October 7, 2021
Recent years have seen various governments take action to close loopholes and provide stricter rules against tax avoidance, and the offshore finance system in general, in part due to public pressure in the wake of leaks such as the Panama Papers, and in part due to constrained public budgets in a decade of austerity. Legislation such as the EU’s Anti-Tax Avoidance Directive (2016) was designed to prevent some of the key methods of moving money between countries to avoid paying tax, and the US’s Foreign Account Tax Compliance Act (2010) aimed to force foreign governments to inform US authorities if US citizens held bank accounts in their jurisdiction.
However, the release this week by the International Consortium of Investigative Journalists (ICIJ) of the so-called “Pandora Papers”, a massive leak of 11.9 million documents from 14 financial institutions, indicates that, to the extent that these laws have made any difference, the world’s wealthiest and most powerful can still relocate their money easily – and legally – without interference from tax authorities, using elite financial consultants and law firms to keep their wealth hidden safely in secrecy jurisdictions, protected by complex networks of shell corporations.
For those familiar with the business, the leaks were no surprise. “About half the world’s GDP is potentially hidden from us,” said Alex Cobham of the London-based Tax Justice Network. “This is not a marginal practice. It is a dominant part of the world’s financial system.” Indeed, the ICIJ estimates that the amount of wealth held offshore globally may be as high as US$32 trillion.
The ICIJ and its media partners were keen to stress that much of the offshore finance activity highlighted by these leaks was not illegal. For some, what campaigners call “tax avoidance” is nothing more than “tax efficiency”, similar to the choices many households make when organising their investments. According to this reading, the loopholes left in tax laws are the fault of governments alone, and low-tax and/or secrecy jurisdictions are simply providing a useful service to investors. However, some of the 35 world leaders named in the documents were elected on the back of vocal campaigns against the offshore holding of assets, labelling it as corruption that undermined struggling economies. Eye-opening examples include Pakistan’s Imran Khan and Kenya’s Uhuru Kenyatta.
Aside from this consideration, it is the sums of money involved that may eventually lead to concerted action from governments and international organisations. Estimates for the amount of tax avoided through such channels runs into the hundreds of billions of dollars, often in the form of capital flight from countries that can ill afford to lose it. The tightening of measures in recent years may have prevented smaller scale individuals and businesses from accessing such options, but for the wealthiest, professional services firms are available which “seem to see every piece of legislation as just another obstacle to get around,” says Cobham. Some argue that creating rules that do not apply to the super-wealthy erodes social solidarity at a time when we need it most.
These leaks may give added impetus to recent efforts to establish a “global corporation tax rate”, provisionally set at 15%, which is promoted by the Biden Administration and the Organisation for Economic Cooperation and Development (OECD). Others argue that a compulsory global register of beneficial ownership would be the most effective tool against immoral and/or illegal use of offshore finance services, on the basis of “nothing to fear, nothing to hide”. After all, if nothing illegal has happened, it is strange that so many of the individuals and organisations named in the leaks have gone to such complex lengths to hide their assets.
Ultimately, says Fergal Shiel, Chief Executive of the ICIJ, use of these offshore vehicles is often less about the law, but the “corrupting influence of secrecy”. He added that, “Politicians can have offshore companies, but at the very least their citizens should know they have these offshore companies, and know what their wealth is.”
