The predictable and legitimate outrage over the offshore money exposed in the newly leaked Paradise Papers looks set to be watered down.
That is because unlike previous leaks of a similar scale, most of the behaviour now exposed is legal, as the FT explains. Some of those now in the spotlight, including the British royal family, can probably claim correctly that there was no tax advantage in their offshore investments; there are reasons of organisational convenience for using them. And many of the offshore financial centres justifiably claim they are fully transparent vis-à-vis other countries’ tax authorities so that it is impossible to hide ill-gotten gains there.
But it would be a mistake to think these are reasons not to be worried. On the contrary, what passes for arguments to the effect of “move along, nothing to see here” are really reasons to double down on reforms. Take each in turn.
Much or most of what is contained in the Paradise Papers may be legal. But there is no doubt that some of it serves to reduce the tax that would otherwise be due. That is true of Apple, which seems to have shifted accounting profits to Jersey from Ireland after the European Commission finally cracked down on its Irish structure. And it is true of individuals such as the sports and TV celebrities served by Appleby, the law firm whose papers were leaked.
Even if all these schemes are found to be legal — and some may not be once the tax authorities investigate them — the conclusion surely is that they should be illegal. And that should include banning transactions with these jurisdictions. EU moves towards a blacklist of 53 tax havens go in the right direction but need to be much firmer on what sanctions blacklisted countries would suffer.
What then if there is no tax advantage involved? This is possible — the FT reports that even a British MPs’ pension fund uses an offshore structure — for reasons of administrative convenience or so as not to fall foul of double taxation. (Though one should think the MPs have the power to make sure that does not happen with UK tax for UK-registered investment vehicles — after all, they write the laws.) But the fact is that the widespread use of offshore structures, including by those with no untoward motive, makes it easier for everyone to hide money. It is hard to think of an offshore structure that cannot also be used to avoid taxes in addition to whatever (minor) legitimate use it may have. That in itself is a count against them.
The small islands under criticism protest that they comply with information and transparency requirements. That is true, up to a limit. There is now a system for the automatic exchange of tax information between different jurisdictions’ tax authorities. That is an improvement from not long ago; though not one that happened without resistance. And it falls fall short of the public registries of beneficial company ownership the UK once called for and the opposition wants the government to demand from UK dependencies.
The offshore financial centres are right to say that they give tax authorities of relevant countries access to such information. They are also right to say that if the governments of those countries want to change or better enforce their tax rules, it is up to them to do so. The primary responsibility indeed lies with the governments of rich countries to legislate and enforce their laws appropriately (including to stop opportunities for hiding money onshore). But the low-tax financial centres are hardly blameless: they benefit hugely from the failure of larger countries to do the right thing. And with their insistence on privacy — the notion that as long as they share information confidentially with other tax authorities, they are doing enough — they collude with those who want to keep the tax-dodging industry alive.
This is because all tax authorities rely, to a large extent, on self-reporting. While the taxman can do a much better job to ferret out tax dodgers — and should everywhere be better funded to do so — this is harder to do when it is easy to camouflage something that is taxable (say, investment income or a VAT-liable transaction) as something that is not. And that is what webs of offshore company structures facilitate. Public registries of ultimate beneficiaries would crowdsource the taxman’s information problem by bringing to light potential abuses. It would bring regular focus on what is now only episodically exposed through leaks such as the Paradise Papers.
Another problem is that very few countries tax wealth directly (most taxes are on income or transactions). That means individuals are typically under no requirement to report their wealth to tax authorities. Putting that wealth offshore then makes it much easier to hide the income from the wealth, and much harder for tax authorities to track it down to demand the tax that is legally due. Between $8tn and $10tn of the world’s wealth, about one-tenth of the total, is estimated to be kept in offshore jurisdictions. Gabriel Zucman and his colleagues show that this is largely the wealth of the very rich. They also estimate that even in Scandinavia, the richest 0.01 per cent of the population pay 25-30 per cent less tax than they should.
A much broader use of wealth taxes would help. This does not need to mean a higher overall tax pressure: income and transaction taxes could be lowered correspondingly. But a legal requirement to report one’s wealth — on the threat of jail in extremis — would make it much easier for tax authorities to target their investigations productively so as to identify taxable income as well. That way, one would not have to wait for leakers and journalists to highlight suspicious structures. If the result was that fewer saw the point of parking their money offshore, that would be proof of the abuse offshore financial centres still facilitate today, however legally compliant they may be.
Words by Martin Sandbu
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