Economy

Why tax havens persist, and where a rethink could take hold

Shift in thought

What could be $200 billion in tax revenue instead sits in offshore centers, parked there by individuals and corporations, often legally. Some reformers would like to remedy that. One lever: new attention on the ethics and morality of the practice.

Commerce Secretary Wilbur Ross appears before the House Committee on Oversight and Government Reform to discuss preparing for the 2020 Census, on Capitol Hill in Washington, Oct. 12, 2017.
J. Scott Applewhite/AP
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Money may be the mother’s milk of politics, but the two don’t mix well when the money is channeled through a tax haven.

The leak of documents last year from a law firm in Panama, a tax haven, led to the departure of two prime ministers (Iceland’s and Pakistan’s). Another leak of papers this past weekend from a law firm operating in the Cayman Islands has now embarrassed Britain’s Queen Elizabeth II and Jordan’s Queen Noor, billionaire and political donor George Soros, onetime presidential candidate Gen. Wesley Clark (ret.), singer and political activist Bono, and US Commerce Secretary Wilbur Ross.

For Mr. Ross, the revelations represent a kind of double whammy. The new leak of documents reveals his investment in an offshore shipping company that did big business with a Russian energy firm part-owned by the son-in-law of Russian President Vladimir Putin and a billionaire close to Mr. Putin. Also, as the GOP tries to push tax reform through Congress, a reform the commerce secretary has called “simple and fair,” he himself has used complicated and opaque methods to lower his own taxes on offshore profits to near-zero.

Such business practices, though often legal, look unsavory in the white-hot glare of the political limelight. So why do rich political figures risk it?

One reason is that tax havens can save them millions of dollars. Another is that these business practices are so common that, in some circles of the super-rich, they’re regarded as standard procedure, much as middle-class taxpayers might take out individual retirement accounts to lower their taxes. And thanks to the secrecy laws of the tax havens, these transactions have been kept hidden.

Until now.

Leaked documents last year from the Panama-based law firm Mossack Fonseca (the so-called Panama Papers) and last weekend’s leaked records from Cayman Islands-based law firm Appleby and corporate services provider Estera (the Paradise Papers) are shining new light on these enclaves and the people who use them. And they raise troubling ethical and moral questions that, according to some observers, are beginning to change attitudes among some of the wealthy people who use them.

“I didn’t speak to anyone who didn’t know at some level this was a violation of moral law,” says Brooke Harrington, a sociologist at the Copenhagen Business School and author of the 2016 book, “Capital without Borders: Wealth Managers and the One Percent.” “You have benefited from this [government support]. Now you want to skip out on the bill?”

No one can say for sure how many tax havens exist, because definitions vary. Eight jurisdictions figure on just about everyone’s list: the Bahamas, Bermuda, the Cayman Islands, Guernsey, Jersey, Malta, and Panama. In 2009, the authors of “Tax Havens: How Globalization Really Works” counted 56 nations that could be seriously considered tax havens, home to an estimated 2 million international companies, even though many of those are shell companies.

Estimates of how much money flows through these entities also varies greatly. At least 8 percent of global wealth resides in these offshore centers, costing the owners’ home nations at least $200 billion in annual tax revenue, according to Gabriel Zucman, a finance expert at the University of California at Berkeley. Much of that lost revenue would otherwise have gone to developed nations in Europe, North America, and Asia.

And it’s not just wealthy individuals. The Paradise Papers also reveal that Apple and Nike used tax havens to reduce their liabilities. Apple, for example, moved to Jersey after authorities pressured Ireland to close a loophole that had allowed Apple to pay far less than the 12.5 percent corporate tax rate. In 2014, the computer and electronics giant had paid only 0.005 percent.

The company says it informed authorities of the move, which did not trim its taxes, according to the International Consortium of Investigative Journalists, a global network of more than 200 investigative reporters, which received and reported on the leaked Panama and Paradise papers.

But the maneuver draws into question the assumption of GOP tax reformers, who claim that by slashing the US corporate tax rate from a nominal 35 percent to 20 percent, corporate money will come flooding back to the United States, creating new capital and jobs.

“I don’t think that’s going to happen,” says H. David Rosenbloom, a former senior Treasury official and now international tax lawyer at Caplin & Drysdale in Washington. “I have seen countless companies go through hoops to reduce their Irish taxes below 12 percent.”

And that is the problem of tax havens, according to “Tax Havens.” Far from being a dark little corner of finance, “they play an important role in the world economy,” the authors write. “First, they undermine the regulatory and taxation processes of the mainstream states…. Second, in doing so, they skew the distribution of costs and benefits of globalization in favor of a global elite and to the detriment of the vast majority of the population.”

Leaked papers revealing investments in tax havens by the world's wealthy suggest U2 frontman Bono used a company based in low-tax Malta to buy part of a shopping mall in Lithuania. Pictured: Ausra shopping mall in Utena, north of Vilnius, Lithuania.
Mindaugas Kulbis/AP
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Defenders of the system point out that many tax haven maneuvers are legal and that what they’re doing is tax avoidance, not tax evasion.

“There is nothing wrong with it,” Ross told the BBC, going on to say he disclosed his investments, including the shipping company partnering with the Putin-linked company, before his confirmation hearings for the Commerce post. “The fact that it happens to be called a Russian company doesn’t mean there is any evil in it.”

(Separately, Ross was dropped by Forbes in its ranking of the richest billionaires because, it says, he grossly inflated his net worth.)

Still, by using shell companies, secret tax records, and other tax-haven tools that criminals, dictators, and money launderers use to hide their money, the super-rich are courting embarrassment if their dealings are made public. And the ethical and moral questions aren’t going away.

“Many people at the top and all over the place realize this isn’t just a technical issue, it’s an ethical question,” says Gawain Kripke, director of policy and research at Oxfam, a global nonprofit that tracks tax havens. And there are signs of change, he adds.

The revelations of the Paradise and Panama papers are just part of the increasing data that’s coming out about tax havens. The European Union is proposing ownership registries that would show the real owners of companies and eliminate anonymous shell corporations. The Organization for Economic Co-operation and Development, which represents the developed nations, has brought together 100 nations to look at gaps and mismatches in tax rules that allow multinationals and wealthy individuals to avoid taxes.

“The fight against unfair financial practices is making great progress,” Tom Cardamone, managing director of Global Financial Integrity, a Washington-based nonprofit research and advisory group, writes in an email. “There [is] much more work to do of course, but I think we're at the end of the beginning on this.”

Public attitudes may be changing, too. In 2015, a committee of Britain’s Parliament accused international accounting firm PricewaterhouseCoopers of promoting widespread tax avoidance. Last week, the company released an asset and wealth management report, which called into question the use of tax havens by companies and individuals.

“In an era of mistrust of financial services, especially among the millennial generation, tax will become important for the brand," it said. “Being viewed as not paying a fair share of tax or using questionable tax havens will be unacceptable.”

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