10 Worst Countries for Tax Evasion

From Washington, D.C., and Brasilia to Moscow and Madrid, the taxman is on a mission to squeeze more revenue from people, many of whom are struggling to make ends meet amid the worst economic slowdown since the Great Depression. He has his work cut out for him. That’s because tax evasion in all its many forms is so pervasive around the world.

How big a problem is tax evasion? Take a look at the table below from Tax Justice Network, a London-based watchdog that fights against tax havens. When combined with information from other academic, governmental and media sources, the full scope of tax evasion’s impact starts to become clear. And the results are surprising in a few ways.

Top 10 Countries Losing to Tax Evasion
Country GDP
Size of
Economy (%)
Tax burden
Overall (%)
Tax lost as
a result of
shadow economy
($ Millions)
U.S. 14,582,400 8.6% 26.9% 337,349
Brazil 2,087,890 39% 34.4% 280,111
Italy 2,051,412 27% 43.1% 238,723
Russia 1,479,819 43.8% 34.1% 221,023
Germany 3,309,669 16% 40.6% 214,996
France 2,650,002 15% 44.6% 171,264
Japan 5,497,813 11% 28.3% 171,147
China 5,878,629 12.7% 18% 134,385
U.K. 2,246,079 12.5% 38.9% 109,216
Spain 1,407,405 22.5% 33.9% 107,350
Source: Tax Justice Network

First, though politicians may disagree, the relationship between high tax rates and tax evasion isn’t so clear-cut. As David Cay Johnston of Reuters recently noted, “The United States has lower tax rates than eight of the nine other top 10 tax evasion countries [on Tax Justice Network’s list]. Rampant evasion in America raises doubts about the notion that high tax rates fuel evasion.” Indeed, countries with some of the lowest tax rates are among the most economically troubled, such as Ireland.

“Tax evasion is endemic and has actually worsened in most countries despite lower top-end tax rates and very generous allowances,” says John Christensen, director of Tax Justice Network International Secretariat, in an email. “In many cases, the situation has deteriorated because the use of sophisticated offshore structures using secrecy jurisdictions has become very much more widespread in recent decades, and politicians have taken the easier route of switching to indirect taxes [such as sales taxes and customs duties], which are broadly regressive and therefore impact more heavily on ordinary people, rather than tackling endemic evasion by rich individuals and powerful companies.”

America Has the Smallest “Shadow”

Countries made the list because they either lack the will or the resources to collect all the monies that they are owed. The U.S. ranks first based on absolute dollars partly because its economy is so big. After all, it’s the world’s largest. Americans, though, are more willing to pay their taxes than people in other countries are, which is known as “tax morale.” A 2005 study published by Yale University found that the U.S. had a higher rate of tax morale than other counties surveyed.

America’s underground or “shadow economy,” which of course isn’t taxed, represents 8.6% of GDP, by far the smallest of any of the countries on the list. Will McBride of The Tax Foundation says tax morale in the U.S. has probably gotten worse since the survey was completed because taxes have grown more complex.

According to data from the IRS’s Criminal Investigations division, the number of cases recommended for prosecution has risen 33% between the 2009 and 2011 fiscal years. However, “The IRS is moving toward a more lax enforcement regime in some ways,” says Scott Klinger of the watchdog group Businesses for Shared Prosperity. He’s talking about cuts to the IRS budget that place it a disadvantage against large multinationals such as General Electric (NYSE:GE), which has 1,000 employees in its tax department employing sophisticated tax-minimizing strategies.

Country-by-Country Snapshots

Brazil, Latin America’s largest economy, ranked second on the list. Experts have noted that the country’s Byzantine tax laws are hampering economic growth. Officials in Brazil last year seized a private island as part of a crackdown on tax evaders.

In third-place Italy, the media is full of reports about people with no legitimate income driving expensive sports cars. Russia, in fourth place, continues to battle corruption. Bloomberg found Prime Minister Vladimir Putin putting a positive spin on the news, noting he “said the positive side of bribery in Russia is it shows that people have money to spend.” No. 5 Germany recently signed a tax-evasion agreement with Switzerland. Media reports have said Swiss banks are hiding as much 180 billion euros in German assets.

In November, Nicholas Sarkozy, president of sixth-place France, threatened to turn Switzerland into a “pariah” unless it stopped helping EU residents evade taxes. In October, Japanese Prime Minister Yoshihiko Noda said tax increases would be needed to fund No. 7 Japan’s reconstruction from this year’s deadly earthquake and tsunami. Tax evaders can be executed in eighth-place China.

Tax authorities in ninth-place U.K. are under fire for entering “into sweetheart deals” that enabled multinationals to avoid paying a large amounts of back taxes, according to The Guardian. And earlier thus year, No. 10 Spain earned kudos for cracking down on evaders. Nonetheless, one estimates shows that 80% of Spanish companies are hiding money in tax havens.

New Thinking at the IRS

Meanwhile, big multinationals are pushing for a U.S. corporate tax holiday that they say will enable them to bring $1 trillion in profits that are being held overseas. Sen. Carl Levin (D-Mich.) rejects this argument, saying most of the money companies say is trapped is actually in U.S. banks. Still, tax haven abuse costs the U.S. $100 billion in revenue annually, according to the watchdog group Businesses for a Shared Prosperity, which is seeing more corporations use tax havens.

The IRS has had some success in encouraging individual taxpayers to come clean about their overseas assets. It’s also changing its strategy with corporations facing the same issue, according to Commissioner Douglas Shulman. “When we engage multinational business taxpayers, we need to think about strategy differently, depending on whether we’re looking at an outbound situation — a U.S.-based company with operations abroad — or an inbound situation — a foreign-based company with U.S. operations,” he said in a recent speech. “That may sound obvious to many, but the point is to recognize the obvious drivers of tax behavior and to then ensure we strategically align our resources and train our people, consistent with basic behavioral patterns.”

Vowing to crack down on tax evaders is a worthy goal and makes for great political rhetoric. Unfortunately, it’s far easier said than done.

Jonathan Berr does not own shares of the stocks mentioned here.

Article printed from InvestorPlace Media, https://investorplace.com/ipm_invpol/10-worst-countries-for-tax-evasion/.

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