Tax Avoidance By The Numbers: The Paradise Papers
Here’s a quick riddle for you: what do Donald Trump’s son-in-law, Shakira, and Queen Elizabeth II have in common?
All of them are mentioned in the Paradise Papers!
This 1.4-Terabyte treasure trove of financial documents contains details about some of the world’s wealthiest people. The list of hundreds of people whose confidential transactions have been revealed by the Paradise Papers includes politicians, business tycoons, entertainment and sports stars, and some of the largest companies on Earth.
The 13.4 million pages that comprise these leaked documents reveal how the world’s rich escape the tax laws of their home countries by using offshore tax havens. It’s more or less a mega-compendium on all things tax avoidance. For that reason, I think it’s an excellent educational resource to any aspiring tax professionals who want to know more about how the global tax system works and the numerous ways people exploit it.
Keep reading to learn more about what the Paradise Papers are all about and what they can teach us about tax avoidance!
Why Are They Called The Paradise Papers?
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It has a nice ring to it, but that’s not the whole story behind its name. Its phrasing sounds similar to “The Panama Papers,” which was a past tax exposé. The Panama Papers are 11.5 million files that were hacked from the database of Mossack Fonseca, a sizeable offshore law firm based in Panama that specialized in incorporating companies in offshore jurisdictions for its clients.
Both leaks were made by anonymous sources to the German newspaper Süddeutsche Zeitung, which shared the data with the International Consortium of Investigative Journalists. Due to the facts that the nature of these papers’ leaking, their subject matter, and their locations are all similar to this earlier exposé, the name “Paradise Papers” was chosen to define this leak as yet another tax avoidance scheme conducted at scenic tropical locations.
It’s important to remember that, in many respects, the data in the Paradise Papers is very different from the information in the Panama Papers. Gerald Ryle of the ICIJ explains, “This leak is important because it’s the high end of town. People may have dismissed [the Panama Papers] as they were rogue players who would take any client. Most of the offshore world is not like that at all. Here you have a gold-plated company.”
In fact, the Panama Papers, which contained leaked documents about the law firm Mossack Fonseca, were different from the Paradise Papers in one more crucial respect; Mossack Fonseca did not know who 75% of its clients were. After the exposé, the company made desperate attempts to identify the real owners of the offshore entities that it had created, reflecting a sad naivety and incompetence on the relatively small company.
Where Did The Paradise Papers Come From?
About half of the Paradise Papers were hacked from the offices of Appleby, a giant offshore law firm that has been in business for over a century. Almost 7 million of the leaked documents are from their records. Appleby holds its headquarters in Bermuda and has offices in the Cayman Islands, Shanghai, Hong Kong, the British Virgin Islands, and several other locations.
These leaks show that this company is complicit in their ethical misdeeds and remains unscathed, although it has received a large amount of negative publicity in the last year. The firm currently has 470 employees operating out of 10 locations. According to their About page, Appleby was crowned Isle of Man Firm of the Year at the Who’s Who Legal Awards in 2018. Furthermore, their Hong Kong managing partner, Judy Lee, won the Asian Women in Business Law Award that same year.
Source: BBC News
The documentation also includes over 500,000 files from Asiaciti, an international trust and corporate services company that was founded in 1978. The company provides “wealth protection services” to its clients by creating offshore trusts on their behalf. Its specialty is setting up trusts in Samoa and the Cook Islands, which are common locations for organizations that engage in tax avoidance. Jay Adkisson, an attorney and witness in the Paradise Papers investigation, stated “The sad fact is that Cook Island trusts are routinely used by people to cheat legitimate creditors.”
There are also six million documents from corporate registries in 19 secrecy jurisdictions that have been declassified. Most of these are located in the Caribbean, but you can see the full list of jurisdictions below:
Declassified Secrecy Jurisdictions
|
1. Antigua and Barbuda |
11. Lebanon |
|
2. Aruba |
12. Malta |
|
3. Bahamas |
13. Marshall Islands |
|
4. Barbados |
14. St. Kitts and Nevis |
|
5. Bermuda |
15. St. Lucia |
|
6. Cayman Islands |
16. St. Vincent and the Grenadines |
|
7. Cook Islands |
17. Samoa |
|
8. Dominica |
18. Trinidad and Tobago |
|
9. Grenada |
19. Vanuatu |
|
10. Labuan |
(Source: Süddeutsche Zeitung)
What is a secrecy jurisdiction? According to UK-based advocacy group Tax Justice Network, secrecy jurisdictions are countries that allow individuals or companies to “escape or undermine the laws, rules, and regulations of other jurisdictions elsewhere, using secrecy as a prime tool.”
That last part about secrecy is important. This is what separates a secrecy jurisdiction from a tax haven; both involve helping foreigners avoid taxes, but only the former does so secretly. An example of a tax haven that isn’t a secrecy jurisdiction would be Ireland, since their tax practices and the companies that take advantage of them are common knowledge.
