From Panama to Pandora papers: what has changed in offshore taxation

The latest data breach detailing the financial affairs of the global elite makes it clear how much progress has been made since the world began to seriously crack down on overseas tax evasion and evasion in 2008 – and how much is left still to do.

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

Russian President Vladimir Putin and former British Prime Minister Tony Blair are among other world leaders to have been linked to the files, a massive dumping ground of 12 million documents.

But while this week’s presentation by the ICIJ, dubbed the Pandora Papers, like its predecessors focuses on the financial dealings of the rich and powerful, there are major differences with previous reports.

Panama, paradise and now Pandora

The revelations in the ICIJ’s Panama Papers data dump in 2016 shed light on tax crimes committed through offshore tax havens – many of which, like Panama itself, have since tightened the rules, including joining the international tax transparency efforts.

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

The latest ICIJ briefing has so far made no allegations of tax evasion.

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

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

A tax rule for them. . .

What the Pandora revelations highlight is the inequalities within a tax system that gives the rich access to privileges unattainable by most.

“The biggest thing I get out of it[the Pandora Papers]. . . Do the current rules provide mechanisms for wealthy people to buy property or hide their wealth that is not available to other people, ”said Daniel Bunn of the Tax Foundation, a US-based think tank United.

For example, the revelation that Tony and Cherie Blair saved £ 312,000 in stamp duty when they bought a British Virgin Islands company that 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 owed on the sale of real estate to him. – even and not when a company owning the real estate is sold.

“It is a political choice,” he said. “If governments want to change this, they should. “

Is the United States lagging behind?

Although the net has drawn closer to users of tax havens in general, the Pandora Papers clearly indicate that certain areas have seen activity develop.

These include the US states of South Dakota, Nevada, Delaware and others which the ICIJ said had “become leaders in the trade in financial secrecy.”

The amount of estimated assets held by South Dakota’s fiduciary sector alone has quadrupled from $ 75.5 billion in 2011 to $ 367 billion in 2020. This growth has been fueled by a lack of relative disclosure rules. to 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, were signed by 110 countries around the world in September.

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

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

“Nobody behaves better when you can’t see them”

Overall, tax activists argue that even with a looming OECD deal and tougher rules on tax havens, the leak shows that things haven’t changed enough since the Panama Papers.

They called for increased transparency of offshore cash flows, including the public declaration of taxes paid by companies country by country and the ban on shell companies.

“There is no reason to allow limited companies,” said Alex Cobham, chief executive of lobby group Tax Justice Network. “Nobody behaves better when you can’t see them.”

“It seems obvious that shell companies – companies without economic substance, whose sole purpose is to avoid taxes or other laws – should be banned,” added Gabriel Zucman, an economist at the University of California at Berkeley. .

Some tax advisers have also expressed concern that the current rules are proving ineffective in tackling corruption, with entire sectors of lawyers and accountants facilitating the flow of money.

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

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