21 November 2017
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EU and other nations grappling with how to counter offshore tax avoidance

Business Times
09 Nov 2017
Neil Behrmann

Paradise Papers also raises issue of what to do about leakage and publication of confidential banking, legal info

[London] THE Paradise Papers are once again causing governments to grapple with ways to counter offshore tax avoidance.

In doing so, nations also need to combat another problem, notably the leaking and publication of confidential banking and legal information. This significant aspect has not been covered adequately by the newspapers and the investigative journalist consortium that have gained access to the papers.

To recap, the leak known as the Paradise Papers covers corporate and individual data from offshore services firms such as Appleby and from 19 corporate registries in offshore centres. The leaks were obtained by German newspaper Süddeutsche Zeitung, shared with the "International Consortium of Investigative Journalists" and newspapers such as the Guardian. Disclosures include reported alleged offshore investments and activities of clients ranging from the Queen of England, US Secretary of Commerce Wilbur Ross and major multi-national companies including Apple, Nike and Uber.

The 13.4 million or so records include alleged ties between Russia and billionaire Mr Ross, dealings of the chief fundraiser for Canadian Prime Minister Justin Trudeau and more than 120 politicians around the world.

The leaked documents illustrate the offshore financial system's connections with sports stars, celebrities, billionaires and other members of the super rich. These global companies and individuals have commissioned accountants and lawyers to find imaginative loopholes to legally avoid taxes.

Brooke Harrington, a certified wealth manager and Copenhagen Business School professor, who is the author of "Capital without Borders: Wealth Managers and the One Percent", maintains that the offshore financial industry makes "the poor poorer" and is "deepening wealth inequality".

Gabriel Zucman, assistant professor of economics at University of California, Berkeley estimates that six European tax havens alone (Luxembourg, Ireland, the Netherlands, Belgium, Malta and Cyprus) siphon off a total of 350 billion euros (S$552 billion) every year. "Globally, our data suggests more than 600 billion euros is artificially shifted by multinationals to the world's tax havens each year."

Offshore centres mainly offer legal tax avoidance and privacy for clients of banks, legal and accounting firms and other funds and institutions. The secrecy of these tax havens, however, also attracts money launderers, tax evaders, criminals and dictators who stash away cash hoards.

The overall economic problem is that indebted nations - especially after the crash of 2008/2009 - are deprived of much needed tax revenue to reduce unemployment, pay for health and education and cope with the growing demands of an ageing populace.

Since the vast majority of the Paradise Papers and former disclosures are legal, governments have a problem. Indeed, as far back as 2010, 114 nations signed up to the Organisation for Economic Cooperation and Development (OECD)'s Convention for international tax co-operation. The OECD Convention was aimed at providing administrative assistance in tax matters. It also guarantees extensive safeguards for the protection of taxpayers' rights and provides a legal basis for other forms of cross-border tax cooperation, including collection of taxes. Recent disclosures of The Panama Papers and now the Paradise Papers illustrate that it is exceedingly difficult to combat the ingenuity of global tax advisers. Companies and the rich and famous who wish to reduce their tax bills are likely to continue to seek their advice, regardless of government opposition and those who question their ethics and morality.

This week European Union finance ministers called for a blacklist of tax havens to be drawn up for approval next month. Discussions included offshore banking centres such as Jersey and Bermuda. But some EU countries, notably Luxembourg and Malta, have also been criticised for acting as tax havens.

"If one tax oasis closes, another one opens," said Austrian Finance Minister Hans Joerg Schelling. "We should toughen measures on those who don't participate in OECD rules, be it on information exchange or other measures". He believes that the centres should automatically be placed on a blacklist so that everyone becomes willing to close tax loophole. French Finance Minister Bruno Le Maire said France will table a proposal to punish tax havens, which includes cutting international funding.

Illustrating the difficulties in imposing sanctions against offshore centres, ministers were divided. "There was strong support for the idea of moving forward quickly," Estonia's Finance Minister Toomas Tõniste, who holds the EU's rotating presidency, told reporters. He added that "most countries" wanted the adoption of the list next month. But he acknowledged that not all the 28 EU member states were equally keen to go that fast.

"A blacklist is always a difficult exercise," Luxembourg's Finance Minister Pierre Gramegna, said. "It's an EU initiative that we have to agree together."

Tax authorities in the UK and India are also examining the Paradise disclosures.

Source: Business Times © Singapore Press Holdings Ltd. Permission required for reproduction.