While we’re defining terms, let’s also briefly go over the difference between tax evasion and tax avoidance. Although these two terms sound very similar, they have an important distinction: tax evasion is illegal while tax avoidance is only considered to be unethical. Most of the information presented in the Paradise papers are examples of tax avoidance, but some of the information has been used as evidence for tax evasion investigations by the relevant countries’ governments.
Does that make sense? Then let’s move on!
Who Leaked The Paradise Papers?
The Paradise Papers were leaked to Frederik Obermaier and Bastian Obermayer, two investigative journalists who work at the Süddeutsche Zeitung. There is no information about the person or organization behind the leaks, making them completely anonymous. Süddeutsche Zeitung says that “To protect [their] sources,” they specifically avoid providing any information “regarding how the information reached the newspaper, who provided it or when it was received.”
What Are The Details That The Paradise Papers Contain?
The Paradise Papers include emails, trust deeds, and tax plans for multinational businesses and organizations as well as wealthy individuals. The leaked documents are from the years 1950 to 2016: over 65 years of data!
Some of the revealed corporate clients include the following:
- Amazon
- Apple
- Barclays Group
- Bayer
- Citibank
- Credit Suisse
- Disney
- Goldman Sachs
- HSBC Bank
- JPMorgan Chase
- KPMG
- Lloyds Banking Group
- Nike
- PwC
- Royal Bank of Scotland Group
- Santander UK
- Standard Chartered
- Uber
It’s clear to see that based on the well-known companies and institutions listed above, the agencies like Appleby and Asiaciti that help individuals avoid paying taxes do so on a large scale. They mainly do this by setting up shell companies for them in the aforementioned tax havens and secrecy jurisdictions. Ugland House, a five-story building in the Cayman Islands, is one of the most popular locations for this practice and serves as the registered office for roughly 20,000 companies. The total number of shell corporations in the tiny Cayman Islands? A massive 100,000.
Who Are Some Of The People Exposed By The Paradise Papers?
In addition to revealing methods of tax avoidance, many of the people mentioned in the Paradise Papers have been exposed for their engagement in other forms of suspicious and secretive activity. Here are some of the most shocking revelations:
- Yuri Milner is a Russian billionaire who has made significant investments in Twitter and Facebook. The money for this came from a bank controlled by the Russian state and another government-financed institution. Milner has also invested in Cadre, a real estate tech firm that has Jared Kushner, the son-in-law of Donald Trump, as its founder. The use of shell companies to fund some of these investments tax-free, as well as the connection between Milner and Kushner, was revealed in the Paradise Papers.
For more information regarding the Trump family’s history of (alleged) tax fraud, read the previous article in this series titled Tax Fraud By The Numbers: The Trump Timeline.
Source – The Guardian
- Wilbur Ross is the United States Commerce Secretary appointed by President Donald Trump in 2017. The leaked papers revealed that through offshore entities, Wilbur Ross held a stake in the shipping company Navigator Holdings. And according to the ICIJ, one of this tropical tax haven-based company’s largest clients is Sibur, “A Russian gas and petrochemicals company… which has close ties to the Kremlin.”
- Stephen Bronfman is a Canadian philanthropist who worked as a fundraiser and financial advisor for Justin Trudeau, the current prime minister of Canada. The Paradise Papers leak revealed that Claridge Inc., one of his investment companies, was involved in a Cayman Islands-based offshore trust worth around $60 million. His association with the prime minister conflicts with Trudeau’s prior statements regarding tax law, when he stated that “Tax avoidance [and] tax evasion is something we take very seriously.”
- Jean-Claude Bastos is an entrepreneur with Swiss and Angolan heritage. in 2011, he was appointed the asset manager to Angola’s $5 billion sovereign fund for the purpose of investing its oil-based wealth. In the 20 months between May 2014 and December 2015, Jean-Claude Bastos’ Mauritius Islands-based asset management company received more than $90 million in management fees from the fund. These tax-free funds were then invested into other companies owned by Bastos according to an article published by the BBC.
Source – BBC
- Queen Elizabeth II’s private estate, the Duchy of Lancaster, invested in BrightHouse, a U.K. firm that finances the sale of household goods to Britons with high interest rates. Instead of making this investment directly, The Duchy followed a convoluted route that involved a private equity company based in the Cayman Islands. This maneuver, which was seen as an act of tax avoidance, elicited harsh criticism from UK politicians and advocacy groups.
- Shakira, the Colombian pop singer, was investigated for tax evasion in Spain following the Paradise Papers leak. The papers revealed that she shifted roughly $31 million worth of intellectual property rights and trademarks through Tournesol Ltd., a company of which she is the sole owner. This company is based in Malta, one of the aforementioned secrecy jurisdictions commonly used for tax avoidance.
- Akira Toriyama is a Japanese comic artist known for creating the popular manga and anime series Dragon Ball. The Paradise Papers leak revealed that Toriyama was an investor in an American real estate company that closed in the wake of a federal investigation that revealed malicious accounting practices.
These are just a few examples of the people exposed by the Paradise Papers leak. More information on individuals and organizations mentioned in this and other leaks can be found on the ICIJ’s Offshore Leaks Database.
What’s So Upsetting About The Paradise Papers?
