Paul L. Caron

Friday, March 3, 2023

Weekly SSRN Tax Article Review And Roundup: Eyal-Cohen Reviews The Interconnections Between Corruption And Tax Crimes By Ring & Grasso

This week, Mirit Eyal-Cohen (Alabama; Google Scholar) reviews Diane Ring (Boston College; Google Scholar) & Costantino Grasso (Manchester Metropolitan; Google Scholar), Beyond Bribery: Exploring the Intimate Interconnections Between Corruption and Tax Crimes, 85 L. & Contemp. Probs. 1 (2022).


Complex economic crimes have emerged as a major menace to the international society in recent years. Yet, few studies have investigated the connections between tax fraud and corruption. While “corruption” has been referenced within the tax abuse context, analysis has been mostly focused on “bribery,” i.e. paying a government official to avoid taxes. There remains a wide gap between the two ends of such spectrum, in which tax avoidance and evasion play a significant role. Various forms of corruption such as “nepotism, asynchronous exchanges, and unreciprocated but corrupt granting of favors” are not included in international terminology as of yet. The legal literature generally rejects a corruption theory beyond bribery. Legal experts appear to oppose a more comprehensive definition of corruption for several reasons including, but not limited to, lack of supported evidence, difficulties to uncover, prove, and publicize tax corruption, and infractions of the “Principle of legality.”

This Article delves into the intricate web of connections between tax crimes and corruption, arguing that a myopic view of the issue has the potential to distort justice by fostering the spread of a false narrative and ignoring the impact of other, more pervasive forms of corruption on efforts to constrain tax offenses. Although many contemporary democracies have made progress in cracking down on bribery, they have stalled when it comes to dealing with other, more persistent types of corruption. The Article does an excellent job providing new ways of conceptualizing the phenomenon. It expands our understanding of corruption and outlines a wide range of harmful tax behavior beyond the few categories of tax offenses that exist nowadays. It provides new lens through which to view problems like tax evasion. It adds to our understanding of how tax misuse and corruption work together and reinforce each other and provides instances of how these issues affect governance and democracy.

Upper class, respected businesspeople, and corporate executives sometimes engage in tax-related corruption by paying bribes to public officials to avoid tax investigations or facilitate complex tax or customs frauds and to generate ill-gotten money that can be “invested” in larger corruption schemes. Tax crime and corruption have formed a symbiotic connection since the late 1990s with the rise in the practice of secrecy in the movement of money internationally. Tax havens and legal loopholes aggravate the situation. Moreover, it is much more challenging today to crack down on tax abuse and fraud by major firms as corporate leaders are seldom prosecuted.

Viewing tax offenses and corruption as crimes of the wealthy highlights their potential to pervert justice. Tax abuse—defined in the article as evading or lowering tax responsibility against the law—and the corrupt practices that allow it, impair justice in a democratic society. They rob countries of essential resources to provide equal liberty and fair opportunity for everyone. Even though taxpayers may legally lower their tax obligation while following the word and spirit of the law, unlawful or unethical activities that evade the tax system are unjust and unfair. Tax abuses hurt the state’s finances and make officials and financial elites more likely to break the law, starting a cycle of corruption and illegitimacy. The fact that people who can divert money into tax havens or secrecy countries may commit tax violations exacerbates this injustice.

This Article takes a close look at several common arrangements, such as unethical lobbying practices, corporate power distortions of the democratic process, and undue interference with anti-tax evasion strategies adopted by counties to compete with each other using preferential tax regimes or “sweetheart deals.” Sweetheart tax agreements and classic corruption both depend on firms with enormous worldwide wealth and market power to urge a country to break from its tax regulations to gain some benefit from having them remain in its jurisdiction. The secretive nature of these special tax arrangements and lack of transparency suggests that corporate entities use their economic clout to obfuscate tax privileges from the political environment and frustrate attempts to establish adequate transparency for identifying and countering potentially corrupt practices. The U.S. industry opposition to anti-corruption transparency measures for foreign government agreements illustrates this connection. Such agreements undermine social and economic trust and act as destabilizing forces in democratic environment. They encourage tax misuse and may deter market actors who see the tax system as unjust.

