Tax Avoidance and Complex Business Structures

From the NYTIMES:

Mossack Fonseca employees were named as the companies’ officers, avoiding whenever possible any link to the Ponsoldt family. The firm even asked a Hong Kong branch of Barclays, the international bank, to override its rules for proof of the so-called beneficial owners of the accounts.

“This is a very special client of ours,” a Mossack Fonseca lawyer wrote, conceding that the firm had intentionally created such a maze of companies so it “leaves us in the position to legally argue that our client is NOT the owner of the structure.” It was not clear if the bank complied.

In a recent paper on business ownership and taxation in the United States, we found complex ownership structures to be common place in the partnership sector:

Partnership ownership is not only concentrated, but also opaque. First, twenty percent of partnership income is earned by partners that we have not been able to classify in ad- ministrative data. Second, following money through partnership structures—between the partnership generating the income and the ultimate owners taxed on that income—proves challenging as well. We develop an algorithm that recursively traces income through partnership structures to ultimate non-partnership owners and attempts to assign that income back to an originating partnership. This recursive algorithm reaches a fixed point before all partnership income has been successfully assigned: fifteen percent of income is in circular structures and cannot be uniquely linked to an originating partnership. Together, the union of income flowing (1) to unclassifiable partners and (2) through circular partnerships amounts to $200 billion or thirty percent of income earned in the partnership sector overall.

About ozidar

I'm an Assistant Professor of Economics at the University of Chicago Booth School of Business and a Faculty Research Fellow at National Bureau of Economic Research. You can follow me on twitter @omzidar.
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