The Paradise Papers show just how far there is to go in the global drive for financial transparency, but experts disagree on what needs to be done.
T he decades-long era of tax haven secrecy seems to be in its twilight days. Over the last few years, over 100 countries have brought in rules forcing finance firms to collect details on overseas clients, with the aim of exposing tax evaders to a global swirl of data.
Previously, many tax havens had cast-iron guarantees on the privacy of the large firms and wealthy individuals who came to their shores. But the US started pulling the plug in 2010, when a federal law was passed forcing foreign banks to hand over data on US-based individuals (on penalty of an unimaginable 30% tax) and requiring those individuals to report their foreign assets to the Internal Revenue Service (IRS).
Since then many countries have followed suit, with a bank information-sharing system known as the Common Reporting Standard born in the process. The global transparency drive faced resistance, but the Panama Papers scandal that broke last year redoubled it, bringing politicians and other highly visible figures under the scornful eye of the public.
While there has yet been little suggestion of financial crime in the wake of another leak, known as the Paradise Papers, it could yet lead to charges and convictions once the proper investigations run their course.
But when it comes to the public fury sparked by the first key revelations, illicit activity is only part of the story.
For a start, the leak has highlighted the sheer scale of secrecy involved in the world of offshore investment. Through financial instruments known as “trusts”, companies and people determined to hide their affairs from competitors, governments and the wider public can still do so with some ease.
Even in the world’s relative beacons of transparency, such as US and UK politics, much can remain concealed - like US Secretary of Commerce Wilbur Ross’ business ties to Vladimir Putin’s family, or Queen Elizabeth II’s estate holdings in Bermuda and the Cayman Islands.
This is where schemes like the Common Reporting Standard seem to be changing things, pushed along by the watershed investigations. Senior politicians such as the former Pakistani Prime Minister Nawaz Sharif were toppled as a consequence of the Panama Papers investigations.
But a significant part of the backlash seems directed at how perfectly legal schemes allow large companies and high-net-worth individuals to park their money on sunny islands with attractive financial conditions.
Stacked in favour of the elite?
Many have labelled the tax avoidance culture prevalent in many countries a system stacked in favour of the elite.
“Lawyers, accountants and bankers have taken the lead in undermining the tax codes of democratic countries,” says John Christensen, director of the Tax Justice Network advocacy group, amounting to “a protracted assault on democracy and the rule of law”.
“The fact that they do this covertly behind hidden offshore structures suggests that they know perfectly well that what they do is harmful, immoral, and more often than not illegal,” he told The World Weekly.
“Offshore tax avoidance schemes are typically only available to large companies and wealthy people,” he adds, meaning “small businesses and the firefighter next door can’t avoid tax.”
“So the tax burden falls unequally on different sections of society, exacerbating wealth and income inequality.”
Some, on the other hand, argue that the large sums and big names involved have clouded the debate.
Diego Zuluaga, head of financial services at the Institute for Economic Affairs, a pro-free market think tank based in London, argues that offshore tax avoidance should be put in perspective.
“Offshore centres are available to anyone, but it only pays people with enough resources to use them,” he told The World Weekly. “That doesn’t mean that ordinary people don’t avoid tax.”
“We use tax-exempt [savings accounts], buy duty-free spirits and cigarettes when travelling, take advantage of interest tax breaks on mortgages and other forms of credit, and save for our pension through tax-advantaged schemes. All of those are forms of tax avoidance which, because of the sheer number of people taking advantage of them, are far bigger in the magnitude of their impact on treasuries than avoidance by the rich and famous.”
“The public’s perception of the tax system as unfairly stacked in favour of the rich is belied by the evidence,” he adds, not least as the private sector contributes more and more in tax. Since 1980, revenues from corporation tax have grown as a proportion of overall tax revenues from 7.5% to 8.5% across OECD countries. They also make up a greater share of GDP.
Indeed, in many developed countries, the richest individuals appear to be paying more and more tax, both in absolute terms and as a proportion of governments’ total tax intake.
In the UK, for example, the top 1% of earners pay 26.9% of income tax receipts, the top 10% pay around 59% and the top 50% pay about 90%, according to 2016-2017 data by the Institute for Fiscal Studies (IFS).
The share of income tax paid by the top 1% of UK earners has steadily grown since at least 1990, according to IFS data.
The IFS found this general rule holds even when other types of tax, including those not tied to earnings, such as VAT and excise duties, are accounted for, amounting to three-quarters of total tax revenue. The top half of households contribute 78% of this revenue.
Nonetheless, many feel that the growing tax contribution of the private sector is not enough. Even though corporation tax intake has grown, the Paradise Papers have revealed just how much more could be taken if multinational corporations followed tax rules ‘in spirit’ rather than just in letter.
There are some exceptions to the overall trend, even if it generally holds since 1980. In the US, Mr. Christensen points out, corporation tax, and excise and estate taxes make up a much smaller proportion of federal tax revenues than they did in the 1940s according to data from the Office of Management and Budget.
Ultimately, the companies that offshore funds invest in, and the income that investors receive from those funds, are taxed wherever they are based. Governments, therefore, can either try to recoup more by toying with their own tax systems or by clamping down on overseas investment.
Many economists, however, believe there are good reasons for letting firms and individuals move their riches around the world, as capital mobility has been central to the globalisation-driven growth seen in recent decades.
Unfashionable as it may be, argues Mr. Zuluaga, tax avoidance is to some extent a necessary part of this. Overseas financial centres have often shielded investments from corrupt governments, he says, and allows firms to “vote with their feet” when faced with “confiscatory” taxation of the likes seen under former French president Francois Hollande.
Most politicians, of course, have not been making such arguments. The issue is deeply sensitive in light of the economic inequality that still pervades global society.
Regardless of whether squeezing the richest companies and individuals more would help or backfire, many believe the Paradise Papers show they could contribute more, and many believe they should.