
22 http://www.irs.gov/Businesses/Corporations/Foreign-Account-Tax-Compliance-Act-(FATCA)
23
http://www.imf.org/external/np/sec/pr/2009/pdf/g20_040209.pdf

11. G20|CORPORATE TAX EVASION 11
community to the catastrophic consequences of the global crisis of 2008. As a result of this
awakening, financial regulation worldwide was put at the forefront of the legislative agendas.
18 March 2010: FATCA is signed into law in the United States.
FATCA will have a far-reaching impact on US-based companies as well as foreign companies
with US assets or clients. Under the new provisions, a Foreign Financial Institution (FFI) may
enter into an agreement with US tax authorities (IRS) requiring it, among other things, to report
information on the foreign institution’s US accounts. A FFI that enters into such an agreement
becomes a "participating FFI”.24
According to the law, if a FFI does not enter into an agreement
with the IRS, all relevant US-sourced payments, such as dividends and interest paid by US
corporations, will be subject to a 30% withholding tax. The same 30% withholding tax will also
apply to gross sale proceeds from the sale of relevant US property. All FFIs must comply with
FATCA or be subject to withholding. Given the significant lead times large companies may need
to comply with FATCA requirements particularly for it system changes.
May-November 2011: Protest Movements. Worldwide protests rose to challenge social and
economic inequality, greed, corruption and the perceived undue influence of corporation on
governments particularly from the financial services sector. Movements such as the Spanish
Indignados or Occupy Wall Street used direct democracy to emphasize direct action. These
Movements and the subsequent ones lead governments worldwide to act more aggressively on
issues such as tax evasion, a subset of the many inequalities highlighted by the protesters.
September 11 2012: Bradley Birkenfeld a former UBS banker transmitted crucial information to
the IRS about schemes used by Swiss banks to help clients evade money. The disclosure of
24 "FATCA Knowledge Center." Foreign Account Tax Compliance Act (FATCA) Resources. Ernst & Young, n.d. Web.
29 Nov. 2013.

12. G20|CORPORATE TAX EVASION 12
Swiss banking information, which caused a fierce political debate in Switzerland before winning
approval from the country’s Parliament set off such a panic among wealthy Americans that more
than 14,000 of them joined a tax amnesty program. I.R.S. officials say the amnesty program has
helped recover more than $5 billion in unpaid taxes.25
April 2013: Offshore leaks. A cache of 2.5 million files revealed the secrets of more than
120,000 offshore companies and trusts, exposing hidden dealings of politicians and wealthy
individuals. The secret records obtained by the International Consortium of Investigative
Journalists exposed the names behind covert companies and private trusts in the British Virgin
Islands, the Cook Islands and other tax havens. The leaks are said to include information about
various major corporations and their dealings in fiscal paradise as well as high net worth
individuals26
. The leaked files provide facts and figures, cash transfers, incorporation dates,
links between companies and individuals that illustrate how offshore financial secrecy has
spread aggressively around the globe.
May 2013: England cracks down on ownership secrecy. David Cameron announced plans
to crack down on UK accountants, lawyers and business figures who use shell companies to
hide the identity of ultimate beneficiaries. Firms registered in Britain will come under a legal
obligation to obtain and hold adequate, accurate and current information on the ultimate owner
who benefits from the company and be required to place the information on a central register
that would be maintained by Companies House. In a speech to the Open Government
25
Kocienwiski, David. "Whistleblower Awarded $104 Million by I.R.S." Nytimes.com. New York Times, 11 Sept. 2011.
Web. 04 Dec. 2013.
26 Ryle, Gerard. "Center for Public Integrity." Center for Public Integrity. N.p., 20 Nov. 2013. Web. 24 Oct. 2013.

13. G20|CORPORATE TAX EVASION 13
Partnership Summit in London Cameron surprised some business leaders by insisting the
register must be open to the public as well as officials.27
June 2013: G8 Summit. G8 leaders gathered in Lough Erne in Northern Ireland to agree to
further transparency on the sharing of tax information and bring the international tax rules into
the modern age. As the summit closed the G8 leaders’ communiqué announced that they will
move to establish the automatic exchange of information between tax authorities as the new
global standard. The G8 leaders stated their support for the OECD’s work to tackle tax
avoidance by multinational companies, and announced that they will draw up a template for
global corporations to report to tax authorities where they make their profits and pay taxes
around the world. This would give governments a new tool against tax avoidance by
multinationals and would be particularly helpful to the governments of developing countries.
Under the agreement reached the G8 seek to provide support to developing countries to collect
the tax they are owed.
ROOT CAUSES
Human Nature
The main origin of tax avoidance is simply human nature. Individuals will do whatever it
takes to maintain and strengthen any form of superiority they hold. Hence they act in their own
best interest when it comes to giving up wealth. The basic theory28
used in nearly all compliance
research builds on the economics-of-crime model, in which an individual “maximizes the
expected utility of the tax evasion gamble, balancing the benefits of successful cheating against
the risky prospect of detection and punishment”. This approach asserts that compliance
27 Wintour, Patrick. "Register Revealing Firms' True Owners Will Be Open to Public, Says Cameron." The Guardian. Guardian News and Media,
31 Oct. 2013. Web. 02 Dec. 2013.
28
[1] Alm, J. "Tax Compliance and Administration." In Handbook on Taxation, edited by W. B. Hildreth and J. A.
Richardson (741-68). New York: Marcel Dekker, Inc., 2000.
28
28

