How will governments solve the tax haven riddle?
Offshore tax havens cost us all billions, but cracking down on them is like a game of whack-a-mole, writes the Star’s Marco Chown Oved
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In the hours and days after the Paradise Papers were made public, politicians around the world were falling over each other to show they were cracking down on the tax havens that deprive billions from public accounts every year.
“We use the information received through leaked lists when they arise, but we do not wait on these lists to attack the problem,” said Prime Minister Justin Trudeau, who faced a barrage of questions over the involvement of the Liberal Party’s chief fundraiser, Stephen Bronfman, in a $60-million offshore trust fund.
But are such vows simply hot air? Tax avoidance due to tax havens is a long-standing problem that has surfaced repeatedly with little changing. Why should we believe that the government will actually succeed in closing the loopholes this time? After all, they’re up against an army of lawyers and accountants, employed by the country’s powerful interests. What chance do regular people have?
Most Canadians don’t understand the complex offshore structures created to minimize tax and that’s because they don’t have to. They’ll never make enough money to take advantage of these structures, which only really work if you’ve already maxed out your RRSP and TFSA and still have a million or so lying around.
Tax advisers who promote the offshore world defend their products as being no different than your RRSP. They’re not illegal, after all.
But that’s the point, as former U.S. president Barack Obama noted: “The problem is that a lot of this stuff is legal, not illegal.”
The entry price for these offshore structures means that they’re beyond the reach of everyone except those whom the industry refers to as UHNWIs — ultra high net worth individuals. In fact, the majority of wealth in tax havens belongs to those worth more than $50 million. These legal offshore tax shelters reserved for the elite create a two-tiered tax system — where the wealthy stockpile their cash tax free and everyone else pays to make up for it.
Yet, as the Star reported this week, clamping down on offshore tax shelters is a Sisyphean task. The last piece of legislation to combat unfair use of offshore family trust funds took 14 years to pass. By the time it became law, everyone with money in an offshore trust had already restructured their assets to avoid being taxable under the new rules.
Since Trudeau’s election in 2015, the Canadian government has stepped up its tax fairness rhetoric, but many basic issues have yet to be addressed.
First off, the government doesn’t know how much money has been moved offshore to avoid tax. Measuring the tax gap, an annual calculation performed by a dozen countries around the world, was until recently considered unnecessary by the Canada Revenue Agency (CRA). When the Parliamentary Budget Officer asked the CRA for the statistics to make the tax gap calculation itself, the CRA stonewalled for years, refusing to divulge “confidential” information, even to another branch of its own government.
Sometimes it seems as if Ottawa has been more interested in helping money move offshore than taxing it. Since 2009, the government (both Conservative and Liberal) has signed 24 Tax Information Exchange Agreements (TIEAs) with tax havens that were ostensibly about gaining access to information on tax cheats, but have only served to open the floodgates for billions of dollars to flow offshore tax free.
While statistics show that at least $55 billion has been transferred to tax havens since the TIEAs were signed, the government can produce no evidence that the agreements have ever helped catch a single tax cheat.
It wasn’t always this way.
Offshore tax havens were born decades ago, in an era when currency controls and restricted trade ruled the global economy. Then tariff barriers came down, globalization gathered speed and tax havens grew from a cottage industry for a few currency traders into fortified fortresses for family fortunes and multinational profits.
Globally, Zucman’s data shows more than $886 billion is artificially shifted by multinationals to the world’s tax havens each year.
Far bigger than an elephant in the room, offshore tax havens are more like a parade of pachyderms hiding in your closet.
They form an entirely parallel global economy, one that exists in the shadows, masked by bank secrecy, anonymous shell corporations and private trust funds.
For decades, there has been little political appetite to confront what has been going on in the offshore realm, partially because the industry exists in the empty space between national legal regimes, and cannot simply be legislated out of existence.
Combating tax havens is like whack-a-mole, where any reform to crack down on a particular tax dodging technique results in a new strategy popping up somewhere else.
Thousands of accountants and lawyers devote their working lives to devising legal methods of avoiding tax through tax havens. Their clients aren’t only wealthy families with inheritances to worry about; these professionals also staff the finance departments of every major corporation in the world, helping maximize shareholder value by minimizing tax.
With so many people overseeing such large flows of money, no wonder the offshore economy has been compared to water, which will find a crack in any stone and work its way through.
Appleby, the offshore law firm at the centre of the Paradise Papers leak, boasts as much, saying tax havens — called offshore financial centres (OFCs) in industry jargon — are an “unstoppable force.”
