Finance ministry tends to lump tax evasion with legal tax avoidance

The tax-collecting Ministerio de Hacienda has criticized tax avoidance as well as tax evasion in the wake of disclosures generated by the Panamá papers.

A statement under the name of Helio Fallas, first vice president and the minister of Hacienda, carries the headline “evasion and avoidance part of the same sickness.”

This has been a continuing theme by the ministry even though evasion is illegal and avoidance is structuring one’s financial affairs in a legal way in order to pay the lowest amount of taxes.

Even the U.S. Supreme Court has recognized the legality of tax avoidance: “The legal right of an individual to decrease the amount of what would otherwise be his taxes or altogether avoid them, by means which the law permits, cannot be doubted.” That was said in 1918.

Fallas is pushing for more income tax and higher tax rates. But he also wants a law that requires Costa Rican corporations to identify shareholders. Presumably the tax collectors would link these shareholder lists to dividends paid and verify that the amounts have been reported as income.

The business community generally opposes making the lists available even to tax officials. Some fear crooks will get a hold of the lists to pick kidnapping targets or for other evil purposes. Some simply prefer privacy.

Fallas also, like most other tax collectors, would like to end the use of offshore accounts located in countries with little or no tax. U.S. tax law requires reporting and payment of income derived worldwide. The Costa Rica code only covers income generated within the country.

Fallas blamed some of the avoidance on obsolete tax laws. He also criticized offshore corporations that are created to take advantage of the favorable tax treatment in places the government calls tax paradises.

He also blamed gaps in the the country’s regulations.

U.S. companies go so far as to establish subsidiaries in other countries to gain a tax break. Other firms simply move headquarters to a more tax-friendly jurisdiction.

Costa Ricans only have to go to nearby Panamá, although officials there have promised changes in the law after the disclosures stolen from a law firm showed heavy use of offshore accounts.

More than 2,000 U.S. citizens surrender their nationality each year to avoid the country’s tax code, although there can be a big financial penalty.

Offshore accounts at least are a counter weight to national legislatures enacting higher tax rates.

David Cameron, the British prime minister, was among those found to have power over an offshore account.

The finance ministry’s narrow view of how individuals and firms should avoid taxation shows up in the traditional Costa Rican policy of decreeing that many tax payments cannot be applied as tax deductions.

The government’s hopes for quick passage of its tax package have been dashed with the reappointment of Rosibel Ramos Madrigal as head of the legislature’s Comisión Permanente de Asuntos Hacendarios. She was less than enthusiastic last year in advancing the government’s proposal out of committee.

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