The Paradise Papers And The Global Pervasiveness Of Tax Havens

Earlier this week, the International Consortium of Investigative Journalists (ICIJ) released a vast collection of documents detailing the extensive use of offshore ‘tax havens’ by the world’s political and wealthy elite. The leak is reminiscent of the Panama Papers exposé of 2016, and offers a disturbing insight into the prevalence of offshore financial activity. The leaked collection has been dubbed the ‘Paradise Papers’ by the ICIJ, and consists of over 13 million documents; over half of the documents are corporate records from Appleby – one of the world’s largest offshore firms.

Although a thorough analysis of the documents will take months, investigations led by the ICIJ have already uncovered information pertaining to multiple globally prominent figures. According to the ICIJ, U.S. Secretary of Commerce Wilbur Ross “has a stake in a shipping company that has received more than $68 million in revenue since 2014 from a Russian energy company co-owned by the son-in-law of Russian President Vladimir Putin.” In addition, the documents show that the Russian government-controlled organisations VTB Bank and Gazprom have previously, via the investment fund of tech entrepreneur Yuri Milner, acquired significant stakes in both Facebook and Twitter.

The findings are not limited to Russia: also included in the collection are details of the offshore activities of Australian businessman James Packer, Bono, and Queen Elizabeth II, amongst others. No doubt there will be more names to come.

In a press release issued shortly after the initial ICIJ report, the Tax Justice Network, an international NGO committed to eliminating tax injustice worldwide, stated that the exposé “has highlighted the failure of governments around the world to deal with the scourge of tax dodging and financial crime facilitated by offshore financial centres”. Indeed, it is important to remember that the parade of prominent persons that will be flaunted by the media in the weeks to come is not what we should take away from this incident. This is not celebrity news – it is a depressing display of the inadequacies of the international system of taxation and corporate regulation.

So what exactly is a tax haven? In essence, tax havens (sometimes referred to as ‘secrecy jurisdictions’) allow corporations and individuals to conduct business in an environment that is not exposed to the same levels of regulatory scrutiny as elsewhere. This is achieved via the construction of legal systems that specifically allow for this to occur; often, such jurisdictions are practically devoid of transparency. Tax evasion is only one of the plenitude of problems caused by tax havens, and is often achieved via a process known as ‘transfer pricing’ – the method by which multinational companies shift profit into jurisdictions that collect little or no tax.

According to Nicholas Shaxson, an investigative journalist and researcher for the Tax Justice Network, over half of world trade passes through such jurisdictions (as of 2011). The ‘classic’ tax havens such as Bermuda, the Cayman Islands, the British Virgin Islands, and Jersey account for a numbing portion of global financial activity. According to Shaxson, the Cayman Islands alone hosts “over three-quarters of the world’s hedge funds, and $1.9 trillion on deposit – over four times as much as in all banks in New York City.” The British Virgin Islands, home to less than thirty thousand people, hosts over eight hundred thousand companies.

Although only a small number of the world’s population are tax haven users, the effect on the world is immense. According to Global Financial Integrity (GFI), a U.S. based think tank, secrecy jurisdictions are major facilitators of illicit financial flow – the illegal movement of money across borders. In 2014 alone, the illicit outflow from developing countries amounted to between 600 and 900 billion US dollars. This value is not an anomaly: between 2005 and 2014, illicit outflow increased at an average rate of 7-8% per year. Another report published by GFI noted that since 1970, the illicit outflow from Africa has amounted to roughly twice the levels of financial aid entering the continent. Clearly, the role of secrecy jurisdictions is an important element of a proper understanding of African poverty.

However, it is not just the already poverty-stricken that suffer from the effects of tax havens. The U.S. Treasury estimated in 2007 that its nation loses around 100 billion dollars of tax annually due to offshore banking abuse, a phenomenon no doubt prevalent across the globe. It is the dutifully taxpaying citizens who suffer the most – they do not deserve to receive disproportionately poor social services because of international tax abuse.

So how can the problem be fixed? The Tax Justice Network posits a number of strategies that it considers viable solutions. One such solution is known as ‘country by country reporting’, which would require multinationals to break down their business reporting country by country. Currently, large multinationals only release reports that contain information regarding the business as a whole – no one outside of the company necessarily has access to location-specific information including that regarding profits, assets, subsidiaries, or taxes. This information gap allows the insidious strategy of transfer pricing to be employed with near impunity – how can one put a stop to alleged shifting of profits without sufficient data?

The value of country by country reporting would be maximized by the concurrent application of a system known as ‘unitary taxation’ – a model in which companies are taxed according to the real economic substance of their operations. In other words, if the true source of profit is in Botswana, then it will be taxed as such. The artificial and damaging accounting contortions that allow profit to be allocated freely would no longer be permitted.

The damaging nature of secrecy jurisdictions was recognized by the OECD as early as 1998, when it stated that tax havens “erode the tax bases of other countries, distort trade and investment patterns and undermine the fairness, neutrality and broad social acceptance of tax systems generally.” In recent years, the issue of tax havens has become increasingly prevalent in national and international debate, and in 2016, the United Nations commissioned a report to examine the global impacts of the offshore system. The report recommended various strategies to combat the issue, including the implementation of country by country reporting. The present challenge is no longer an issue of what to do, it is an issue of how: the difficulty of implementing worldwide tax reform should not be understated.

GFI President Raymond Baker once stated that the offshore system is “the ugliest chapter in global economic affairs since slavery.” It is easy to understand how he came to this conclusion: the welfare of millions is being sacrificed at the altar of financial gain. The problem of tax havens is inherently international and thus any solution requires a coordinated international response. As always, finding a unanimous voice is no small task. Attitude is also a significant factor; the imposition of yet more regulation goes against the grain for many people. However, regardless of these obstacles, it is vital that the global effort for change persists. The Paradise Papers leak has forced this issue into the spotlight – we should take care not to let our interest fade as the stories inevitably fade from our newsfeeds.

Isaac Chesters

Isaac is currently pursuing a Master of Laws at the Australian National University.
Isaac Chesters