Issue link: https://maltatoday.uberflip.com/i/906955
Opinion 25 maltatoday SUNDAY 26 NOVEMBER 2017 What Paradise Papers tell us about business and elites T he so-called Paradise Papers may sound familiar – leaked documents from a law firm that specialises in offshore services reveal how the global elite avoid paying taxes. Even the name has the same ring to it as last year's Panama Papers expose. But the Paradise Papers are different, reflecting the complexity of the global offshore tax system. Pa na ma i s genera l ly con sidered, a mong t a x haven exper t s, a s one of t he lea st reformed corners of t he of fshore world. Internat iona l r u les rega rd i ng t a x eva sion a nd avoida nce a re i ntended to help nat iona l govern ment s to pu rsue t hei r ow n of fenders, but t he Pa na ma Papers revea led t hat t he cou nt r y wa s bei ng u sed pri ma ri ly by t he bu si ness a nd pol it ica l el ites of cou nt ries l i ke Ru ssia, C h i na a nd ma ny more i n Lat i n A merica a nd A sia; cou nt ries where t he govern ment s a re closely l i n ked to bu si ness a nd wh ich a re less l i kely to u se tool s prov ided by new i nternat iona l r u les to pu rsue of fenders. Hence, relat ively few A merica n s or Eu ropea n s were caug ht i n t he Pa na ma stor y. A nd Mossack Fon seca, t he law f i rm at t he cent re of t he lea k ha s si nce been d i scred ited. The Pa rad i se Papers revea l t he goi ngs on of t he el ite of t he of fshore world – t h i s t i me i n t he supposed ly h ig h ly- reg u lated haven s of t he Cay ma n Isla nd s, Bermuda, Si ngapore a nd t he l i ke. A l l places t hat received a fa i rly clea n bi l l of hea lt h du ri ng t he OECD peer rev iew process on ly a few yea rs ago. The law f i rm at t he cent re of t h i s new lea k, Appleby, i n si st s t here i s "no ev idence of w rongdoi ng " i n a ny of t he revelat ion s. Nonet heless, t he Pa rad i se Papers w i l l tel l u s a lot about t he ac t iv it ies of bu si ness a nd pol it ica l el ites of wel l- reg u lated cou nt ries l i ke t he US a nd U K – i mpl icat i ng big mu lt i nat iona l s such a s Ni ke a nd Apple, a nd i nd iv idua l s i nclud i ng t he Brit i sh Queen. 1. Tax avoidance is a booming industry C lea rly, ju ri sd ic t ion s such a s t he Cay ma n Isla nd s a nd Bermuda t hat lev y no i ncome t a x, capit a l ga i n s t a x, VAT, sa les, wea lt h or cor porate t a x, st i l l at t rac t a g reat dea l of bu si nesses. W hy, for i n st a nce, ha s t he Duchy of La nca ster, t he Queen's private por t fol io, i nvested i n t wo of fshore f u nd s, i n Cay ma n a nd Bermuda? A f ter a l l, t he Queen pays t a x on ly volu nt a ri ly. A more cha rit able i nter pret at ion i s t hat a ny big i nvestor who i s seek i ng to d iversi f y t hei r por t fol io wou ld i nev it ably end up u si ng of fshore f u nd s. The papers show t hat about £10m (US$13m) of t he Queen's private money wa s i nvested of fshore – a ver y sma l l percent age of her wea lt h. There i s not h i ng i l lega l about t h i s but t he et h ics of it have been quest ioned. Prac t ica l ly, t he ent i re wea lt h i nvest ment i ndu st r y – t he i ndu st r y t hat i nvest s for t he rich a nd t he wea lt hy of ou r world – operates t h roug h t he of fshore world. A nd t he rea son why i s si mple. Each f u nd or t ra n sac t ion, or aeropla ne or yacht, or whatever one ca res to reg i ster i n t he Cay ma n s or Bermuda, i s not subjec t to t a x . A nd it 's h idden f rom publ ic v iew. 2. Secrecy prevails through trusts Despite a spate of new reg u lat ion s, t he Pa rad i se Papers show t hat a nyone