26 Apr 2016
What is the big takeaway from the Panama Papers? That corrupt politicians have made a habit of secreting their ill-gotten gains offshore? The level of obfuscation that can be obtained through the use of certain offshore structures? That banks have been complicit in helping customers avoid tax by setting up offshore vehicles? None of these are earth shattering revelations – there have been many well publicised scandals illustrating these realities in the past.
What then has fuelled the story and the accompanying media outrage? The answer is possibly to be found in the misunderstanding of and prejudice against ‘offshore’. The absence of balanced reporting on the subject has been staggering – so much so that every past and present consumer of offshore including the British Prime Minister is being tarred with the brush of illegality or at the very least immorality.
In the rush to judgment and potential policy reform there needs to be a reality check about the legitimate and illegitimate role offshore plays in the global financial system.
Attention can then be re-focused on preventing genuine criminal abuses of offshore whilst allowing the legitimate economic benefits of offshore to be gained by companies and individuals internationally.
Applying the term offshore only to small island tax havens like the BVI is disingenuous. Offshore financial centres include onshore jurisdictions that through beneficial tax policies attract capital from foreign companies and high net worth individuals. Three of the world’s leading offshore centres are the UK, Ireland and the USA.
The UK’s beneficial tax treatment of wealthy resident non-domiciliaries is an example of a highly successful offshore policy applied by an onshore jurisdiction. Ireland has an aggressive policy of attracting foreign capital through the application of beneficial tax rates on offshore companies attracting companies including Apple which legally pays less than 4% in taxation on its worldwide profits. In several American states it is possible to incorporate companies whilst obfuscating the identity of the beneficial owners to a far greater extent than is possible than for example with a Jersey company. Combined with the beneficial tax treatment of those companies America is rapidly emerging as the world’s leading offshore financial centre. One of the reasons there are so few US citizens named in the Panama Papers is that they needn’t go offshore when the benefits of doing so can be obtained with ease domestically.
The UK, Ireland and America are all deemed to be less compliant with international anti-money laundering standards than many so called tax havens and yet they do not fit the mental model of a palm fringed offshore centre. The point is, whether a jurisdiction plays the offshore game depends not on what it looks like but what it does. The cold hard reality is that most countries seek to attract as much capital as they possibly can by creating regulatory and tax arbitrage opportunities. Some centres are more successful at it than others. Those jurisdictions that are less good at it like to cry foul.
In a similar vein, companies everywhere compete to maximise profits. One way of doing so is by paying as little tax as possible. There are numerous ways of achieving that objective including through the use of structures that are based offshore. This practice is so widespread that it is no exaggeration to say that almost every person in the UK benefits directly or indirectly from an offshore structure somewhere in the constellation of their employment or financial affairs. The Guardian Newspaper, for all its self-righteous slings and arrows against those who move assets offshore is itself ultimately owned by a parent that has well publicised offshore dealings. Every pension scheme in the UK is ultimately invested in investment funds or companies that are domiciled offshore. Every UK bank has a presence offshore. Even the buildings occupied by the Inland Revenue are owned by an offshore company.
The point is that the use of offshore is a deeply ingrained component of the financial system, not only in the UK but internationally. It is the reason that so much of the world’s capital is held in or through offshore centres. For as long as tax arbitrage opportunities exist to maximise profits, companies and high net worth individuals will seek them out. It would be a spectacular act of economic suicide for the UK to act against the British territories from which it benefits through massive inward investment flows by repelling the legitimate business they conduct to Chinese satellite centres such as Singapore and Hong Kong.
One of the most surprising elements of the onslaught against offshore is that nobody has yet made a convincing case that legislating against the use of offshore would result in onshore economic benefits. In fact there are numerous studies that strongly indicate the opposite.
In the same way that companies seek to minimise their tax liability so to do individuals. The tax systems of most of the World’s free market economies make allowances for that. The objective of tax planning is to mitigate one’s liability to taxation. It’s the reason that BBC presenters have employment companies, and even less well remunerated people invest in ISAs and transfer property to their children in the hope that they can avoid paying inheritance tax if they don’t die within 7 years of doing so. It’s also the reason that so many of Britain’s best known entrepreneurs hot foot it from the UK to lower tax jurisdictions in the months preceding the sale or flotation of their companies, to avoid paying often tens of millions of pounds in Capital Gains Tax. The pampered bureaucrats of the OECD, who are often to be found shouting loudest about the necessity of increasing tax on corporates the world over, pay no personal income tax at all.
None of this illegal. Until relatively recently it was not regarded as immoral either. The degree to which sentiment has changed since the financial crisis has been illustrated by the extent to which David Cameron has been rattled by revelations that he benefitted from an offshore trust despite the fact that there is no suggestion of wrongdoing. Having previously jumped so enthusiastically on the ‘tax avoidance is immoral’ bandwagon he has been shown to be a hypocrite. This has proved to be great fodder for political commentators but the net benefit has been to shift the spotlight away from the genuinely corrupt politicians revealed by the Panama Papers. Putin must be laughing all the way to his offshore bank.
Despite the charge of immorality, tax competition between states and the fluidity of capital mean that ‘offshore’ will always be with us. Offshore is a natural concomitant of the desire of nations to attract capital and the motivation of companies and individuals to take whatever steps are legally available to reduce their liability to tax and increase profits and wealth.
And yet, offshore is a tale of two different types of financial centre – those that play by the rules and seek to repel financial crime and those that don’t. There are aspects of offshore that are highly toxic and should be stamped out. They include jurisdictions that do not; i. regulate corporate and trust services; ii. include foreign tax evasion as predicate conduct for money laundering purposes; iii. maintain registers of beneficial owners of companies; iv subscribe to the OECD’s common reporting standards; v. routinely comply with mutual legal assistance requests; vi. prosecute offences of money laundering and repatriate assets.
Jurisdictions that offend against these standards include numerous onshore financial centres as well as some island tax havens that have set their face against the international community. The interests the anti-offshore lobby seek to advance would be far better served by a more sophisticated approach to criticising offshore. In that way the genuine miscreants and the crimes they facilitate can be focused upon whilst the efforts of the better quality offshore centres can be recognised. Currently all offshore centres are being labelled as criminal enterprises and there is a danger that those which act as responsible international citizens may feel that there is little to lose by beginning to break the rules, if they get no credit for maintaining higher standards than those jurisdictions that are their harshest critics.
Panama leaks may change the world. But not in the way that you expect. Far from being the beginning of the end for offshore (how many false dawns have there been on that road), it might just be the end of the beginning of a process of acceptance. That offshore, in one form or another, will always be with us. Rather than raging against it indiscriminately, we could better spend our time working out how to do it well, without giving succor to the bad actors.
Stephen Platt is an English barrister, Adjunct Professor at Georgetown University and Author of ‘Criminal Capital – How the Finance Industry Facilitates Crime’.
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