What is capital flight? And what is tax avoidance and evasion? We’ve talked about how the rich shape democratic decisions. This is about how they escape decisions. In this video, I’ll explain the basic concepts... namely real and virtual capital flight, tax evasion and tax avoidance. Real capital flight is when people move their properties or businesses... to escape demands from governments. Important demands are taxes. Imagine a company in Brazil, that makes 100 million dollars profit. The corporate rate in Brazil is 34 percent, so they’ll have to pay 34 million in taxes. But in Bulgaria, the corporate tax rate is only ten percent. If they move there, the company would save 24 million dollars. When it comes to real capital flight, a company has to physically move. The Brazil company should close its factory and build a new one elsewhere, in Bulgaria. Besides real capital flight, there’s also virtual capital flight. In this version of capital flight, nothing has to physically move. Owners keep their property in the same place, whether that’s land, buildings or machines. The company makes and sells products in the same places. What changes is the legal location. Virtual capital flight uses legal tricks to label the business location differently. In reality, the location doesn’t change. But the consequences are very real. It means less tax money... for governments to spend on things, like schools, hospitals or roads. Within the category of virtual capital flight, there are some important distinctions. One difference is between illegal activities and legal activities. Virtual capital flight that is illegal is called tax evasion. Activities that are technically allowed are called tax avoidance. There’s a large grey area between the two, leaving discretion to authorities and judges. Another important difference is between attempts to escape taxes on wealth... and attempts to escape taxes on income. Escaping tax on wealth is done by individuals... and it’s often illegal, so tax evasion. Escaping taxes on income... is attempted more by companies. It’s often legal, so tax avoidance. I’m going to give you a brief idea of how people evade or avoid taxes... using international transactions. Increasing amounts of money are hidden offshore. You shouldn’t think of offshore as any particular place or country... or a place literally on another shore. Offshore is anywhere that enables you... to escape the rules in your own country. How can individuals escape taxes on wealth? The idea is to make yourself look poorer in the eyes of the authorities in the country. You can do this by setting up a so-called shell company offshore... that will keep your identity secret and not ask too many questions. This shell company can be owned by another one, That one owned by another, and so on. Finally, you transfer the ownership of your assets - your houses, businesses - to this company. When the tax authorities look at your properties... they see properties owned by anonymous foreign corporations. It’s difficult to connect properties to you and make you pay taxes on them. You can pay taxes at the extremely low rates of where your shell companies are located. Places like Panama or the Bahama’s. At the same time, you enjoy the benefits... of living in countries with higher taxes, like Germany or Japan. This is a simplified version of these tactics, but the schemes can get incredibly complex. That’s the whole point of them. The complexity is meant to confuse authorities. Let’s move on to how international companies escape taxes on their profits. The goal is to make the company’s profits appear someplace where taxes are low. Imagine a business that designs shoes in Ireland, and makes them in India. Which part should be taxed in Ireland, and which part in India? What governments have agreed to is to pretend... that the Ireland branch and the India branch are separate companies. The Irish governments taxes the Irish branch, and the Indian government the Indian branch. When the shoemakers in India get the designs from Ireland... we ask what price they would have paid if they’d bought them from someone else. These are called the transfer prices. By using transfer prices, we can work out... what profit the branches would have made if they were separate companies. This level of profit should be taxed by the separate governments. The trouble is that companies got good at manipulating transfer prices. Companies want to pretend the designs are the profitable part of the business... and putting the shoe together is not, so they can make more profits in Ireland... where taxes are 12,5 percent, and less in India, with 35 percent taxes. Again, this is a simplified version of only one of the tactics companies use. It can get very complex, and this complexity is deliberate. These were the basic concepts. You can apply them in the next activity.