Early April 2016, about 12million documents containing private financial information were leaked by the ICIJ from Mossack Fonseca, a Panamanian law firm. The documents contained information on more than 200,000 offshore entities worldwide. The case became known as the Panama Papers. In Portugal, this was not the first time the issue of tax havens, money laundering and offshore accounts invaded public opinion. In Portugal, the “Operação Furacão” (2005) had already caused some fuss, and in its sequence the well-known “Operação Monte Branco” fully exposed the issue to the public. But how big is the problem of tax evasion and which are its main sources? How are authorities (in particular in Portugal) dealing with the issue? These are the questions we try to briefly address in this post.
In his work “The Hidden Wealth of Nations”, Gabriel Zucman, a Berkeley professor, argues that 8% of the world’s wealth is kept offshore with purposes of money laundering and tax evasion (only undeclared money), representing around 190 BUS$ in tax revenue loss. This is a way how rich people evade taxation (they’re the ones with wealth to hide). The biggest problems – besides tax revenue loss – with offshore accounts and tax evasion by the rich are related to the inequality issues it brings to the table. The unfairness of the rich not getting their income properly taxed while the poorer get, and the implied failure of the redistributive mechanism (the wealth does not trickle down) is a severe problem. It is of crucial importance to state that this is not the only source of tax evasion. Undeclared economic activities and black markets also take an important role in the problem and the responsible agents are not only the richest.
As for Portugal, according to Zucman, 37% of the country’s wealth is located offshore and recent studies by the OBEGEF reveal that parallel economy accounts for 26% of the GDP. It accounts up to five national budgets destined to the National Health System.
On the one hand, the Portuguese authorities and government have been taking proactive measures to tackle the issue. The Strategic Plan to Reduce Tax Evasion and Fraud stresses the legal obligation to issue receipts in all economic transactions, allied to the creation of the “e-fatura” platform and continuous cross-checks of the data. The legal possibility to deduct expenses in critical sectors of undeclared activity such as mechanics, contractors or hairdressers and tighter controls to firms as to avoid “under the table” payments and compensations to their employees are some of the measures being rightfully implemented.
On the other hand, it is in the financial side that still lie the biggest flaws. The overly time-consuming procedures of the judicial system (took 10 years for the first “Operação Furacão” trial, and “Operação Monte Branco” case is dragging) eventually lead to expiry of the cases and no consequences for the criminals. Tighter capital control (including bank accounts checking) is on the table but brings up very important considerations about privacy violation.
It is crucial that government continues to tackle this situation, making justice more efficient, designing mechanisms to avoid undeclared capital outflows and stress economic activity control, but is also important a public awareness effort such that each citizen understands his own importance and does not contribute to the problem, even if short-term individual benefits seem obvious.
Filipe Bento Caires
Other reference: http://pascal.iseg.utl.pt/~socius/investigacao/EVASAO/index.html