May.26, 2010

WHAT is black money? An asset or a value as the result of an illegal act, which may involve actions such as tax evasion or false accounting including the practice of engaging in financial transactions in order to conceal the identity, source, and/or destination of money, and is, among others, a main operation of the underground economy practiced by individuals, small and large businesses, corrupt officials and members of organized crime, through a complex network of shell companies and trusts based in offshore tax havens.

l Consequences of black money: Decrease in govt. revenues; decrease in quality & quantity of public goods & services; higher taxes & inflation; difficulty in monetary & fiscal policy formulation; increase in criminal activities.

l Conversion from black to white: Amnesty schemes (VDIS); Demonetising higher denomination currency.

l Controlling the Black Money: Prevention of black money through clean, transparent and accountable governance; zero tolerant transparent fiscal accountability; proper tax structure (income tax, vat and other revenues fees and charges); compliance friendly simple rules & regulations; use of e-money; efficient & powerful i.t. & vigilance dept; awareness of benefits of tax payment.

Breeding of Black Money: Clandestine international arms, weapons and nuclear deals, , expenditures incurred by security and intelligence agencies at home and abroad, financing of terrorist activities, phantom Aid and projects, all sorts of elections, kickbacks from ADP, public procurements and purchases, tender and public works, properties sales and purchase, bribes and speed money, deals with foreign investors in power, mining, oil and gas exploration, money laundering by multinational companies, big business houses and others to tax havens, drug trafficking, smuggling, extortion, transfer, promotion and postings, tax evasion by businessmen, politicians, lawyers, engineers, doctors, consultants and research scholars, high officials and elites of the society holding unaccounted wealth power and properties. Illicit transactions of corrupt politicians, professionals, and NGOs so that black money from inappropriate sources may be illegally used for personal gains.

Where is black money? In Bangladesh black money is used for grabbing assets like land, residential buildings, commercial and industrial undertakings, shares, savings certificates, etc. and quite a big part is in banks, financial institutions and investment companies. The holders of black money are also engaged in underground and illicit activities such as drug trafficking, smuggling, capital flight through 'hundi', running underground network of political and terrorist activities, bribing to acquire big business etc. Huge money is also lavishly spent on foreign tours and private functions. But the major part leaves the country for holding huge assets in tax havens abroad.

Black Money laundering (cleaning): The act of "money laundering" methods was devised to disguise the origins of money generated by the sale of then-illegal alcoholic beverages. Following Al Capone's 1931 conviction for tax evasion, mobster Meyer Lansky transferred funds from Florida "carpet joints" (small casinos) to accounts overseas. After the 1934 Swiss Banking Act, which created the principle of bank secrecy, Meyer Lansky bought a Swiss bank to which he would transfer his illegal funds ("capital flight") through a complex system of shell companies, holding companies, and offshore accounts.

The first reference to the term "money laundering" itself actually surfaced during the Watergate scandal. US President Richard Nixon's "Committee to Re-elect the President" moved illegal campaign contributions to Mexico, then brought the money back through a company in Miami. It was Britain's Guardian newspaper that coined the term, referring to the process as "laundering (Cleaning)"

A shell corporation is defined as "a company that is incorporated, but has no significant assets or operations." Shell corporations are not in themselves illegal and they may have legitimate business purposes. However, they are a main component of the underground economy, especially those based in tax havens. They may also be known as International Business Corporations (IBCs), Personal Investment Companies (PICs), front companies, or "mailbox" companies. A classic tax avoidance operation is based on the buying and selling through tax haven shell companies to disguise true profits. The firm does its international operations through this shell corporation, thus not having to report to its country the sums involved, avoiding any taxes. Oxfam International calculates that the money flowing out from developing countries and deposited in tax havens at $50 billion a year.

A tax haven is a place where certain taxes are levied at a low rate or not at all. "What ... identifies an area as a tax haven is the existence of a composite tax structure established deliberately to take advantage of, and exploit, a worldwide demand for opportunities to engage in tax avoidance." The central feature of a tax haven is that its laws and other measures can be used to evade or avoid the tax laws or regulations of other jurisdictions.

There are some 55 "offshore" tax haven zones, including legendary Switzerland; the Caribbean with money-laundries Grand Cayman, Antigua, Aruba and the British Virgin Islands; European favorites Luxembourg, Liechtenstein, Monaco, Austria, Cyprus; and British Channel Islands Jersey, Guernsey, Isle of Man. An offshore financial centre (OFC) is usually a low-tax, lightly regulated jurisdiction which specializes in providing the corporate and commercial infrastructure to facilitate the use of that jurisdiction for the formation of offshore companies and for the investment of offshore funds. The IMF considers the following to be characteristics of an offshore financial centre:

l Jurisdictions that have relatively large numbers of financial institutions engaged primarily in business with non-residents;

l Financial systems with external assets and liabilities out of proportion to domestic financial intermediation designed to finance domestic economies; and

l Centres which provide some or all of the following services: low or zero taxation; moderate or light financial regulation; banking secrecy and anonymity.

Recycling Black Money: Firms set up offshore "subsidiaries" in a tax haven which, on their books, perform functions that let them cut onshore taxes. They may sell their own "logo" to the subsidiary and then pay a high price to "rent" it back, deducting "rent" as expense. They may move money to the subsidiary and "borrow" it back, deducting interest payments. If several of their subsidiaries are involved in a deal, the firms may grossly inflate profits assigned to those in offshore tax havens, which levy no or minimal taxes on "profits".

The drug industry, where real cost of goods to manufacture drugs is usually around 5.0% of selling price, has a lot of room to artificially increase that cost of goods to 50% or 75% of selling price. This money is then accumulated in corporate tax-havens where the drugs are manufactured, such as Puerto Rico and Ireland. Puerto Rico has for many years attracted lots of pharmaceutical plants and Ireland is the new destination for such facilities because of the low taxes. Ireland has, in fact, one of the world's lowest corporate tax rates with a maximum rate of 12.5 per cent. In Puerto Rico, over a quarter of the country's gross domestic product already comes from pharmaceutical manufacturing. According to the U.S. Federal Tax Reform Act of 1976, manufacturers are permitted to repatriate profits from Puerto Rico to the U.S. free of U.S. federal taxes. And by the way, the Puerto Rico withholding tax is only 10%.

Microsoft Corp recently saved at least $500 million from its annual tax bill using a similar strategy to the one the drug industry has used for so many years. Microsoft has set up a subsidiary in Ireland, called Round Island One Ltd. This company pays more than $300 million in taxes to this small island country with only 4 million inhabitants, and most of this comes from licensing fees for copyrighted software, originally developed in the U.S. Round Island paid a total of just under $17 million in taxes to about 20 other countries, with more than 300 million people. The result of this was that Microsoft's world-wide tax rate plunged to 26 per cent in 2004, from 33 per cent the year before. Most of the other tech companies are also doing the same thing.

IPR Trick: A company takes patented product and then develops a new generation. Then, of course, the old product disappears. Some, or all, of the cost and development work for the new product takes place in Ireland, or at least, so the company claims. The ownership of the new generation product and all income from licensing can then legally be shared between the U.S. parent company and the offshore corporation or transferred outright to the tax-haven. In fact, according to Business Week, U.S. multinational corporations have built up profits of as much as $750 billion overseas, much of it in tax havens such as the Ireland, Bahamas, and Singapore to avoid the stiff 35% levy they'd face if they repatriated the funds back into the U.S.