Investing in Paradise to avoid tax?
Donald Drysdale wonders whether the Paradise Papers revelations will turn public animosity against offshore secrecy and tax avoidance into positive Government action.
The Paradise Papers
Eighteen months after the world’s press revealed what was contained in the Panama Papers, another crisis has shaken the offshore financial services sector.
Allegedly the work of illegal hackers rather than an internal leak, this latest event has released into the public domain sensitive internal information from law firm Appleby and trust and administration services provider Estera, both operating in Bermuda and other offshore territories. The revelations also include information from 19 corporate registries maintained by governments in jurisdictions known for financial secrecy.
These latest disclosures have been dubbed the ‘Paradise Papers’ – apparently either a reference to the enviable Bermudan climate or an allusion to ‘paradis fiscal’, the French term for a tax haven. Reportedly they consist of 1.4 terabytes of data comprising 13.4 million confidential electronic documents relating to offshore investment.
The documents were fed to Süddeutsche Zeitung, Germany's leading daily newspaper and erstwhile recipient of the Panama Papers from an anonymous source. As on that occasion, Süddeutsche Zeitung shared the Paradise Papers with the International Consortium of Investigative Journalists (ICIJ). Specific details began to emerge in worldwide press reports from 5 November 2017 onwards.
If press reports are to be believed, the ICIJ’s investigation of the Paradise Papers has shed light on the offshore dealings of some of the world’s wealthiest people and largest companies.
Those named in the press so far include: the Duchy of Lancaster (Her Majesty the Queen’s private estate); the Duchy of Cornwall (private estate of HRH The Prince of Wales); close associates of Donald Trump, Vladimir Putin and Justin Trudeau; sporting celebrities Lewis Hamilton and Gary Lineker; well-known entertainment industry figures including Madonna, Martha Stewart, Shakira, Nicole Kidman, Justin Timberlake and Harvey Weinstein; top universities in the UK and US; and technology giant Apple.
It is clear from the reports that the names appear for a wide variety of different reasons. Some of those named have made modest investments offshore, some have simply wanted to acquire local property interests there, and others have registered intellectual property rights in order to direct income flows offshore.
Jumping to conclusions
The Paradise Papers, following hard on the heels of the Panama Papers, have heightened worldwide public awareness of the use of offshore activities in avoiding or evading taxes. But there are two sides to every story.
Commentators tend to assume that all offshore investment is connected with tax evasion, but holding funds or other assets offshore is not illegal per se. There can be many legitimate reasons for doing so. Sometimes there may be justifiable personal, family or business reasons, including the natural desire of wealthy individuals to keep details of their personal financial affairs out of the public eye.
Even the ICIJ have confirmed this as follows: “There are legitimate uses for offshore companies and trusts … [and the ICIJ does] not intend to suggest or imply that any people, companies or other entities included in the ICIJ Offshore Leaks Database have broken the law or otherwise acted improperly.”
There are complex rules to determine how offshore income is taxed. From a UK perspective, those correctly declaring and paying their UK taxes should not be castigated.
Are changes needed?
To many observers, it is strange that the British Government chooses to encourage behaviour that arguably aids and abets tax avoidance and evasion. It does so by supporting overseas territories which operate as tax havens and provide secrecy for investors. These territories have committed to holding central registers of beneficial ownership information, but the Government will not open these to public scrutiny – thus seriously undermining their effectiveness.
Feelings are running high. In the House of Commons on 6 November, John McDonnell, Shadow Chancellor, described the Paradise Papers as the biggest tax scandal of this generation. He called on the Government to remove exemptions from non-domiciled individuals, secure full transparency of trusts, and establish an independent public inquiry into tax avoidance.
In the same debate, Stewart Hosie (SNP) called on the Government to throw their weight behind not just local but global transparency on the beneficial ownership of businesses through offshore trusts, funds, and other opaque devices.
Also on 6 November, Jon Thompson, HMRC’s Chief Executive and Permanent Secretary, appeared before the House of Commons Public Accounts Committee. He confirmed that HMRC had requested access to the Paradise Papers but had not seen them yet. Based on previous experience, he doubted whether the ICIJ would co-operate.
In contrast to the Panama Papers which were searchable on a website, the Paradise Papers are not widely available. They are only accessible to those within the ICIJ. This has left HMRC relying on snippets of information published by the ICIJ, the Guardian and the BBC. It seems that HMRC have even had to resort to watching Panorama.
The future of data leaks
Security should be at the heart of every organisation which handles personal data. In Europe this will be re-enforced from 25 May 2018 by the new General Data Protection Regulation (GDPR), to which the UK subscribes. Maximum fines for contravening it will be €20m (or 4% of total worldwide business turnover) but lesser contraventions also carry hefty fines.
Investors, taxpayers and practitioners who use offshore advisers must assess not only any tax and reputational risks they face by doing so. They should also consider how secure their personal data will be, in the hands of advisers and registers in offshore jurisdictions, given the persistency of hackers and the clamour of a worldwide press hungry for scandal.
While data breaches have become inevitable in our digitised world, it seems inappropriate that HMRC or any other tax authority should have to rely on such criminal activities as an essential source of ammunition to tackle tax avoidance and evasion.
The ripples from the Panama and Paradise Papers will take a long time to subside, and before they do so there will be other exposés. Electronic data will never be totally secure, and criminal hackers are hell-bent on exposing those who conduct their financial affairs in ways that are arguably suspicious.
Article supplied by Taxing Words Ltd