ANALYSING TAX VEHICLES AS TAX EVASION METHODS: USING SHELL COMPANIES AS A CASE STUDY

Tax havens can be defined as countries that can finance their public services with no or nominal income taxes and offer themselves as places to be used by non-residents to escape tax in their country of residence. [1] ^[2] In other words, tax havens are countries that do not have resources but primarily get their revenue from creating an avenue for rich individuals and corporations. They can be classified as territories that offer low tax rates and favourable regulatory policies to foreign investors.

To understand how these vehicles are used to evade tax, a distinction must be made between tax avoidance and tax evasion. Tax avoidance is defined by Her Majesty’s Revenue and Customs (HMRC), as ‘’the bending of the rules of the tax system to gain a tax advantage that parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose than to produce this advantage. It involves operating within the letter but not the spirit of the law.’’[2] ^[3] Whilst, tax evasion was defined as ‘’when people or businesses deliberately do not declare and account for the taxes that they owe. It includes the hidden economy, where people conceal their presence or taxable sources of income’’.[3] ^[4] Tax avoidance is completely legal and it is the use of tax laws to reduce one’s tax burden.

Some of these vehicles are peculiar to certain jurisdictions. Some of these tax vehicles are:

▪        Shell company/corporations.

▪        Trust funds.

▪        Hedge funds.

▪        Bearer shares.

▪        Corporate Secrecy.

▪        Illegal Re-invoicing.

▪        This article seeks to critically analyse how Shell companies could be considered as tax evasion methods.

SHELL COMPANIES

A Shell company is an organisation with financial assets, yet no huge business venture. Shell enterprises do not make items, procure workers, or create income. Shell companies can be utilised for unlawful purposes like tax evasion or real purposes like putting away assets or for the creation of new companies.

Shell companies may likewise be known as global business enterprises, post-box organisations, or letter-box companies. This type of company is very peculiar to Panama.

Shell enterprises conceal the personalities of their owners. They can be set up namelessly, letting organisations and people take part in monetary dealings without uncovering their identity.  A business can enjoy lower taxes and access to foreign markets by incorporating a Shell company in a tax haven.

A Shell corporation can be used to do the following:

• Open bank accounts and move funds.
• Engage in financial transactions.
• Buy real estate.
• Own copyrights and collect royalties.

The process of registering a Shell company does not require a lot of personal information. Regularly just the identity of the intermediary acting for the client and the beneficiary of the Shell company is usually required.[4] ^[5] To enhance secrecy, nominee directors are often hired to file the paperwork under their names.[5] ^[6]

Also, to enforce more secrecy, a Shell company could be registered as a subsidiary of an existing Shell company.[6] ^[7] This implies the Shell company is formally owned by another Shell company. Shell companies can repeatedly layer along these lines to create high-level secrecy. This allows the Shell companies to be registered in different countries, thereby protecting the owner from being investigated by any of the countries. Shell companies could be created anywhere in the world but there are certain countries that are receptive to Shell corporations being created in their jurisdictions. These countries are; The Bahamas, Jersey, Luxemburg, Bermuda, The United States of America, The Cayman Islands, Switzerland etc.

Furthermore, the states of Nevada, Delaware and Wyoming are one of the most receptive states with laws that allow the easy creation of Shell corporations.^{[7] [8]} The United States of America can be seen to be the second easiest nation to open a Shell corporation.^{[8] [9]} This can be deduced from the fact that the states of Wyoming, Delaware and Nevada have favourable laws that allow for the easy creation of Shell companies.

Therefore, the degree to which a Shell organisation can genuinely protect the beneficial owner of the property being known would be based on the type of intermediaries that are being used. This would require making all financial transactions look legitimate for the purposes they have been intended for and the jurisdiction where the Shell company has been created and where it has been created to operate from.^{[9] [10]} This is where the role of nominee directors arises. They are usually business partners or family members.^{[10] [11]} In order to enhance secrecy, nominee directors are often hired to file the paperwork under their names.

There are various ways tax evasion could be facilitated using a Shell company. These include but are not limited to:

1. Shelf corporations: A Shelf corporation is an unused Shell company that can be converted for illegal use.[11] ^[12] These companies are usually attractive because they are old and have been established for a while. These companies are easy to buy in places like Wyoming, Nevada, St. Kitts and Nevis.[12] ^[13] Once a Shelf company is purchased, its credit and tax history can be acquired as well to make them look credible. This creates layers of secrecy, making it impossible to identify the beneficial owners.
2. The use of Nominee Directors: Shell companies use nominee directors to bear the legal title in place of the beneficial owner. This requires third parties to be directors of the firm.[13] ^[14] A power of attorney is usually signed to transfer the powers to manage the Shell entity to the beneficial owner. Furthermore, a signed and undated resignation is also provided by the nominee to protect the beneficial owner. This promotes secrecy and protects the identity of the beneficial owner. According to James Ball, twenty-eight nominee directors are in control of over twenty-one thousand companies.