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.

The UK National Crime Agency (NCA) reported a 35% increase in incidents of modern slavery and human trafficking in the UK in 2017.

Global estimates indicate that there are 40.3 million slaves in the world – 24.9 million in forced labour and 15.4 million in forced marriage. Of the 24.9 million people in forced labour, 16 million are exploited in the private sector.

In an increasingly connected world, with far-reaching supply chains, businesses cannot ignore the risk of modern slavery. And as the 2017 figure from the NCA shows, it’s not merely a problem for ‘other’ countries.

Within the UK, the Modern Slavery Act that came into effect in 2015 requires companies, or parts of companies, providing goods or services in the UK with a turnover above £36 million to publish a slavery and human trafficking statement. This should set out the organisational structure (including supply chains) and detail what steps they are taking to prevent modern slavery within their own business and supply chains, identify risk areas and explain what staff training is being undertaken to combat this. The statement needs to be signed off by a director or other member of the governing body in the firm, ensuring senior level buy-in to the whole process.

“The Act appears to be having a positive impact, not simply because business is taking the issue more seriously, but because the total number of convictions has increased considerably – 349 in in 2016 compared to 189 in 2014,” says Phil Hall, AAT’s head of Public Affairs and Public Policy.

What are accountants doing?

There have been big commitments from big firms. PwC has had a human rights policy and working group since 2012 and the Modern Slavery requirements are being met by that group. KPMG established a Steering Group, which meets on a quarterly basis, to guide their approach to Modern Slavery.

Meanwhile, the chief executive of Grant Thornton in 2017 provided a clear commitment to collaborate closely with suppliers to help them understand and work towards their own obligations under the Modern Slavery Act. They already had a Responsible Purchasing Policy and now have a Supplier Code of Conduct, used for all new major suppliers of goods or in re-tendering, which clearly states Grant Thornton will cease working with a supplier if any occurrence of modern slavery is discovered.

Additionally, in their role as auditors and advisors, accountants undertake modern slavery audits at businesses to identify areas of concern or risk, and for the purposes of completing legally required statements. However, it’s been questioned whether accountants are best-placed to undertake this given a traditional focus on numbers rather than social issues. “But this ignores both the multi-faceted skillsets of accountants today and the many existing requirements for ethical considerations, such as the International Ethics Standards Board for Accountants (IESBA) Code of Ethics for Professional Accountants, which places a clear responsibility on professional accountants to act in the public interest,” says Hall.

Furthermore, accountants can strive to clean out slavery with integrated reporting, which takes a more holistic view compared to single-capital financial reporting, which it can be argued has lost touch with modern values beyond the balance sheet and what increasingly conscious stakeholders demand, such as improving the environment and society.

Turnover below £36 million?

While there’s no legal obligation for SMEs to comply with section 54 of the Act, there are clear benefits to doing so, says Hall. “It’s worth remembering that the statement will appear online. Such transparency is appealing not just to suppliers, but it could prove helpful in reassuring large companies who are customers or potential customers as it provides them with certainty about their own supply chain. There’s a clear role for accountants too, as they can help SMEs understand Government guidance in this area and ensure that the SME has a statement that meets the requirements of section 54.”

Indeed, AAT has inserted modern slavery compliance clauses into all its new supplier contracts for some time, even though it has a turnover well below the £36m threshold. “It is likely that we will soon begin publishing a statement in just the same way as much larger companies, demonstrating not only commitment to fighting modern slavery, but serving as a reassuring measure to our suppliers,” says Hall.

“Naturally we’d encourage others to do the same.”

Not too long ago, the Office of Tax Simplification (OTS)reported on a perceived spike in number of companies whose turnover hovers just below the £85k threshold.

This suggests that some SMEs are deliberately refraining from growing their business because the VAT cliff-edge is such a disincentive. “Some businesses limit expansion — for example by not taking on an extra employee, or an extra contract, or closing their doors for a period, to keep their turnover below the threshold,” the OTS was quoted as saying in the Financial Times, adding this was an “entirely legal practice”.

