Tag: Taxes

So, shell companies. They are similar to what they sound like as they ARE shells of companies. They are pretty much like an empty shell. 

There’s nothing inside. It’s a firm with no current business activity or significant assets. Shell companies aren’t necessary illegal, but are sometimes used illegitimately for  reasons such as disguising business ownership from law enforcement or the public. But legitimately, they can be used to store a company’s money it’s raising before it launches, or for security reasons such as working in an unsafe region or country. 

When used illegitimately, shell companies are usually used during money laundering. Money laundering is pretty much just “laundering” money made through criminal activity like drug trafficking or terrorist funding,  in order to make it look clean. This money is, well, dirty, so so it needs to be laundered before it can actually be used. This is to make sure the money can be used effectively, and so there is no suspicion when using it. There are three parts in money laundering: placement, layering, and integration. The first, placement, comes from the need to deposit the money in legitimate financial institutions. The only way to do so is if it comes from legitimate sources, so often a business owned by the criminal organization is used. For example, a restaurant may inflate the receipts to funnel illegal cash through the restaurant and into the restaurant’s bank account. The next is layering. Layering consists of concealing the money through a series of transactions. This is to make it difficult to trace the original source. Layering is often done through chain-hopping which is the act of converting one cryptocurrency into another moving from one blockchain to another, mixing/tumbling which is the act of blending various transactions across several exchanges, or cycling. (More can be found at these links: complyadvantage.com and linkurious.com)

Not only that, shell companies can be used for tax avoidance. Tax avoidance is an action taken to lessen tax liability and maximize after-tax income. Simply put, finding a way to avoid paying taxes in a legal manner.  The best way to do so is setting up a shell company in a tax haven. 

Before I explain let me interrupt. Happy New Year and Merry late Christmas. I actually spent my Christmas overseas and visited the Cayman Islands. We took a tour and had a lot of fun on our trip. In fact, on the tour we learned a lot of interesting facts about the islands, including one very important thing. The Cayman Islands have no income or withholding tax imposed on the individual. So like if something is $10, that’s all you have to pay. Literally. That makes the Cayman Islands a tax haven. Since no taxes are imposed, shell companies are commonly set up in the Cayman Islands to reduce tax bills and just get out of paying taxes legally. Another example includes Hong Kong, Switzerland, Panama, and even Ireland. See where I’m getting to? 

Ireland has a low tax rate of 12.5% , making it one of the lowest tax paying countries compared to the U.S. with a 35% rate. This is a reason why Apple long many other companies such as Google have shifted headquarters there. According to BBC, Apple created an avoidance structure that “helped it reduce it’s tax rate on profits outside the US to the extent that its foreign tax payments rarely amounted to more than 5% of its foreign profits.” In some years it’s dipped below 2%, and one Irish Apple Company had a tax rate for one year of 0.005% . For Apple, if tax haven benefits were not used, it would have owed the U.S. government $65.4 billion in taxes. However, this is about to change as Ireland announced in October 2021 that it will change it’s tax rate to 15% in 2024 (originally 2023). 

This entire process of tax avoidance is not new. It’s been around for a while. In 2016 11.5 million legal documents-called the Panama Papers- were leaked, containing personal financial information about many wealthy individuals and public officials. It exposed a network of 214,000 tax havens involving these officials and entities from 200 nations. Although most of the documents showed no illegal or inappropriate behavior, some of the shell companies set up by the firm from which the documents were leaked, were revealed to have been used for illegal purposes such as tax evasion and fraud. Hence, shell companies can be interpreted as illegal and used illegitimately. 

People with huge companies like Nike or Apple often do this for many reasons. One could be for greed. With so much money one would want to keep it to themselves. Not only that, with so much money they would have to pay higher taxes. Arguments against this include, “using the same amount of road someone making less than them uses”. Why should they pay more when they use the same services as others? As a result, they’ll try to pay lower taxes or even get out of it completely. Such methods as we’ve discussed include tax havens and shell companies. 

Why should we care about this? Well for starters, they aren’t paying their taxes. As I’ve mentioned before, taxes are essential to providing us benefits such as public school dunking, building roads, and other public services. Everyone pays a fair share of their income that they worked hard for these taxes and yet these big companies who have more wealth decide to reduce their amount simply because they want their money to themselves. If that’s so then why don’t we also keep our money to ourselves? Taxes take away a huge portion and we could easily use that money for so many other things instead. It’s simply not fair. If they can “escape” paying the tax in full amount, they why not us? Then what would happen? Would we be able to experience the luxuries of maintained, smooth roads, or having public education or other services? Most likely not. We need to pay our taxes, no matter how much money you make. It’s to benefit us and make our lives better. 

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