From Panama to the Pandora papers: what’s changed in offshore tax

The latest data leak detailing the financial affairs of the global elite makes clear how much progress has been achieved since the world began to clamp down in earnest on offshore tax evasion and avoidance in 2008 — and how much still remains to be done. Leaders including King Abdullah […]

The latest data leak detailing the financial affairs of the global elite makes clear how much progress has been achieved since the world began to clamp down in earnest on offshore tax evasion and avoidance in 2008 — and how much still remains to be done.

Leaders including King Abdullah of Jordan, Czech prime minister Andrej Babis and Ilham Aliyev, Azerbaijan’s strongman president of 13 years, have been named by the International Consortium of Investigative Journalists for using offshore tax havens to store and move their money.

Russian president Vladimir Putin and former UK prime minister Tony Blair are among other global leaders to have been linked to the files, a massive dump of 12 million documents.

But while this week’s exposé by the ICIJ, dubbed the Pandora Papers, focuses like its predecessors on the financial dealings of the rich and powerful, there are key differences to earlier reports.

Panama, Paradise and now Pandora

The revelations in the ICIJ’s 2016 Panama Papers’ data dump shone a light on tax crimes taking place via offshore tax havens — many of which, such as Panama itself, have since tightened rules, including joining international tax transparency efforts.

The 2017 Paradise Papers in turn tended to focus more on companies’ creative tax avoidance — which the OECD is now seeking to address via a global agreement on a minimum corporate tax rate.

The ICIJ’s latest exposé has so far not alleged tax evasion.

“From a pure tax perspective, [these papers are] less serious than the Panama Papers,” said Professor Rita de la Feria, chair in tax law at the University of Leeds. The introduction of financial accounts data sharing between tax authorities and the impact of the leaks themselves have deterred evasion, experts say.

Instead, Pandora has focused on the use of offshore trusts and shell companies by the super-rich and political classes. These legal structures are often created to maintain confidentiality, although they can also be misused for money laundering or corruption purposes.

One tax rule for them . . . 

What the Pandora revelations highlight are inequalities within a tax system that gives the wealthy access to privileges not available to most.

“The biggest thing I take from it [the Pandora Papers] . . . is the current rules provide wealthy individuals with mechanisms to purchase property or hide their wealth that aren’t available to other folks,” said Daniel Bunn of the Tax Foundation, a US-based think-tank.

For example, the revelation that Tony and Cherie Blair saved £312,000 in stamp duty when they bought a British Virgin Islands company which owned a London building from the family of Bahrain’s minister of industry and tourism.

Dan Neidle, tax partner at Clifford Chance, a law firm, said what the Blairs did “was not a loophole” as stamp duty is only due on the sale of real estate itself and not when a company that owns the real estate is sold.

“It’s a policy choice,” he said. “If governments want to change that, they should.”

Is the US falling behind?

Though the net has been closing in on users of tax havens in general, the Pandora Papers make clear that some areas have seen the business grow.

These include the American states of South Dakota, Nevada, Delaware and others which the ICIJ said had “transformed themselves into leaders in the business of peddling financial secrecy”.

The amount of assets estimated to be held by the South Dakota’s trust industry alone has quadrupled from $75.5bn in 2011 to $367bn in 2020. This growth has been fuelled by a lack of disclosure rules compared with other jurisdictions.

Since 2014, international rules have led to the automatic exchange of information on financial accounts between tax authorities. The rules, developed by the OECD and known as the Common Reporting Standard, have been signed up to by 110 countries around the world, as of September.

But the US does not participate in the global rules. Instead, it operates its own regulations — known as FATCA (Foreign Account Tax Compliance Act). “The US has a much more limited version of the CRS,” said Neidle. “In principle, it’s behind the rest of world in terms of tax transparency.”

The revelations are potentially embarrassing for President Joe Biden who pledged last year to “lead efforts internationally to bring transparency to the global financial system and go after illicit tax havens”.

‘Nobody behaves better when they can’t be seen’

Overall, tax campaigners argue that even with an OECD deal imminent and tightening of rules on tax havens, the leak shows not enough has changed since the Panama Papers.

They have called for increased transparency of offshore money flows, including public reporting of tax paid by corporations on a country-by-country basis and the banning of shell companies.

“There is no reason to allow anonymous companies,” said Alex Cobham, chief executive of the Tax Justice Network pressure group. “Nobody behaves better when they can’t be seen.”

“It seems obvious that shell companies — corporations with no economic substance, whose sole purpose is to avoid taxes or other laws — should be outlawed,” added Gabriel Zucman, an economist at the University of California, Berkeley.

Some tax advisers also expressed worries that the current rules are proving ineffective at tackling corruption, with entire industries of lawyers and accountants facilitating the flow of cash.

Most shocking of all might be, the fact, according to George Bull, senior tax partner at accountancy firm RSM, the “sheer amount of dirty money going through some of the world’s financial centres”.

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