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Tax Evasion, Parex Style 7

According to "Nothing Personal" ("Nekā Personīga"), a TV3 show, Valerijs Kargins and Viktors Krasovickis, the ex-masters of recently nationalized Parex bank, each had a loan of 28 million LVL from Parex bank, which they then deposited in their own bank at an annual interest rate of 36%. This is a rather novel way to pay yourself a salary.

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Why did they do this? There are two likely reasons. First, I wonder whether smaller shareholders knew. The second, and more interesting, explanation is plain tax avoidance. In contrast to salaries, or even dividends, interest income is tax free in this fine country. Of course, an important question is whether Mr. Kargins and Mr. Krasovickis were involved in tax avoidance or tax evasion. I am not a legal person but I know that in many countries tax evasion is considered to be a criminal offense.

Now, I am not surprised that the rich are also trying hard not to pay their taxes. Nobody likes paying taxes. But what does surprise me is that Mr. Kargin and Mr. Krasovickis could do it in a way that was so …SIMPLE. Seriously, I am disappointed. I expected the world to be a lot more sophisticated than this. I thought avoiding taxes was not easy. I thought that in order to outwit the tax authorities one had to be real smart, employ mind-boggling schemes involving off-shore companies, complex financial transactions and what not!

Well, this all raises a number of interesting questions. First, didn't Financial and Capital Markets Commission (FKTK) know? If they did know but did nothing about it, doesn't it make them complicit in tax avoidance/evasion (whatever it is)? If they didn't know about this, what DO they know about the banks they're supposed to supervise??! Frankly speaking, I don't know which of the above versions is scarier, especially given today's economic situation. Second, what about the State Revenue Service (VID)? Is it a big secret that Mr. Kargins and Mr. Krasovickis are owners of a large bank and, therefore, earn substantial amount of money, which, well, in principle, should be subject to tax? If these gentlemen could avoid paying their taxes in such a simple way, what does it tell about the tax authorities? Finally, this story only came to surface because Parex ended up nationalized. Nationalization happened quite some time ago but, if my memory serves me right, no public official rushed to tell us about these miraculous deposits. On the contrary, it appears to have been leaked by an anonymous source. It all makes me wonder about how many other bankers are doing something like this? Moreover, how many of their friends, and the friends of their friends, etc. evade taxes like this?

In Latvian here

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Komentāri (7) secība: augoša / dilstoša

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->local 12.12.2008 12:43
i should clear that from a legal point of view imho K&K were misusing their power in company, not rewarding themselves - also bad, but a sowmewhat different thing here. p.s. not a lawyer, though

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->local 12.12.2008 12:17
you are rewarded illegally for employment (not like K&K), i bet it's illegal; and with bank transactions with additional parties involved it may be easier to track you down, especially if it becomes a common practice for the "bank"

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local 12.12.2008 10:49
Well...the problem with "aplokšņu alga" is that it is not allways easy for emploer to hide it, not allways easy to find free cash which can be used for this transaction (because you cannot make a transaction "aplokšņu alga" in accounts...), and there is allways a risk of being caught. If the above mentioned solution is legal (though a bit unethical), it could be an improvement if any of mentioned shortcommings of "aplokšņu algas" are a problem for the employer.

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->local 12.12.2008 10:40
if you have no interest in the financial institution i'd say you'd be better off with plain and simple aplokšņu alga.

Difference in K&K case appears to be that they were willing to keep the money exactly in Parex (stockholders, after all).

so the situation would be different if e.g. your employer (or friends) somehow owns the financial institution - if your & amployer's combined deposit is less than the loan , financial institution gets something out of it anyway.
Then come the bankruptcy risks, but that's a different story

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Local 11.12.2008 10:45
As far as I understand, this is considered legal in Latvia.

I really do not want to pay any more taxes (except VAT, which is hard to avoid) to this country, as I have a strong feeling that rate of return to me from paying them (including non-tangible good feeling generated from caring about other citizens of Latvia) is less than for other investment possibilities.

Now I guess I have found a way how to avoid paying taxes from salary to government.

At first there must be some financial intermediary (can be very small), which would agree to help me. According to plan, I would take a credit from bank at some 15% interest rate (market rate), and simulateneously make a deposit earning 45% (should be legal - bank can explain such a rate by saying that I'm a loyal customer, for example). Then, my employer makes a deposit earning 10% (or any market rate, as he is not a "loyal customer"), and simultaneously take a loan with some 60% interest rate (if tax inspectors have interest, bank can say that it evaluates firm risky, thus the high interest rate charged, firm can say, that other banks are not giving loans, or other excuse - should be legal imho).

The result - I have my salary by receiving generous, tax-free interest on my deposit, employer pays no taxes on me. Bank gets fair share of 3-5% for making this transaction possible. Everyone is happy. For me as employee, the downisde is:
1) I will not get pension when I'm old. But, given life expectancy form males = 60 years in Latvia, and possibility of pension fund being looted / some other global, pension fund-destoying events (war, etc.) happening in the meantime, I consider this a minor loss.
2) I will have little work experience in my CV. This is worse, but assuming I get skills while working anyway, should be managable.

What do you thing about such a plan? Would it be legal, and could I find financial intermediary (now, when Parex is almost gone...:))) ) that would agree to such profit opportunity in this hard period for financial firms...?

Best,
---Local

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x 10.12.2008 18:08
and where do you find any legal provisions against having such a deposit? criminal law is not anything like philosophy:))

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