Newspapers, magazines, and journals are buzzing with the Panama Papers. This massive, international "tax scandal" is being interpreted from many different angles. Tax experts are falling over themselves to emphasize the profound differences between tax avoidance and tax evasion, even though both ultimately result in no or less tax being paid.
Tax avoidance is legal because it involves taking advantage of opportunities to pay as little tax as possible, within the limits of the law: after all, everyone has the right to choose the most tax-efficient option. Tax evasion, on the other hand, is illegal because it involves deliberately filing no or incorrect tax returns, or failing to pay the tax due (tax fraud).
The line between the two forms of tax savings is not always clear-cut because there is disagreement about how the law should be interpreted. Did someone pay no or less tax based on sound arguments ("defensible position"), or was the State Treasury deliberately and unlawfully disadvantaged? This is a matter for tax lawyers.
An example of taxpayers categorized as tax evaders are those who hold accounts in countries like Switzerland and Luxembourg with banks like UBS, Credit Suisse, and Safra Sarasin, which—as the last of the Mohicans—had banking secrecy that is now increasingly eroding. While multinationals are currently facing no tax obstacles, State Secretary for Finance Wiebes is significantly increasing the pressure on these tax evaders.
This means the penalty for those who fail to declare their undeclared assets to the Tax and Customs Administration by July 1, 2016, will be doubled from 60% to 120% of the amount of tax evaded. Anyone who fails to use the special voluntary disclosure scheme before July 1, 2016, therefore risks losing their entire (undeclared) savings to income tax, interest, and penalties. Fortunately, we see at least two arguments to limit the damage for those who voluntarily disclose.
First, there's currently a debate about whether the wealth tax in Box 3 violates property rights, as the law assumes a fictitious annual return of 4%. Not everyone achieves that return on their undeclared assets. Paying tax (following a voluntary disclosure) while making (almost) no return then leads to a violation of ownership and thus to an infringement of property rights.
Secondly, the fine percentage for those who have voluntarily repented has been lower in the past – at one point even as low as 0% – so those who have voluntarily repented now should be able to benefit from those previous, lower fine percentages (based on the principle of criminal law legality).
While Wiebes' strict intentions to crack down even more on tax evaders are certainly debatable, he's right that the net is closing in. The upcoming UBO register, which the Netherlands must have in place by June 26, 2017, also contributes to this. The ultimate beneficial owners of each entity will be listed in this public register (see our blog).
Whether the net will ultimately be completely free of loopholes remains to be seen, but playing hide-and-seek with the tax authorities will certainly not become any easier.
