The 11 million document strong emergence of “The Panama Papers” this April, pertaining to the alleged offshore tax arrangements of over 140 politicians from 50 countries in tandem with corporate giants, has given rise to a global outcry- public calls for a substantial, sustainable crackdown on evasive wealth management and illegal tax avoidance. Though well-intentioned rhetoric is plentiful, meaningful reform may not come as easily.
Supporters of tax restructuring, including the European Commission and the United States government, hope the largest offshore data outflow in history will provide a new impetus to long-awaited efforts to bring to order the covert and competitive world of tax.
Wolfgang Schäuble, Germany’s Federal Minister of Finance, has devised a 10-point plan to tackle global tax evasion, though there are more hurdles than helpful hands between Panamanian wrongdoing and internationally sound finances. Tax reformation, it seems, on a national level is plagued by public misconceptions over tax arrangements, media bias and the perception that taxes just aren’t used efficiently.
On a pan-European and global scale, taxation law improvement is hindered by the European Union’s foot in the door, unaccountable EU officials made questionable by the papers and long-term failures of haven blacklisting. All in all, the components preventing transparent taxation, stand in solidarity opposing what would have otherwise been a success been for Schäuble and financial stability the world over.
Here in the United Kingdom David Cameron’s alleged ‘dodgy dealings’ have prompted widespread lobbying for investigative and transformative measures to be taken by the government regarding tax policy and regulation. Is UK tax evasion as severe as we think, comparative to our European and International counterparts, or has the public over-stigmatised offshore investment due to a lack of understanding?
“Man makes modest investment and pays all his tax.”
James Quarmby, Tax Expert, in a BBC interview stated the headline that the papers should have printed. The Prime Minister had invested in an investment fund-commonly known as a hedge fund- regulated in Ireland. Hedge funds of this nature are a common investment, made by pension funds- what Quarmby called a “mundane investment”.
This particular fund invested in commodities. There is no tax at fund level, but there is tax at dividends level. Typical of any distributor fund, profits are distributed proportionally to the number of shares owned and every penny appears on the tax return for the native country of the tax payer. It really is a very tax inefficient method; stigmatisation arises over misconceptions surrounding distributor funds.
The point of situating a fund offshore is to enable a fund to be set up much more quickly with a better equipped network of professionals. The fund being regulated in Dublin, Ireland is hardly a tax haven, an EU country abiding by EU tax law offers no tax benefits in Ireland.
There are thousands of offshore investment funds of this nature and many millions of people in Britain own shares, many of whom hold them through unit trusts. Such funds, including those listed outside of the UK are included in the pension funds of local government, most of Britain’s largest companies and indeed some trade unions. Even a quick look shows that the BBC, The Mirror Group and The Guardian all have these sorts of overseas investments.
Without a doubt the British media is a mud-wrestling, no holds barred political arena. A quick look at recent and historic cases of Labour’s tax avoidance reveals that the media sensationalise conservative tax avoidance, when in fact it’s a mutually-assured, non-partisan issue. Therein, lies the problem. Complete tax crackdown, for the UK alone, cannot occur when neither party’s hands are clean.
Whilst the press is rife with tales of Cameron’s mother transferring around £200,000 to him there exists widespread neglect to mention fiscal faux-paus of the shadow party. Corbyn- yes even Corbyn- has his own questionable investments. In the last three years he declared a collective amount in excess of £10,000 in payments from Press TV (the Iranian State Television Channel) as well as Al Jazeera (the Doha-based Qatar-backed channel). Qatari corporate tax rates don’t exceed 10%.
Schäuble’s 10-Point Plan: A Preface to Failure?
On the matter of trumping tax evasion on a global scale, the proposals championed by Germany’s Finance Minister are gaining the most traction with international officials. They shall feature at the International Monetary Fund’s meetings over coming weeks, as well as in in the G20 in July. From Obama to Hollande, world leaders have spoken out in support of the 10-point plan. This is an attempt for Germany to take the leading role. What does the plan entail, and why won’t it work?
