Another harmful tax practice would be tax evasion where it happens when business illegally refrain from paying tax as they might be involved in illegal activities or have misstated the amount they need to pay to the Internal Revenue Service (IRS) (LawFirms, 2012). One of the ways to evade tax is by concealing the money in an off shoring bank account that is usually at country that are still developing that could benefits overseas corporations and individuals (Johnson, 2006). However, these offshore havens are disintegrating foreign tax revenues and may aid tax evasion (Johnson, 2006).
According to William Brittain-Catlin, MNC has been attracted to set up subsidiaries at the common offshore havens, the Cayman Islands in order to be benefited from the confidentiality of the financial jurisdictions and also the non-existence of taxes that allows firms to not paying taxes on the profit generated from the firms (Johnson, 2006). Offshore banking accounts that assure financial confidentiality have allowed firms to conceal their debt in multi offshore bank account that could mislead the firm's investors with incorrect financial statements which would then enhance the investors' confidence and continue to inject money into the firm (Johnson, 2006). For example, when the IRS authority inspects on a suspected offshore bank account that is used by a taxpayer that have the probability to evade the tax obligations, the IRS authority would not be able to get any information about the existence of the bank account as the legislation ensures confidentiality and anonymity (O'Neill, 2001).
Enron Corporation, the infamous corporation that was involved in the biggest financial fraud scandal has shifted hundreds of millions of dollars of debt to offshore accounts in order to hide the weakness in the financial statements (Eichenwald, 2002). However, offshore bank accounts are not illegal when individual or corporation did not misuse the advantages of the offshore bank accounts to aid in tax evasion.
According to Tax Justice Network (TJN), an estimation amount of $21 - $32 trillion of concealed assets is not taxable by stealth as reported by USA where the amount is as much as the combination of American and Japanese GDPs (Stewart, 2012). While the onshore brings advantages to the corporations by providing good public amenities, education and legislation, the offshore helps them to avoid from paying tax (Tax Justice Network, 2005). The offshore is considered as the fiscal black holes and the shadow of economy has contributed a large disproportion in the market (Kilzer and Conte, 2012). The 2009 Global Financial Integrity (GFI) study has concluded that there is an approximately US$850 billion - US$1.1 trillion of annual overseas transactions from developing countries (Tax Justice Network, 2005).
The European Union crisis is getting serious as countries for instances, Greece finding difficulties in paying back their overwhelming debts towards the government (Livesey, 2012). The TJN has examined that Greek taxpayer's €20 billion of money are sheltered and concealed in Swiss bank accounts while there is a cost of evasion of tax and social-security contributions approximately an annual €30 billion estimated by the government (Livesey, 2012). By off-shoring bank accounts has caused the economy in their host-country to deteriorate as the host-country is dependent on the money to funds the economy survival of the host-country (Johnson, 2006).
The Organization for Economic Co-operation and Development (OECD) stated that an amount of US$5 trillion to US$7 trillion are being concealed from the tax authorities through offshore banking which resulted in an annual loss of US$100 billion in tax revenue (Livesey, 2012). For instances, the United States Treasury suffers from an annual $280 billion of loss in their tax revenue (Bowen, 2012). The Congressional Research Service has reported that an annual cost of $70 billion has been resulted from Americans who conceal their money illegally in overseas accounts (Kilzer and Conte, 2012). By hiding money in offshore bank accounts has shifts tax burden to the rest of the taxpayers (Kilzer and Conte, 2012) where the US taxpayer has become the victim (Bowen, 2012). This loss in tax revenue of $280 billion could have help in paying the country's debt and providing infrastructure as well as contributing in the recovery of the economy (Bowen, 2012).
In addition, this practice has also harmed developing countries by reducing their tax revenue that is used to ease the countries' financial crisis (Bowen, 2012). For instances, Ethiopia with a 94 million population with per capita income of only $1000 has been receiving support of $829 million for their development (Kilzer and Conte, 2012). However, it is found through The Global Financial analysis that the aristocratic of Ethiopia have been shifting a total of $3.26 billion out of Ethiopia (Kilzer and Conte, 2012).
Generally, a resident in Malaysia for whether he/she is an individual or a business entity can has foreign currency accounts with onshore licensed banks or foreign banks based on any intention (PwC, 2012c). Malaysia's government has been coming up with acts or engaging with other countries' legislation in order to address the issue of tax evasion which involves the illegality of offshore bank accounts.
The 2011 Financial Secrecy Index has positioned Malaysia at the 27th place where the country is still transforming in order to provide sufficient financial explicitness that could obstruct and inhibit illegal financial transactions (Tax Justice Network, 2011).
All tax havens and financial institutions where Malaysia is included with the existence of Labuan Offshore Financial Center have agreed to comply with international tax standard based on the Harmful Tax Practices by OECD. This is only when there is an information exchange for the information is criminal or civil through double tax conventions (DTC) and tax information exchange agreements (TIEA), uptight concealment of exchange of information, righteous information and the authority to acquire information (ISLA Associates Ltd., 2012).
The New Zealand's Revenue Minister, Peter Dunner has enter into an agreement that alters the current double tax agreement (DTA) with Malaysia that would be a great help in communicating tax information to fight tax evasion between both countries (Stewart, 2012). In addition, the Treasury Department of U.S. has been engaging with over 50 countries in order to enhance the worldwide tax agreement and enforce the guidelines for reporting information and tax withheld which are known as the Foreign Account Tax Compliance Act (FATCA) (Treasury, 2012). FATCA is enforced in U.S. to prevent Americans from keeping money from the tax collector offshore (TheStar Online, 2012d). However, the U.S. Treasury Department is still communicating with Malaysia in order to conclude these agreements (Treasury, 2012).
