Revelations from the ‘Paradise Papers’ affair, stemming from the leak of confidential documents from Bermuda-headquartered law firm Appleby, are raising controversy about the extent of potentially questionable dealings in offshore financial centres. They follow April 2016’s equally revelatory ‘Panama Papers’, which uncovered what looked like massive tax evasion and money laundering.
The Organisation for Economic Co-operation and Development estimates that such tax dealings could amount to around 4%-10% of global tax each year. This translates into a loss of tax revenue of anywhere between €100bn-€240bn. Loss of revenue from individuals keeping their money in offshore trusts or any hiding of assets sheltered by bank secrecy rules can be added to the overall figures. The OECD is leading efforts to confront what many see as aggressive tax-planning by multinationals.
Offshore centres can argue that they often compete with low tax regimes in places like the Netherlands, Luxembourg and Malta in the European Union and states such as Delaware in the US. They can claim, too, that they are improving their practices. And they point out how large global banks have had to pay fines for security lapses in their money laundering control systems.
In an era of loose capital controls and low interest rates, investors are always looking for the best returns and lowest levels of tax. It could be argued that if pension funds, hedge funds and others putting money in entities incorporated in offshore jurisdictions enjoy better returns, those returns will eventually benefit pensioners who will pay tax on the payments they receive in their country of residence. Tax efficient vehicles available in offshore financial centres can play a role in improving risk management.
This can provide sufficient funds for insurance and reinsurance and facilitate financing in crucial areas such as shipping and aircraft, as well as energy and life sciences.
They arguably improve the functioning of capital markets by offering investors security against unpredictable and volatile regimes they may face at home.
Yet their secrecy and lack of transparency and the difficulty in knowing who the ultimate beneficiaries may be has encouraged a belief that these centres may play a role in hiding illicit gains or tax avoidance. The ability of a large multinational company like Apple to move the place it registers its profits from Dublin to Jersey to reduce its tax bill is exasperating, given how little tax it pays in the UK despite large revenues generated there.
There are many legitimate reasons for the existence of offshore finance centres. But the mood is changing. The OECD is overseeing the development of a common reporting standard to ensure the exchange of data for tax purposes between states. More than 90 countries have signed up. The latest revelations suggest change is overdue.
Vicky Pryce, a former Joint Head of the UK Government Economic Service, is a Board Member at the Centre for Economics and Business Research and a Member of the OMFIF Advisory Board.