Schäuble’s plan involves global registry of people using shell companies, a blacklist of countries that harbour tax evaders, and a reinvigorated pressure on banks, amongst other service providers, to stop partaking in suspicious business. Germany is not faultless on this matter; if Germany aren’t capable of enacting and enforcing their own Finance minister’s plan, then the chances that the rest of the world will are less than favourable.
Between 1981 and 2007 German corporate tax rates have decreased by over 22%, the second highest in Europe. Staff numbers for tax investigation and enforcement have been cut by over 10%. There is no surprise that loopholes and pitfalls in German tax law have come to light. The combined cost of two famous scandals which were allowed to fester for years in Germany, Becker and Volkswagen, have a combined value of over £30 billion.
Cue the OECD- Schäuble’s Blacklist is more of a Wish List
The transparency plans of Schäuble’s blacklist have come under fire from Fabio de Masi, a leftist German MEP. Masi pointed out that these plans fail to include trusts, one of the major vehicles for tax minimisation found in the Panama Papers. He also recognised Germany’s hypocrisy, accusing Schäuble in particular during continuing discussions. In light of recent events, these denunciations aren’t without merit; Germany blocked an attempt to make public registers for owners of shell companies.
Cue the OECD. The Panamanian case demonstrates how only a global deal can resolve issues surrounding tax. Concurrence between the world’s economic powers is no easy fix. In the wake of the financial crisis, this group of affluent countries escalated their campaign against tax evasion. Their envisaged ‘peer-review’ system aimed to promote information exchange between authorities. Progress has slowed and as time since the crisis has gone on the tide of corporate opinion has changed, ebbing from proponents to opponents of change.
The European Union’s Foot in the Door
For a long time the European Commission in tandem with the governments of France and Germany, have been concerned about businesses or individuals using EU member countries to evade taxes. However, led at the time by the current Commission President Jean-Claude Juncker- Luxembourg, as well as Austria, blocked reforms.
The emergence of years of tax misconduct originating from Luxembourg in the so called ‘LuxLeaks’ of November 2014 highlight Juncker’s inability to facilitate significant and effective tax reform. With the vast majority of instances having occurred under the current Commission Presidents leadership of Luxembourg the scandal is the legality, not the illegality, of it all. PepsiCo Inc., FedEx Corporation and Amazon have all profited through subsidiaries in Luxembourg, avoiding billions in each respective case. FedEx paid less than 1% tax in the country where 35% of all Gross National Product derives from financial services.
EU Officials Caught in the Fray
As though serious, long-lasting change on a European and global level wasn’t challenging enough, the presence of many EU officials in the Panama Papers hardly better the chances of change. To name but a few:
Domecq Solis Beaumont, Energy Commissioner, makes an appearance. The Panama Papers allege that his business interests in bull breeding benefited from EU agricultural subsidies in more tax efficient locations. Her husband was an advocate for EU funds to subsidize the industry when he was an MEP (1986-1999).
Stavros Papastavrou, Greek Bailout Expert. It has been revealed, after a tax-evasion probe discovered an undeclared bank deposit of around $6.9 million in a Swiss HSBC account with his name on it. Papastavrou denied the money was his and has been forced to settle charges of tax evasion and money laundering with a $3.6 million fine.
The Cypriot Connection to the Ukrainian President- while his nation’s soldiers were battling in a bloody conflict, Ukrainian President Petro Poroshenko set up an offshore firm in the British Virgin Islands purely with the intention of avoiding tax. He registered Prime Asset Partners Ltd, and records show that he is the firm’s only shareholder.
All in all, the future of world finance and tax arrangement hardly echoes the optimism of our politicians. This being said, an OECD pact would bring nations a step closer to transparency. However, it remains difficult to culture cleaner finances within Europe when a vast amount of tax law is dictated by unaccountable officials.