In the past, Chancellor Philip Hammond has considered lowering the rate at which VAT is payable – after all, the UK is well out of line with the rest of Europe where the average turnover for starting to pay VAT is around £20k. However, this move is widely considered too unpopular to stomach; consequently, Hammond has evidently decided to go more gently. Instead of lowering the rate, a review is currently looking at ways of tapering entrance to VAT registration, aimed at removing those barriers to growth.

Along the way, such moves should also reduce the temptation for businesses to lie about their turnover when they approach the £85k mark. The temptation is a very real one: with the current cut-off in operation, a business with an annual turnover of £85,000 can face a VAT bill of up to £17,000, whereas one with turnover of £84,000 would be exempt.

Rounding the edges

The changes are likely to be: freezing the level until 2020 at which VAT is payable; delaying VAT registration where a company’s turnover is below 50% of the VAT threshold for a period of 12 months; and creating a taper by allowing companies with a turnover of between £85,000 and £115,000 “to keep some of the VAT that would otherwise go to HM Revenue & Customs,” according to the FT. “While that would be a net cost to the Treasury, it could be offset by more economic growth if companies were no longer reluctant to cross the £85,000 VAT threshold.”

These changes, if they happen, are likely to have significant effects on small businesses: some good, some bad. So what are the impacts on accountants – and what’s the inside view from the industry?

“The freezing of the registration level is undoubtedly going to have an impact on businesses,” says Lucy Cohen, Commercial Director at Mazuma Accountants. “When you combine it with other rising costs that will increase their sales prices (such as minimum wage rises) we’re potentially going to see more people pushed into VAT registration far sooner than they otherwise would have been.” This may not be such a big deal for B2B businesses, Cohen argues, “but for B2C businesses this is going to be a real blow. That additional 20% on the sale price will either have to be passed on to the customer, making their pricing less competitive, or it has to absorbed by the business somehow, making their profits lower.” For many small businesses, lower profits means less money to take out as dividends or drawings. “There could be significant real-life consequences for small business owners as a result.”

More positively, one of the proposals is to delay VAT registration in cases where turnover does not exceed 50% of the VAT threshold for more than 12 months. “This is potentially positive – if not slightly onerous to monitor for business owners,” Cohen says. “It may encourage businesses hovering just below the VAT threshold to take on additional work that may tip them into VAT, but gives them a grace period to gradually increase prices or revise their systems so that when VAT does apply, it is a far less traumatic beast.” While it does give them a bit of breathing space, is it just delaying the inevitable and making the process more complex though? “Yes – it may help small businesses, but it’s making an already complicated thing yet more complicated. Would a ‘ripping the Band-Aid off’ approach be better?”

Pros and cons

What about the impacts on accountants? “More VAT-registered businesses inevitably means more work for accountants – which in terms of opportunities for added value is a good thing.” However, for Cohen, the interesting element here is the psychology of what might happen. “If more people feel like they are pushed into needing an accountant rather than choosing one, then it could have a negative impact on the image of the industry. There needs to be a focus by accountants on how we can add value rather than just doing and filing the calculations – especially with MTD on the horizon.”

What does Cohen think of the efforts to smooth the “cliff edge” on VAT – and do the current proposals go far enough? “On one hand, VAT remains a fact of business and something that accountants are well versed in and able to communicate to their clients about,” she says. “On the other hand, that ‘cliff edge’ can really hit businesses hard – especially if they haven’t registered in time and have to take the hit of back-dated VAT.” Cohen wonders if we are heading towards the point “where the view is just to say, ‘all businesses that turn over more than £10k should be VAT registered’? Should it just be made a fact of business life that you have to deal with VAT registration and level the playing field a bit for B2C businesses?”

The dilemma is interesting. “Ultimately I’m not sure – but one thing I do know is that more complication in the rules is bad for businesses.” The risk of these proposals is that it gives companies “yet another thing to get mired in. That creates a deterrent from running a business that exceeds the threshold” – the very thing the proposals are designed to avoid.