Panama Papers offer us a poor man's guide to putting assets offshore
Published 09/04/2016 | 02:30
Wealth is like sea water, the more we drink, the thirstier we become, is how the 19th Century German philosopher Arthur Schopenhauer put it.
The revelations contained in the infamous Panama Papers, revealed this week, show us just how true that statement is. We have seen it in Vladimir Putin's friend the cellist, with $2bn passing through companies linked to him. We have also seen it in the Jersey oil company attempting to avoid paying $400m in tax in Uganda - a sum equal to one year's state spend on the Ugandan health service.
The most surprising thing about the Panama Papers is that most of the tricks used by some wealthy clients of Mossack Fonseca to help avoid tax are decades old. They also all have their roots in rules covering normal business operations which can be adapted in ways they were never intended. They aren't the latest tax avoidance twist, they were in use in places like Switzerland, Liechtenstein, Jersey and the old Guinness & Mahon bank in Dublin under Des Traynor decades ago.
Digital technology allows billions of euro to flow around the world in seconds, but it also leaves a trail. The old ways of shielding money abroad are still being used in the digital age, despite people knowing about them for decades. It appears that the movement of money is more easily traced than ever before, but its ownership remains hidden.
Here are three examples of how wealthy people could use offshore corporate vehicles to reduce their tax bill.
1. Bearer shares: If someone owns a company they are the registered owner of the shares in that firm. Sell the shares and the new owner must be registered. A bearer share company is different in that it is owned by whoever physically holds the shares. Their name doesn't appear on the share certificates. Transferring ownership of the company can be done by simply handing over those pieces of paper to whoever they want. It is instant and effectively untraceable. It can be done by moving them from one safe deposit box on a Pacific island to the box beside it. It can be almost impossible for revenue authorities to establish the beneficial ownership.
Bearer share companies were used for practical reasons in financial services centres such as Dublin, until 2014. They may have had a legitimate intent, but gradually more and more jurisdictions are banning them.
2. Opaque offshore companies: If you want to know who owns a company in Ireland, go to the Companies Registration Office and find out. There are jurisdictions, such as the British Virgin Islands or Luxembourg, where share ownership is not publicly available.
If you cannot establish who owns something, the scope for abuse is vast. Privacy and confidentiality are important cornerstones of business.
However, mechanisms to allow for privacy can become vital vehicles of secrecy. Sometimes corporations and individuals will use companies registered in a variety of jurisdictions to hide the ownership of assets. They may even use nominee companies, in places like Ireland.
That is where the ownership of an asset, a firm, a property, a share, is held by a company, usually run through a solicitor's office or accountancy firm, on behalf of someone else. When Sean Dunne's wife Gayle Dunne bought Walford on Shrewsbury Road for €58m - the most expensive house ever bought in Ireland - she used a solicitor's nominee company.
The actual beneficial owner is not disclosed. Nominee companies are still used in Ireland as part of regular corporate confidentiality, but such opaque structures can be abused to help milk the system or even game it.
3. Trusts: There are lots of different kinds of trusts going back over hundreds of years. Most involve charities, not-for-profit organisations and sometimes to hold family wealth. In most cases the money is not owned by anybody but is held in trust, under the control of the trustees and used for a specific purpose.
However, where abused, individuals can set up an offshore trust into which they transfer millions in assets. That individual is no longer the owner of that trust - the trustees are its custodians and decide how the money is spent.
This enables the wealthy person to deny all ownership or interest in the assets. However, the trustees may well secretly act in accordance with the wishes of the wealthy person through a private set of instructions as to what to do with the money. This would make it a sham discretionary trust but it can be very hard to prove.
He might tell the trust to buy a villa in Italy, which he or his family can use, but he will never be its registered owner. He might simply make arrangements for the money to be spent for the benefit of his children but in ways that are kept secret.
Compare these options with "Joe Soap" who is paying PAYE in Ireland. Its pay up or be taken to court and have your name published as a tax defaulter.
This week, Barack Obama's US administration scuppered a $160bn merger between drug companies Pfizer and Allergan. It would have seen those firms benefit to the tune of billions - at the expense of the US revenue - in a perfectly legitimate way.
Without changing the rules the firms would have merged and been registered in Ireland. Their US subsidiaries would have carried big borrowings owed to the Irish parent company. The interest bill on those debts would have been offset to reduce their American tax bill. They would also have been subject to 12.5pc Irish Corporation Tax but with the use of patent reliefs they could have reduced their tax bill further.
Joe Soap can merely claim back a few quid in medical expenses. He has zero scope to cut his tax bill in a meaningful way. He will land himself in court if he doesn't pay his motor tax, TV licence or NCT. The Revenue can come after a shopkeeper selling mass cards and not charging VAT, while remaining powerless to tackle complex global avoidance - often because it is totally legal.
Every economy needs wealth creators to provide jobs and pay taxes. However, nobody wants to be taken for fools either.