Amidst the publicity surrounding publication of the Paradise Papers last November, some important facts were lost.
In journalists’ efforts to make the revelations seem more dramatic than they otherwise would be, that is perhaps inevitable, but it remains regrettable.
First, much of the coverage focused on the names of a few high-profile individuals, whose behavior (on the basis of expert tax advice) was portrayed as being on the borderline of acceptability, if not implicitly illegal.
Second, by focusing on a very narrow section of the activities of the international finance sector revealed in the leaked papers (which totalled some 13.4 million confidential electronic documents), the media tended to conflate illegal tax evasion and legitimate tax planning. In all the coverage, there was little time given to explaining the important role the international finance, or offshore, centers play in the world economy.
Of course, detailing the many initiatives recently introduced to improve transparency, promote the exchange of information and tackle evasion may not make for the best headlines. The Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS), measures to tackle base erosion and profit shifting and the introduction of beneficial ownership registers, as well as the U.K.’s Criminal Finances Act, might not grip readers. Nor, perhaps, would good news stories—such as the positive recent MONEYVAL reviews of Jersey and Guernsey’s Anti-Money Laundering and Counter Terrorism Financing regimes, or the Organisation for Economic Cooperation and Development’s (OECD) assessment of Jersey as a cooperative tax jurisdiction.
Nevertheless, the facts remain, and reputable international finance centers do have an important role as tax-efficient conduits. Funds (including many of the public’s pension funds) are pooled from across the world and invested traditionally in onshore jurisdictions, with those investors paying whatever income or capital gains tax is required by their home revenue authorities.
Of course, public interest and journalistic enquiry inevitably tend to focus on the private tax arrangements of wealthy individuals and businesses. But we should remember the old saying: What interests the public is not always the same as what is in the public interest.
International initiatives and pressure from onshore governments and supranational bodies have already significantly reduced the ability to arbitrage tax regimes across jurisdictions or salt away undisclosed wealth. The fallout from the Paradise Papers will likely result in further calls for transparency (such as expanding public registers of beneficial ownership) and further tax policy changes—regardless of the reforms already in place. In some cases, this may be warranted, but we should be careful not to undermine the important role international finance centres play, and there are signs we risk doing so.
The key lesson from the Paradise Papers is that firms and their clients must now not only ensure they behave legally but also increasingly—if they wish to avoid censure—have due regard to public reaction should these arrangements be made public. Meanwhile, offshore centers continue to play an important role in the global economy, and many of them are at the forefront of fighting financial crime, a commitment that independent evaluations continue to underline.