14. G20|CORPORATE TAX EVASION 14
depends largely upon audit and fine rates. Indeed, its central conclusion is that an individual
pays taxes only because of the fear of being caught and the resulting punishment. However, it is
clear that compliance cannot be explained entirely by the level of enforcement. The levels of
audit and penalty rates are set at such low levels that most individuals would evade if they were
rational simply because it is unlikely to get caught. Although it must be noted that government
are drastically changing their behavior in regards to tackling tax evaders due to budget
constraints.
A Legal Limbo
Taxes depend on definitions of legal terms, which are usually vague. For example, the
distinction between "business expenses" and "personal expenses" is of much concern for
taxpayers and tax authorities, as the proper distinction between the two is not properly defined.
As a result, any term of tax law becomes a potential source of tax avoidance As legislators act
independently of their constituents on many issues, tax laws do not reflect the interest of the
majority of a jurisdiction’s population (poor and middle income). In an article for the Guardian,
Joseph Stieglitz noted, “Companies like General Electric lobbied for provisions that enabled
them to avoid even more taxes”.29
MNC, like General Electric lobby for, and usually obtained,
amnesty provisions that allow them to comply with the letter of law, while avoiding its intent. In
the case of tax law, GE can bring their revenue back to the US at a special low rate, on the
promise that the money would be invested in the country. The lack of clearly established
definitions as well as the exemption and amnesty provisions create a legal limbo which allows
for more tax avoidance and evasion.
29
Stiglitz, Joseph. "Globalisation Isn't Just about Profits. It's about Taxes Too." The Guardian. N.p., 23 May 2013.
Web. 29 Oct. 2013.

15. G20|CORPORATE TAX EVASION 15
Tax shelters
Tax shelters are investments that allow, a reduction in one's income tax liability. The
term "tax shelter" was originally used to describe primarily certain investments made in the form
of limited partnerships, some of which were deemed by the U.S. Internal Revenue Service30
to
be abusive. These loopholes allow financial engineers and advisors to devise strategies to pay
as little tax as possible within the law. In 2003 the Senate's Permanent Subcommittee on
Investigations held hearings about tax shelters which are entitled U.S. tax shelter industry: the
role of accountants, lawyers, and financial professionals.31
Many of these tax shelters were
designed and provided by accountants at the large American accounting firms. Examples of U.S.
tax shelters include: Foreign Leveraged Investment Program (FLIP) and Offshore Portfolio
Investment Strategy (OPIS). Partners at the accounting firm, KPMG, devised both programs.
These tax shelters were also known as "basis shifts". Contrarily to the overall vague legal
definitions of taxation, clear laws govern tax shelters.
POLICY OPTIONS
Governments worldwide generally use two types of tax compliance policies. On the one
hand, policy options aimed at coercing tax compliance by increasing risks for practicing tax
evasion, and on the other hand a set of policies emphasizing development of supportive tax
paying values among citizens via service improvement and informational strategies.
Governments’ tax agencies tend to favor coercive policies.
The first policy option or strategy is directed at enacting statutes and adopting
administrative powers and procedures which coerce compliant behavior. The strategy of taking
these actions is what we are witnessing throughout the developed world in these days of budget
30
"Tax Information for Individuals." Tax Information for Individuals. Internal Revenue Services N.p., n.d. Web. 30 Oct.
2013.
31
"Senate Report 109-54 - THE ROLE OF PROFESSIONAL FIRMS IN THE U.S. TAX SHELTER INDUSTRY."
Senate Report 109-54 -

