Tax avoidance (technically legal) and tax evasion (illegal) are universal. They take place in all societies, all industries, and all economic systems. It is an open secret among companies that with a bit of know-how taxes on profit can be very low. It is regrettable how little attention this phenomenon has received, although it directly concerns the welfare of the country and the quality of citizenship.
In the past few weeks, Korea Center for investigative Journalism (KCIJ), a non-profit independent news agency also known as Newstapa, along with National Tax Service (NTS) have exposed companies and prominent figures in South Korea suspected of tax evasion through paper companies and offshore accounts. Executives and family members connected to Hyosung, OCI, Korean Air, Daewoo International, Hanjin Shipping, SK and Hanwha have been found to own paper companies in tax havens.
It’s a good sign there are certain groups dedicated to disclosing tax frauds, however there should also be efforts in explaining why such frauds are a big social problem, how it affects the economy, and how they prevent honest taxpayers from enjoying their economic rights.
These efforts would help boost public attention and support, especially when they are essential in pushing the NTS to continue the investigation and to bring transparency in the investigation itself. Fiscal policy (tax policy) is one of the most important steering instruments of governments. The true priorities of policies are often revealed by where and how much budget is being allocated to each sector. Whether the government has raised its social welfare budgets, and who enjoys the tax reliefs are indicators to whether the government is fulfilling their international and national commitments, which includes the realization of human rights.
Fiscal policy is important in realizing human rights, while it can raise revenue to finance public goods and services, and contribute to redistribution of income and assets from the richer to the poorer strata of society. A sufficient provision of public resources is particularly important in realizing economic, social, and cultural rights (ESC rights). However we often witness the government solving the problems of fiscal deficit by raising tax rates or cutting the public spending, rather than trying to reduce the tax gap. It ends up burdening a higher percentage of the low-income strata than of the high-income strata.
There are multiple causes to tax evasion: weak tax authorities, insufficient taxation systems, tax havens and shadow finance centers, price manipulation in intra-group trading, and lack of transparency in payment flows.
Fiscal policy reforms and strengthening of the tax authorities followed by active participation of the public are necessary to bring tax justice. The corporations would have to provide complete disclosure for all subsidiaries and holdings of the countries in which they are making profits and paying tax, giving details of the respective amounts involved, in their annual statements and financial reports. To bring transparency in the information they provide, tax authorities around the world should share the information to cross-check validity of the information, which would enhance the accountability of implementing the tax policy.
Efforts in bringing public awareness to tax frauds should continue for it to make any difference to the current fiscal policy. However, it shouldn’t stop in just revealing the problem; it should also keep the public interested, and encourage them to participate in solving the problem. A question should be raised over whether there would be a place for NGOs and human rights organizations to take part in this process.