The world’s rich and powerful people continue to surprise the rest of the world with how secretly and unfairly their wealth is being secured.
The Paradise Papers, a leak of 13.4 million offshore documents published on Nov. 5 mostly came from two offshore services firms, Bermuda-based Appleby and Singapore-based Asiaciti Trust, as well as from 19 corporate registries maintained by governments in secret offshore jurisdictions.
Among those exposed were U. S. Secretary of Commerce Wilbur Ross, pop star Madonna, tech giant Apple, Queen Elizabeth and at least 11 Ukrainian business and political heavyweights, including President Petro Poroshenko.
Weeks before the Paradise Papers became public on Nov. 5, Appleby announced that it had been hacked and that their documents were leaked to journalists of Suddeutsche Zeitung and the International Consortium of Investigative Journalists.
Billions gone
It’s hard to say how much developing countries like Ukraine are losing due to offshores. But the figure is in the billions.
Kostiantyn Likarchuk, senior partner at Kinstellar, says that Ukraine’s state budget is deprived of at least tens of billions of dollars due to offshore tax evasion. The Economist suggests a similar number, estimating roughly 10 percent of the country’s gross domestic product, standing at $93 billion in 2016, has been lost this way during the 1990s and 2000s.
The Tax Justice Network, a non-profit advocacy group, suggests that globally, annual tax losses are at $500 billion or more. This represents over 20 percent of corporate tax revenues which have not been paid. Global estimates of wealth hidden by individuals via offshores are astounding, ranging anywhere between 7.6 trillion to $32 trillion.
Why offshore?
Offshores can be used for various purposes such as securing patents and intellectual property, but for many the principal attraction of these tax havens is secrecy and the low-tax or no-tax business environment. Although setting up an offshore company isn’t necessarily unlawful, it is considered unethical by many.
“No one would go to the trouble of setting up an offshore company if they could do this at home or onshore,” George Turner, a researcher at Tax Justice Network, told the Kyiv Post. “In this way, offshores allow them to do things they can’t do otherwise.”
Offshore companies, often dummies, are used not only to avoid paying taxes but also hide cash flow and ill-gotten property.
Moving activities offshore isn’t cheap. One of the firms operating in Bermuda, Healy Consultants Group PLC, advertises some of its services online for $16,980. This would include offering registration of an exempt company that would not have to pay taxes or act according to the usual regulations of its home country. One can register their offshore in three weeks with a minimum capital deposit of $1. No physical office is required and no corporation tax is applied.
Bermuda is a famous tax haven, but some European countries also offer tax relief and little regulation.
Transparency International found 766 companies registered in the United Kingdom that had been directly involved in laundering over $100 billion out of at least 13 countries, including Ukraine.
This widespread use of offshore jurisdictions also distorts the statistics of foreign investment flow. Ukraine’s top foreign direct investors come from Cyprus, British Virgin Islands, Netherlands as well as Belize, Panama, Seychelles, Luxembourg, and Switzerland, according to the State Statistics Service.
Non-tax reasons
Kinstellar’s Likarchuk says that there are many purposes of an offshore. One reason is to secure a business under British law since it is more “convenient and flexible” when resolving a dispute.
“Most people, even very powerful and influential want to bring their disputes out of Ukraine and have them resolved somewhere abroad in London, Stockholm or elsewhere,” Likarchuk said. This assures a higher level of security and stability as well as provides companies with more access to foreign banks that often will not accept Ukrainian law-governed documents.
Another reason would be to secure business operational activity such as protecting patents and intellectual property.
“From an operational perspective, you would establish structures outside of Ukraine,” Likarchuk said. “It’s quite normal.”
It becomes more controversial when one structures a mergers and acquisitions transaction. “That’s when people try to avoid taxes,” Likarchuk said. This way one can transfer large amounts of money immediately avoiding the need to pay taxes. “That’s when these kind of British Virgin Islands and Cyprus holdings kick in.”
Another aspect is confidentiality and the option to hide behind trust declarations such as if an owner of an expensive yacht or car would want to avoid declaring the expensive asset.
Avoidance vs. evasion
The distinction between tax avoidance and tax evasion is clear. Tax avoidance means taking advantage of loopholes in legislation, while tax evasion is an absolutely illegal action where an entity does not declare income, property, or commits fraud in order not to pay taxes. But both are the same in a sense that someone deliberately sets out to not pay taxes.
“It is important to remember that both start with the same intention and in the end have the same result — societies lose money. Both practices are abusive and governments need to challenge them,” Turner said.
Fighting the system
The Tax Justice Network suggests several ways to combat tax dodging via offshore jurisdictions.
One way is to set up an automatic exchange of banking information. If a Ukrainian citizen sets a bank account on the British Virgin Islands, the offshore bank would have to pass on the information to the Ukrainian authorities.
Full disclosure of beneficiaries is another step. Today, most company registries list owners and directors, who may not be the ultimate beneficiaries of the company.
In 2017, Ukraine integrated its national registry of beneficiary ownership to integrate with the global Open Ownership Register. The website combines data from company registers around the world where anyone can search for information on specific companies.
Finally, multinational corporations must publish financial reports on revenues, sales, staff, taxes paid, losses based on every country. This way, it will be easy to see the discrepancy between operations and profits of a company in the particular country in which it operates.