“OFCs touch upon every type of business, and upon every type of transaction, in every part of the world. That is not going to change any time soon,” wrote Canadian lawyer Michael Burns, Appleby’s managing partner in the British Virgin Islands, in the Cayman Financial Review.
But political passiveness and public indifference began to change in April, when the Panama Papers leak laid bare the internal workings of a major offshore provider.
It crystallized a feeling that the system was rigged, especially for millions in the U.K. and Europe who had been asked to suffer under austerity measures for years because governments couldn’t afford to provide basic services like public pensions, health care and education.
The leak showed how the wealthy and corporations weren’t suffering at all. Neither were they paying much tax.
Lavish lifestyles and record profits abound thanks to private anonymous corporations and offshore subsidiaries. The leak also revealed how corrupt politicians hide bribes and money pilfered from public coffers, as well as how criminals launder their ill gotten gains.
Shortly after the Panama Papers were made public, 300 prominent economists penned an open letter to world leaders, stating bluntly: “The existence of tax havens does not add to overall global wealth or well-being; they serve no useful economic purpose.”
But the wave of popular demand for immediate reforms would crash against the bulwark of vested interests. Mossack Fonseca was dismissed as the offshore industry’s bad apple, a firm that didn’t follow the rules like everyone else.
The IFC Forum, a lobby group that represents offshore law firms, insisted that not all tax havens are alike. British overseas territories and crown dependencies like the BVI, Cayman Islands and Isle of Man were a class above, the IFC Forum claimed, and had “the highest regulatory standards.”
Additional transparency would drive business away and force criminals further underground, claimed the group, which includes Appleby.
Last year, a partner in the firm told a journalist that criticism of the sector was unfair: “It’s a bit like saying that because (doctor and serial killer) Harold Shipman murdered his patients, that all doctors should be thrown in jail.”
Unlike Mossack Fonseca, Appleby was held up by its peers as one of the best, repeatedly winning “offshore law firm of the year,” and landing the most prestigious clients, ranging from royalty to celebrities, from professional athletes and their teams to the companies that clothe them.
Yet the leak reveals their public boasting of high standards and rigorous checks weren’t enough to keep out dirty money.
“Some of the crap we accept is amazing totally amazing,” state presentation notes prepared by Appleby’s director of compliance in 2011. “We have a current case where we are sitting on about 400K that is definitely tainted and it is not easy to deal with.”
“MONEY LAUNDERING IS A DIRTY CRIME,” screamed notes accompanying the same PowerPoint presentation. “THERE IS USUALLY ALWAYS A VICTIM AT THE BOTTOM OF THE PILE AND A RICH PERSON AT THE TOP.”
Appleby did not answer detailed questions sent by the ICIJ and the Star.
“We are an offshore law firm who advises clients on legitimate and lawful ways to conduct their business. We do not tolerate illegal behaviour. It is true that we are not infallible. Where we find that mistakes have happened we act quickly to put things right and we make the necessary notifications to the relevant authorities,” reads a statement put out by Appleby after it was contacted about the leak.
Yet time and again, Appleby failed to follow the rules. Between 2005 and 2015, the firm underwent more than a dozen internal and government audits, which found regulatory breaches that led managers to worry about possible litigation and “serious financial and reputation consequences.”
One of those audits, carried out by the Bermuda Monetary Authority in 2014, found nearly half of the files reviewed lacked information on the origin of the money Appleby managed for its clients. Appleby’s internal records show that the firm set aside $500,000 for the fine, the amount of which was never made public.
While the BMA now posts fines and sanctions online, a spokesperson for the Bermuda Monetary Authority told ICIJ it would not confirm or deny old enforcement decisions.
Since regulators can’t be relied on, it seems like the ICIJ’s massive leaks have been the only remotely effective way to expose wrongdoing.
First there was Offshore Leaks, then Lux Leaks, Swiss Leaks, the Panama Papers and now the Paradise Papers. But will anything change?
What’s clear is no country can act alone. Only a co-ordinated effort will prevent the offshore economy from simply finding a new loophole to exploit.
Leading the charge has been the Organization of Economic Co-operation and Development (OECD) with a system that mimics the tax co-ordination across state lines in the U.S. This summer the OECD launched a 67-country deal, called BEPS, which forced multinational corporations to do country-by-country reporting. Starting this year, big companies will have to declare how many people they employ, how much money they make and how much profit they book in each country where they operate.
This will provide tax authorities with a road map to work together to figure out how much tax the corporations should pay in each country.
It’s a start, but it’ll take more than that to get those elephants out of the closet.