The Article demonstrates that corruption and tax misuse overlap in many ways. This dynamic has been epitomized by the LuxLeaks controversy, in which a number of papers disclosed the preferential tax arrangements the Luxembourg government had made with several international corporations. Another example is the Apple-Ireland Tax Litigation when Apple transferred its “crown jewels” to a foreign subsidiary that had no workers and minimal activity, implementing a complicated and self-serving cost-sharing agreement. Apple subsidiaries were permitted to direct the majority of their income to a “headquarters” that had no physical location and no workers thanks to a unique deal with Ireland. In its final ruling, the European Commission determined that Ireland had illegally provided state assistance to the Apple group by engaging into the contentious tax arrangements, in violation of the Treaty on the Functioning of the European Union and ordered Ireland to reclaim the unpaid tax. The General Court overturned the Commission’s ruling against Ireland on state assistance, but this did not make the agreement legal. The jury is still out on this case as the European Court of Justice is now hearing an appeal filed by the Commission.

The Article uses the standard international definition of corruption as misuse of authority for private gain and go on to expand the intricacies of corrupt activities such as favoritism, self-interested lobbying, and conflicts of interest. It defines tax abuse as encompassing not only tax evasion and other tax offenses but also the unethical and cynical exploitation of lawful loopholes to reduce tax liabilities in contravention of the spirit of the law. It uses a comprehensive strategy that involves criminological and socio-legal literature, analyzing high-profile cases, and integrating data from the worldwide research project VIRTEU (a two-year international research project on Interdisciplinary Research on Tax Crimes in the European Union, which aimed at exploring the interconnections between tax crimes and corruption).

The Article indicates several dynamics in tax practice that create vast opportunities for tax abuse. It points a finger at tax professionals, especially major accountancy and legal companies, who sometimes abuse their power to influence political decisions due to tax systems’ complexity. The VIRTEU initiative findings reinforce that notion that excessive corporate influence drives the tax advising industry’s prevalence and profitability. This is exacerbated when accounting firms commonly provide both auditing and advisory to the same clients, which creates an apparent ethical tension. The Big Four also influence the shaping of tax law, corporate accounting, and auditing regulations. Academics who advise major private companies like accounting and law firms may also consult the government, courts, and top attorneys and accountants to help untangle complex and opaque tax strategies. Likewise, the Revolving Door, where public sector officials move to the private sector and vice versa, also contributes to fostering tax corruption. When public officials join the private sector, their access to key officials and intimate knowledge of internal investigatory operations and strategies may allow them to provide the private organization with non-public information and insights that may help lobbying, designing tax avoidance structures, and avoiding enforcement detection.

Corruption at the national level has far-reaching consequences that include not only misuse of tax dollars but also weakening societal cohesion and tax compliance norms. It can lead to skewing political decision-making to the point of “state capture” (industry shaping of government’s agenda). Examples of such state capture include misuse of public office as influential people exert undue pressure on state institutions in order to further their own interests via the passage of laws, the awarding of contracts, or the granting of special favors. Corruption and tax misuse threaten the capacity of all nations to maintain a stable income stream based on democratic values of fairness and equality. The rapid proliferation of tax abuse “gray zones” by wealthy people and companies’ tax advisors enables the use of legal loopholes in the tax framework to lower (and even eliminate altogether) tax burdens. Even obvious tax abuse is difficult to prosecute due to legal ambiguity. The lack of transparency caused by the mix of administrative discretion, high complexity, and little public disclosure all contribute to increasing the likelihood that certain taxpayers may misuse the tax system, which is problematic in a democratic society. Governments must have a deep grasp of the factors at play to meet this challenge.

This important Article promotes a broader definition of corruption and tax misconduct. The answer is not simple, quick, or risk-free, but the established consequences from inaction should motivate researchers, politicians, and government actors. By instigating a dialogue and providing a framework for reconsidering the negative influence of political, social, and economic elites, this Article makes a significant contribution to the literature on tax and criminal law. Future research is needed on expanding the definition of corruption to include criminal schemes that relate to unethical and corrupt practices in taxation.

Here's the rest of this week's SSRN Tax Roundup:

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