APRIL 9 2016
Offshore companies can be legal. So can setting up a firm whose owners are not known to the public. But as the Panama Papers leak has shown this weak, these business tactics can lead to gross distortions of the rules.
The leak of Mossack Fonseca’s internal records included details of more than 214,000 offshore entities, with ties to people in more than 200 countries. Mostly the law firm set up anonymous shell companies, which do not carry out any business themselves, but act as a vehicle that could be used by clients to hold assets offshore, or handle cross-border deals.
Some were in Panama, others were in a constellation of tax havens including the British Virgin Islands and the Seychelles. Since 2009 clients have been rapidly shutting down these vehicles as global regulations caught up with the practices, according to leaked documents. The scale of the firm’s operations is industrial but not unique. One building in the US state of Delaware, for example, has 285,000 registered businesses. The two-storey building at 1209 North Orange Street houses firms that only need to declare a registered holder, which can be another company, to take advantage of the state’s liberal tax and corporate rules.
Ugland House in the Cayman Islands, meanwhile, has about 12,000 companies registered inside, attracting the attention of US President Barack Obama in 2008. “That’s either the biggest building or the biggest tax scam on record,” he said.
IN BRIEF
What is a tax haven?
The basics
Tax havens are countries or regions where personal and business taxes are likely to be very low, or even non-existent.
As a result, these countries often attract individuals and companies who are seeking to pay less tax than they would at home.
Businesses may move their headquarters to a tax haven, or individuals choose to live there for some or all of the year, to qualify for the lower tax regime.
Tax competition
Some countries or jurisdictions construct tax legislation with the explicit intention of becoming “havens” for those seeking to avoid tax in their own countries.
This gives rise to “tax competition” between nations eager to get businesses to set up within their borders.
Secrecy jurisdictions
The term “tax haven” does not only refer to countries with low tax rates. It can also be used to describe regimes where financial information is kept secret.
This is where jurisdictions choose not to share financial information relating to businesses and individuals with authorities elsewhere.
The Tax Justice Network defines “secrecy jurisdictions” as countries which “use secrecy to attract illicit and illegitimate or abusive financial flows”.