For as much time as the companies and influential individuals would keep hiding their wealth in the offshore companies, the developing countries would continue to have money loss that could have been used in order to provide the basic public services that could help to alleviate and assuage poverty from developing economies.
This Saturday almost 11.5 million secret documents suspected to have connection with Mossack Fonseca, a Panama based law firm were leaked as an anonymous source transferred those documents to Süddeutsche Zeitung, a German newspaper. The newspaper then shared these documents with International Consortium of Investigative Journalists (ICIJ).
These files are the clear evidence that how there are countless ways exiting at the disposal of rich authorities to secretly offshore the wealth even through organized tax regimes. The names of several companies, celebrities and politicians have been high lightened among which some of the high profile names include Ex- Prime Minister of Iraq, Ayad Allawi, the President of Ukraine, Petro Poroshenko, the former President of Sudan, Ahmad Ali al-Mirghani etc.
Some of the news sources have mentioned that former Prime Minister of Iceland, Sigmunder Gunlaugsson who recently resigned was the first victim of Panama papers.
However, according to some experts view point, the game in which there is massive avoidance of tax does not only involve elite and influential tycoons. The actual victims of Panama Papers are the remaining 9.5 million people who have total net worth of less than $1 million and they are simply categorized as “Everyone else “in the global wealth table of Tax Justice Network.
According to John Christensen who is the co-founder of Tax Justice Network, UK, Panama papers are an abuse to human rights. According to him the actual victims are the ordinary people because if the rich person is evading tax it means ordinary people like us are actually paying the deficit created by his pocket. The same happened in several countries where value added taxes have been imposed but still the public services are not provided the way they should have been.
There have been global efforts going on for the uplift of the countries like Sudan, Nigeria, Malawi but these efforts are badly hindered due to tax evasion. This happens because in most of the cases the tax avoiders often transfer their money through the countries where there is unfair tax policies and pacts. These are those countries which are also poor economies and have no law and order. With this they have less to spend on infrastructure, healthcare, education, shelter etc.
This explains the hemorrhage of foreign aid that these economies receive.
To make complex things simple, in order to manipulate the taxes, the companies that are working in developing countries set up the subsidiary in the tax haven. After this they sell their products to this subsidiary at lower prices in order to reduce their tax burden. Ultimately this subsidiary sells the products in the market at higher rates and huge profits are secured at either lowest or no tax rates.
In other words we can say that the companies first manipulate the prices of their products in order to avoid tax and the outcome of this is borne by the countries with unfair tax policies leading them into vicious circle of poverty because due to less tax revenues they are unable to feed their own economies. In Africa it has been estimated that 60% of the capital flight of the nation is due to this practice.
Malawi is one of the poorest country of the world with 50% of its population living in poverty. The tax revenues that are meant to develop and restructure the economy is diminishing at an increasing rate. Similarly, 30% of the African economy’s wealth is held offshore in tax havens and is leaving Africa with tax revenue loss of $ 14 billion per year. Nigeria has been experiencing one of the most illegal outflow as percentage of GDP (Gross Domestic Product).
Tax avoidance game has adverse consequences on developing economies where a single buck contributed to tax revenues can become source of development and improvement in the basic infrastructure, healthcare and education. Each dollar paid as tax can lead the economy towards self-sufficiency where they would no longer be relying on foreign aid.