The week of November 6-10 was uncomfortable for a host of well-heeled figures. In the frame were U2’s Bono, Commerce Secretary Wilbur Ross of the United States and Queen Elizabeth of Britain, as well as some of the world’s most valuable companies, including Apple and Nike.
All these, and many more, feature in the “Paradise Papers,” a trove of more than 13 million documents, many of them stolen from Appleby, a leading offshore law firm. The International Consortium of Investigative Journalists and its 95 press partners, including the BBC and The New York Times, began publishing stories based on the papers on November 5.
In April 2016 the ICIJ’s last big splash, the “Panama Papers,” shed light on some of the darkest corners of offshore finance. In contrast, many of the activities highlighted by this leak are legal. Nonetheless, they would be widely seen as flouting the spirit of national tax laws by exploiting the gaps that open up between them when finance straddles borders.
Among the most enlightening documents are those concerning the tax gymnastics employed by Apple and Nike to shift profits to havens. For Nike moving the rights to its “swoosh” design and other trademarks to Bermuda helped cut its worldwide tax rate to between 10 percent and 20 percent, down from more than 30 percent 10 years ago.
By contrast, an investment in a Cayman-registered fund by the queen’s private estate—made much of by the BBC—appears to have carried no tax advantages. If investing through offshore funds is, in itself, wrong, then millions of Britons are guilty too.
Thousands of private-equity and hedge funds are registered in tax havens. This is often to avoid an extra layer of taxation in the fund’s country of domicile, not to dodge tax owed in the investor’s home country. Most if not all large pension plans, the BBC’s included, invest some of their money in such offshore vehicles.
More broadly, the leak will fuel a debate raging since the global financial crisis, one over the pros and cons of offshore finance for the world economy. Detractors—among them Angus Deaton, a Nobel-winning economist—argue that tax havens serve no useful purpose, merely allowing a financial elite to dodge regulations and financial obligations that apply to everyone else. Defenders insist that they oil cross-border investment by, for instance, offering individuals from different countries “tax-neutral” venues in which to make pooled investments, and that they also offer a legitimate financial refuge for citizens of countries in turmoil.
This defense elicits little public sympathy. It is true, however, that small offshore centers have gotten little credit for clean-ups during the past decade. By some measures of tax and corporate transparency and combating money-laundering, Jersey, the Cayman Islands and some other havens score better than many rich countries.
Plenty of dubious or downright nefarious things happen offshore. It would be a pity, though, if the Paradise Papers were to reinforce the cliché that the culprits are palm-fringed islands, when it is the much larger, onshore financial centers, such as London, New York and Miami, that offer the most attractive combination of respectability and secrecy—making them magnets of unparalleled power for the world’s tainted money.
© 2017 Economist Newspaper Ltd., London (November 11). All rights reserved. Reprinted with permission.
Image credits: DTJE | DREAMSTIME