who w i shes to concea l t hei r a f fa i rs f rom compet itors, a l l ies, govern ment s or t he publ ic ca n st i l l do so w it h g reat ea se. A nd t hey ca n do so t h roug h t he faci l it ies of a "t r u st ", a n a rcha ic A ng lo- Sa xon i n st r u ment t hat ser ves a s a foolproof sh ield f rom scr ut i ny. We have lea rned, for i n st a nce, t hat Wi lbu r Ross, t he US secret a r y of com merce, had com mercia l l i n k s to V lad i m i r Put i n's fa m i ly, wh ich operated t h roug h a s ystem of l i n ked t r u st s located i n va riou s of fshore ju ri sd ic t ion s. I do not t h i n k t hat even t he Muel ler i nqu i r y i n t he US i nto t he Tr u mp ad m i n i st rat ion's l i n k s w it h Ru ssia cou ld have pierced t he vei l of secrec y of fered by of fshore t r u st s. But t he lea ked docu ment s f rom law f i rm Appleby revea l t hat a ny complex bu si ness dea l s t hat wou ld i nvolve concea l ment a nd subter f uge wou ld work t hei r way t h roug h t r u st s. It i s h ig h t i me we do somet h i ng about t hese t r u st s. 3. Highly complex tools are used The Pa rad i se Papers show how complex f i na ncia l i n novat ion s, such a s t he u se of derivat ives a nd f i na ncia l swaps a rra ngement s, ca n be u sed for t a x avoida nce. Th i s i s a n a rea of avoida nce t hat i s norma l ly not wel l u nderstood a nd sca nt i ly st ud ied. New resea rch t hat col leag ues a nd I a re conduc t i ng , however, ha s fou nd t hat cross-cu rrenc y i nterest rate swaps a re u sed per va sively i n t a x m i n i m i sat ion mecha n i sm s. Th i s i s d i f f icu lt to detec t a nd i nvolves a pa rent a nd subsid ia r y compa n ies swappi ng a loa n i n one cu rrenc y to a not her. Th i s process swaps t he ri sk s a nd t he i nterest rate of t he orig i na l cu rrenc y for t he subsid ia r y 's – a leg it i mate ri sk m i n i m i sat ion i n st r u ment. At t he sa me t i me, t h i s faci l it ates mov i ng f u nd s of fshore to low t a x ju ri sd ic t ion s. 4. The law needs to change Ma ny professiona l ser v ice f i rm s operate t h roug h of fshore ju ri sd ic t ion s. They a l l cla i m to be h ig h ly professiona l, fol low i ng not on ly t he let ter, but a l so t he spi rit of t he law. But i f t hese f i rm s a re not d i rec t ly l iable for t he ac t iv it ies of t hei r cl ient s, t he of fshore world w i l l cont i nue to t h rive. These f i rm s t a ke adva nt age of reg u lator y loopholes to a rbit rate bet ween d i f ferent r u les a nd ju ri sd ic t ion s i n order to m i n i m i se t a xat ion. The quest ion i s for how long such prac t ices a re goi ng to be con sidered leg it i mate. The Pa rad i se Papers revea l how l it t le t he world rea l ly k nows about t he level of t a x avoida nce t hat t a kes place. U K cit i zen s, for i n st a nce, ca n lega l ly i nvest i n of fshore f u nd s a nd set up compa n ies i n t hose haven s. But t hey mu st revea l t hese hold i ngs to t he t a x ma n. We do not k now whet her t hose na med i n t he papers d id, a nd we do not k now whet her t he t a x aut horit ies w i l l do somet h i ng about t hose who d id not. We on ly k now t hat a lot i s goi ng t h roug h of fshore. The Pa rad i se Papers show t hat, despite prom i ses of t he opposite, opacit y i s st i l l per va sive i n t he of fshore world. Ronen Palan is P rofe ssor of Inter national Politic s , City, University of London T his ar ticle orig inally appeared in T he Conversation Ronan Palan UK citizens can legally invest in offshore funds and set up companies in those havens. But they must reveal these holdings to the tax man