16. G20|CORPORATE TAX EVASION 16
constraints. Coercive policies are based on increasing the risks incurred when practicing tax
evasion. These policies are improving evasion discovery capabilities32
, increasing evasion
penalties and strengthening delinquent tax collections capabilities. Hiring more auditors and
supplying them with computer technology improve discovery capabilities.33
Another policy which
may be enforced and has been implemented in many European countries, would be to make
evasion penalties more stringent by increasing interest rates on delinquent accounts and raising
fines, and by elevating tax evasion from misdemeanor to felony status.34
These practices are
designed to influence taxpayers' mental calculations in such ways as to induce compliance.
Although there is a long list of individual countries with good methods to decrease tax evasion,
the problem of the globalized nature of the economic system and the use of other jurisdictions to
bypass national laws remains the main cause of the continued issue of tax evasion.
The second policy course would be to encourage compliance through a variety of
services such as instructing taxpayers about tax regulations, and through installing a firm sense
of civic duty and moral obligation among citizens. In opposition to the first strategy, which
constructs a threatening environment, the second aims to establish a cooperative relationship
between taxpayers and their government. Governments can instill string compliance values so
that obedience to tax laws becomes more an automatic or natural act. Values can be reinforced
through promotional campaigns and other means that inform citizens of the societal costs of tax
evasion and which illustrate the positive externalities a society gains from it. Furthermore,
improved service and tax education efforts can empower citizens with the knowledge they need
to comply and avoid mistakes in calculating taxes owed, and contribute to removing frustrations
32 "
Internal Revenue Manual - 25.1.1 Overview/Definitions." Internal Revenue Manual - 25.1.1 Overview/Definitions.
Internal Revenue Services, 16 Dec. 2011. Web. 03 Dec. 2013.
33
Kristof, Kathy. "Obama Budget Surprise: More Tax Audits." Cbsnews.com. Cable News Network, 15 Feb. 2011.
Web. 02 Dec. 2013.
34
Wood, Robert W. "Not Even Probation For Stephen Baldwin's Tax Evasion, Jail For Wesley Snipes." Forbes.
Forbes Magazine, 02 Apr. 2013. Web. 02 Dec. 2013.

17. G20|CORPORATE TAX EVASION 17
and the sense of mystery in tax filing. In the UK for instance, the government is working to
prevent tax evasion by giving people the opportunity to declare what they owe. They are running
campaigns to encourage people to tell HMRC (Tax agency) what they owe. So far HMRC has
“raised 547 million dollars from voluntary disclosures and almost 140 million from follow up
activity including 20 000 completed investigations”.35
This type of initiative should be expanded.
Monitoring tax evasion is a very complex endeavor. Ultimately, there are only two broad
course of action possible; one being reactive, meaning acting after the fact to recoup what was
lost through fines and penalties, the other being proactive, by developing a set of tools to
prevent tax evasion from happening in the first place. Changes in policies and the so-called
“fiscal instability” will constantly reshape citizens’ behavior. The emphasis therefore needs to be
utilized for improvement to occur.
PROJECTIONS
The tax evasion issue has increased impact on the global world and could reach new
heights. The income inequality gap between the very rich and the rest of the world’s population
will widen to levels that will pose serious threats to the market economy. When a system fosters
inequalities cracks will start to appear. As a direct consequence of the non-confidence in the
system, people that are marginalized economically will take to the street and social unrest will
cause many developed nations to implode. We already witnessed this phenomenon in
countries like Greece and Spain. In those two countries the potential consequences of
prolonged protestation were mitigated by the intervention of the IMF, Germany and the
European Central Bank. However, if this was to happen in bigger economies, namely France
and/or Italy, the magnitude of the disaster would be extremely hard to combat.
35
"Tell Us What You Think of GOV.UK." Reducing Tax Evasion and Avoidance. Her Majesty Revenue and Customs,
08 Oct. 2013. Web. 03 Dec. 2013.

18. G20|CORPORATE TAX EVASION 18
Another potential consequence of a failure to reach a long-term agreement would be the
unbalancing of the world economy, with risks of destabilization for entire economies due to a
possible sudden repatriation of huge amounts of liquidity. As a matter of fact, a recent report
commissioned by the tax justice network and written by former McKinsey chief economist
James Henry found that wealthy individuals and corporation have accumulated $21 trillion in
secretive offshore accounts.36
That’s a sum equal to the gross domestic product of the United
States and Japan combined. In the event that this money was to be brought back “on shore”,
entire economies would collapse under the pressure caused by the influx of cash.
In conclusion, the issue of tax evasion is simply the mirror of the society we have
decided to build for ourselves. So long as we believe the system the way we conceived, which
is the most adequate to ensure relative stability and prosperity, we will see the issue of tax
evasion remain. It is deeply rooted at the core of the free market economy. It is unlikely that
there will ever be a full end to tax evasion, but this committee has the chance to take great
strides to significantly diminish the problem.
36
Allen, Frederick E. "Super Rich Hide $21 Trillion Offshore, Study Says." Forbes. Forbes Magazine, 23 July 2012.
Web. 08 Dec. 2013.

19. G20|CORPORATE TAX EVASION 19
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