The free flow of capital is a hallmark of modern capitalism. Major economies can function as they do because capital moves freely across most national borders. This makes the world a more prosperous place, but at a cost: it creates opportunities for aggressive tax accounting, outright tax evasion, money laundering, and sanctions-busting.
The Paradise Papers — 13.4m financial documents belonging to offshore law firm Appleby — have revealed many cases of avoidance, some of them aggressive. As eye-opening as some of these cases may be, the papers contain no obvious instances of criminality. The line between tax evasion and tax avoidance is sometimes thin, but it is rarely invisible.
The fact that the Paradise Papers contain little or no direct evidence of criminality does not mean their publication was pointless. As more information enters the public domain about who owns what and where, it becomes easier to reform tax regimes to make them more efficient and equitable, and to pursue actual criminality.
The papers’ focus on offshore centres, however, is a distraction from the most important point. There is more money laundering in London and New York than on small Caribbean islands. Hundreds of British shell companies are implicated in £80bn of money-laundering scandals, according to a report released this week, calling for an overhaul of the UK’s “light touch” regulatory regime. Transparency International UK, a non-governmental organisation, has said the UK is home to a network that operates much like the companies at the heart of the Paradise and Panama papers.
If advanced economies want to prevent aggressive tax avoidance, they should look first to their nearest neighbours. Ireland, Luxembourg and, to a lesser extent, the Netherlands all have tax codes that have facilitated elaborate avoidance structures created by major multinationals. The European Commission is right to test the waters with regard to Ireland’s tax regime for Apple, arguing it constitutes illegal state aid. There is progress elsewhere. More G20 nations are implementing plans drawn up by the OECD to tackle “base erosion” and profit shifting. The rules are designed to improve transparency, close loopholes and restrict the use of tax havens, and collect up to $240bn a year in lost revenue.
If national governments want to stop corporations shifting their profits offshore, there are other measures they can take. The US, for example, could eliminate the “check the box” rule that permits American companies to exempt their foreign subsidiaries from corporation tax. These rules were introduced 20 years ago as a simplification measure, but they were swiftly repurposed by tax planners to circumvent the anti-tax haven rules.
Successive attempts to withdraw the check-the-box rule were beaten back after lobbying by businesses. Broader US tax reform also presents an opportunity to tackle the issue of multinationals shifting profits to tax havens. The latest proposals would effectively levy a global minimum tax of 10 per cent, with the aim of discouraging companies from shifting profits to tax havens.
The Paradise Papers have provided a certain amount of entertainment, covering as they do the activities of individuals from The Queen to Formula One driver Lewis Hamilton. They will make a bigger contribution if they draw attention the convoluted structure of global tax regimes, and how those structures sap governments of funds while making criminality harder to detect.