Capital Origin

FEBRUARY 17, 2016

Capital Origin
In recent years, the fight against shadow incomes in the world intensified. So much so that in 2017 there will be no banking secrecy anymore, and many countries will exchange information about their citizens. In 2017, there will be over 50 such countries, and in 2018, this number could reach hundreds. It is especially significant after the so-called “Panama scandal”, when it turned out that a number of officials, among them the first persons of states from around the world, members of their families, businessmen, cultural workers and artists, athletes and other celebrities are shareholders, directors or beneficiaries for offshore companies registered in Panama. On the one hand, there is nothing illegal in investing abroad or doing business abroad. On the other hand, such information may indicate that these people want to hide their financial situation from the tax authorities in their own country.
The main reason why governments began to fight “shadow” capital is tax evasion, concealment of income or removing it abroad, and sometimes the use of funds in not entirely legitimate operations (financing of terrorism, illegal arms and drug trafficking, etc.).
As a rule, the question of the origin of capital arises from the tax authorities and agencies, who combating money laundering, when an investor is buying major assets in his own country or withdraws funds for investment abroad.
However, honest taxpayers need not fear exchange of tax information. In fact there are more than enough legitimate ways to earn capital, even very large one. Apart from wages, the standard source of income, capital can be earned through passive income, i.e. income that does not require participation of the investor. These include interest income from deposits, coupon income from bonds, dividends, investments in precious metals (precious metals or bullion), income from sales of securities (shares, bonds, certificates of investment funds), as well as income from real estate investments. Property can bring profit from both rental and its subsequent resale.
The key problem with its legalization is documental proof. If wages, pensions, social benefits, interest income, dividends, income from investments in investment funds usually cause no questions, in case of operations with securities and real estate, as well as the sale of business, certain nuances appear.
The matter is that sometimes entrepreneurs are trying to “blow up” the amount of capital at the expense of fictitious securities transactions. It is not the first year when regulators of stock markets in a number of countries around the world are struggling with the so-called “junk” securities, insider information trading and trading between related parties. For example, an entrepreneur should have a specified amount of capital on the balance sheet by a certain date. The entrepreneur’s assets include only shares. Their market value is far below the required amount. In this case, the holder of securities conducts several sales and purchases of shares at the desired inflated price through associated persons. As a result, stock prices are growing, and evaluation of the entrepreneur’s capital grows with them, although he has the same shares as assets. On the stock exchanges, there were cases when assets of investors contained securities that were worth nothing, but at the expense of stock price manipulation, their price skyrocketed.
There also arise problems with the property assessment: investors show overestimated value of their assets, but in fact, for the apartment, land or house it is often impossible to bail out even half of the claimed amount. In such cases, it is necessary to carry out an investigation or engage independent evaluators who can give an opinion on the value of certain assets.

Author: Ignas Jurkonis