Offshore investments after the Paradise Papers

The Panama Papers and, more recently, the Paradise Papers have exposed such high levels of legal tax avoidance that governments are now under increasing pressure to address them.

But what is the likelihood of multilateral co-operation – and what would the impacts on accountants be if such legislation were to come through?

‘Paradise Papers’ became the nickname for some 13 million documents that were leaked to the German newspaper Suddendeutsche Zeitun. Approximately half of the documents were linked to the offshore legal service provider Appleby. Appleby operates from the Seychelles, the British Virgin Islands, Bermuda and the Cayman Islands – hence the nickname.

Offshoring is nothing new, but it has become more widespread due to changes that occurred with legal tax efficiency advisors in the last decade.

Tax packages

“After the global financial crisis, there was a round of mergers and acquisitions in the offshore provider industry itself,” says Mark Konza, deputy commissioner at the Australian Taxation Office, quoted in The Guardian. “Some large networks have begun to emerge…. one company we know has offices in 46 jurisdictions around the world, through constant merger and acquisition activity.”

Some of these companies offer “tax packages” to wealthy individuals and these services are publicly advertised. In practice, the package helps to “set up a company in one jurisdiction, then help that company obtain a bank account in a second jurisdiction and a business address in a third jurisdiction,” according to Gareth Hutchens in the article.

Konza questions the legality of these activities. “They would say they give you the arrangements, they give you the tools, but what you do with them is up to you. So they try to stay morally ambivalent.” Some websites “have various case studies on them, showing it’s possible to be done. One of my favourite case studies ends by saying ‘Is it legal? It’s pretty grey’.”

Ethical versus legal

Without tax reforms and prosecutions, the impacts of both sets of leaks are likely, long-term, to be minimal. Observations about the ethics of the activities under scrutiny are sobering. “By our reckoning, the 500 largest US non-financial companies have now accumulated around $1 trillion more than their businesses need,” says Basil Venitis of the Venitism blog. “The majority of this is held offshore, in non-US overseas subsidiaries, to avoid the incremental US income taxes they would pay if they repatriated the money under current US laws.”

Yet most – if not all – of the activities are legal. Without global, multilateral agreement on offshoring, it’s hard to escape the conclusion that whenever individual countries or economic unions bring in new legislation, individuals and corporates will simply move their money to countries still willing to allow them low or tax-free status.

That is what has happened when we examine global corporate structures’ attempts to legally avoid tax. Consider how Apple based itself in Ireland to take advantage of the “double Irish” tax loophole, which “allowed Apple to funnel all its sales outside of the Americas – [then] about 55% of its revenue – through Irish subsidiaries that were effectively stateless for taxation purposes, and so incurred hardly any tax,’ according to the BBC. “Instead of paying Irish corporation tax of 12.5%, or the US rate of 35%, Apple’s avoidance structure helped it reduce its tax rate on profits outside of the US to the extent that its foreign tax payments rarely amounted to more than 5% of its foreign profits, and in some years dipped below 2%.” The EC calculated that “the rate of tax for one of Apple’s Irish companies for one year had been just 0.005%.

After the loophole was closed, Apple moved from Ireland to Jersey. When the EU decided that Apple’s arrangements in Ireland amounted to “illegal state aid”, in the words of Anita Ramasastry, a law professor who writes on international law and globalisation in Verdict, it told Apple to pay Ireland tax for 2003 to 2013, of €13bn plus €1bn interest. As a result, neither corporate nor government is happy. Apple described it as “total political c**p”; and Ireland “fears multinationals will go elsewhere.”

But this is tantamount to the specious argument that “if we don’t do it, someone else will.” Where it is possible to move, the move will follow. The case for the defence is that it’s one of a corporation’s principal raison d’etres to make money for its shareholders, and to become an attractive investment option. The sense of frustration and often outrage from the point of view of someone who is not in the position to make such huge savings on their tax bill is, in terms of bringing prosecutions or leading to culture change, negligible. As Basil Venitis says, “All this excess cash is not good for the economy, since it isn’t being used productively.” And for Anita Ramasastry, “it isn’t a victimless act when companies and the wealthy shield their money from governments.”

What is likely to change?

In the EU, the fallout from the Panama Papers is leading to notable changes in tax law, mainly in the provisions of the new anti-money laundering (AML) regulations. Most significantly, the fourth AML directive includes a requirement for companies to reveal their true owners in a publically available register (designed to expose “shell” companies and highlight the “hidden” movement of money); information on the beneficial owners of trusts to be made available to tax authorities and lawyers following AML cases; a requirement for member states to verify this information, and an extension of existing AML legislation to virtual currencies.

As a current EU member, the UK will implement these rules. It has also declared the intent to create public registers of share ownership in BOTs (British Overseas Territories) – but this has not come without resistance. The premier of the Cayman Islands has described the move as “reminiscent of the worst injustices of a bygone era of colonial despotism” and says he wants “to remove that ability for the UK to be able to randomly legislate for us.” The premier of Bermuda, similarly, has said he “does not recognise the right of the United Kingdom parliament to legislate on matters which are internal affairs reserved to Bermuda under its constitution.”

Future moves

For accountants, the advice is to watch changes closely and see what happens. Any changes to the tax system are likely to bring increased accountancy work which is good for the profession as a whole; but there is also the responsibility to show that licensed practitioners do not engage in practices that, whilst being legal, are widely considered unethical.

Ultimately, the distinction remains between legal and non-legal activities. One of the reasons the Paradise Papers have had less media attention than the Panama Papers is that, whilst many of the practices leaked can appear ethically dubious, little of what they report has been shown to be illegal. “The economist Gabriel Zucman has worked to estimate how much wealth is stashed in low-tax havens and what that means for government coffers,” Ramasastry writes. “According to his research, the United States loses close to $70 billion a year in tax revenue due to the shifting of corporate profits to tax havens. This is close to 20 percent of the corporate tax revenue that is collected annually.” Zucman “notes that this is legal. He also reports that an estimated $8.7 trillion, or 11.5% of the world’s GDP is stashed offshore by wealthy households. Much of this revenue may not be reported to tax authorities. This is likely not legal.”

For the future, it will be interesting to see if the EU’s moves on beneficial ownership reporting are followed by other regions. (Notably, the new legislation falls short of including trusts). Without the political will to significantly alter current tax laws across global jurisdictions, it’s hard to see that much other than the cosmetic will change. We can promote good practice and ethical behaviour as far as is possible, but enshrining changes of such magnitude in law represents a significant challenge for current and future governments.

Mark Blayney Stuart is Business Journalist of the Year, Wales Media Awards 2017 and Former Head of Research at the Chartered Institute of Marketing.