Most of the revelations from this massive leak are in regards to the way that these powerful individuals and companies have taken advantage of existing laws to lower or eliminate their tax payouts. What’s worse is that there are few disclosures regarding these public people and entities’ contravention of the tax laws; without these leaks, the general public would have no idea of it at all.
Whether or not these organizations break any laws by engaging in these deceptive practices is beside the point. By not paying taxes, they deprive the governments of their countries of vast sums of money that are intended to keep the systems functioning that allowed them to reach their incredible wealth and prestige in the first place.
Consider the following:
- According to an Internal Revenue Service report, tax avoidance amounted to $458 billion lost per year from 2008 to 2010. The I.R.S. says that they will be able to recover only an estimated $52 billion of each year’s unpaid taxes: about 11%.
- The U.S. PIRG, an advocacy group, released a report pointing out that 366 of the Fortune 500 companies (roughly 73%) have subsidiaries in offshore tax havens. These firms hold over $2.6 trillion in accumulated offshore profits. The largest culprits? Apple, Pfizer, Microsoft, and General Electric. It’s estimated that if all the Fortune 500 companies repatriated their profits, they would owe $752 billion in back taxes.
- In his book The Hidden Wealth of Nations, UC Berkeley economics professor Gabriel Zucman estimates that 8% of global wealth (about $7.6 trillion) is held offshore.
Here’s some more information that may cause your blood pressure to rise:
- In May 2013, Apple CEO Tim Cook told a U.S. Senate Permanent Subcommittee of Investigations, “We pay all the taxes we owe, every single dollar. We do not depend on tax gimmicks… We do not stash money on some Caribbean island.” But the truth is that the world’s most valuable public company holds much of its non-U.S. earnings offshore to avoid paying U.S. taxes, as has been revealed by the Paradise Papers.
Source – ICIJ
- Nike, the massively profitable sportswear company with a global reach, has taken advantage of Bermuda’s laws to avoid paying taxes. Its Swoosh brand is held by Nike International Ltd., which is registered in Bermuda. This location has helped Nike to create a $6.6 billion mountain of cash that has been taxed at just 3% outside the U.S. with no taxes being paid in the U.S. on this amount.
- Edward Kleinbard, a tax professor at the University of Southern California, states that “U.S. multinational firms are the global grandmasters of tax avoidance schemes that deplete not just U.S. tax collection but the tax collection of most every large economy in the world.” These harsh words are backed up by another economist, Gabriel Zucman. According to him, 63% of the foreign profits made by U.S. companies find their way to tax havens as outlined in the graph below:
Source – ICIJ
Why Aren’t More People Talking About This?
The Paradise Papers revelations were made in November 2017. At that time, there was extensive media coverage across the globe as well as a great deal of public anger against the profitable multinationals that were stashing their money in these offshore tax havens and secrecy jurisdictions. Protesters in Paris even chained themselves inside an Apple store and demanded that the company pay $15 billion in taxes.
But what has been the outcome after more than a year has passed?
The Independent Commission for the Reform of International Corporate Taxation (ICRICT), an agency that is working towards getting multinationals to pay taxes, says that the progress in the last 12 months has been insufficient. It points out that:
- Tax havens have still refused to publish public registers of the companies and trusts registered with them. This encourages the establishment of new shell companies that remain hidden from scrutiny.
- Multinational companies still don’t reveal country-by-country data of their revenues and profits.
- The U.S. has not signed the OECD Common Reporting Standard, an information standard that provides automatic access regarding bank accounts between tax authorities of different countries.
What about Appleby, the law firm at the center of these leaks? Well, after a lengthy legal battle in which they attempted to prevent the Guardian and BBC from disseminating the leak, all parties have reached a settlement and stated that they’ve “resolved their differences.”
So, will it be business as usual for the tax havens? It certainly looks that way. Although there doesn’t seem to be a clear explanation as to why this entire occurrence has been swept under the rug, a reasonable guess would be that the combination of a constant bombardment of sensationalist headlines every day and aggressive legal threats from the ultra-rich parties exposed have caused this incident to fall into the memory hole.
The Bottom Line
Even though there has not been much action taken by the tax authorities of various countries based on the leaks, the Paradise Papers have served a useful function.
The rich and famous are more likely to exercise a higher degree of caution when they enter into transactions that they would like to hide from the public. This is because despite their attempts to pull attention away from these leaks, individuals are still upset and have demanded more accountability from their politicians and transparency from large corporations.
Additionally, this entire ordeal serves as an excellent lesson into how tax avoidance works. Companies like Apple, Nike, and Pfizer; politicians like Wilbur Ross, Stephen Bronfman, and Queen Elizabeth II; and other rich people like Shakira, Akira Toriyama, and Jean-Claude Bastos will take their large sums of money, invest them in businesses with “offices” located on tropical islands, and then funnel that money tax-free into other business ventures and financial relationships.
Most of these actions are only tax avoidance instead of tax evasion since no laws are being broken, meaning that the problem is institutional. That means that fixing this issue will involve fixing the system that it exploits.
And the first step to fixing any system is to understand it.