Finance & economics | Sun-kissed stories

The Paradise Papers shed new light on offshore finance

The data leak will increase pressure to clamp down on tax avoidance

THIS week was uncomfortable for a host of well-heeled figures. In the frame were U2’s Bono, America’s commerce secretary, Wilbur Ross, and Britain’s Queen Elizabeth, as well as some of the world’s most valuable companies, including Apple and Nike. All these, and many more, feature in the “Paradise Papers”, a trove of more than 13m documents, many of them stolen from Appleby, a leading offshore law firm. The International Consortium of Investigative Journalists (ICIJ) and its 95 press partners, including the BBC and the New York Times, began publishing stories based on the papers on November 5th. Dozens appeared this week, with more to follow after The Economist went to press.

The ICIJ’s last big splash, the Panama Papers in April 2016, shed light on some of the darkest corners of offshore finance. In contrast, many of the activities highlighted by this leak are legal. But they would be widely seen as flouting the spirit of national tax laws by exploiting the gaps that open up between them when finance straddles borders. Among the most enlightening documents are those concerning the tax gymnastics employed by Apple and Nike to shift profits to havens. For Nike, moving the rights to its “swoosh” design and other trademarks to Bermuda helped cut its worldwide tax rate to between 10% and 20%, down from over 30% ten years ago.

By contrast, an investment in a Cayman-registered fund by the queen’s private estate—made much of by the BBC—appears to have carried no tax advantages. If investing through offshore funds is, in itself, wrong, then millions of Britons are guilty, too. Thousands of private-equity and hedge funds are registered in tax havens. This is often to avoid an extra layer of taxation in the fund’s country of domicile, not to dodge tax owed in the investor’s home country. Most if not all large pension schemes—the BBC’s included—invest some of their money in such offshore vehicles.

The global impact of the Paradise Papers is unlikely to be as spectacular as that of their Panamanian predecessor. That felled the leaders of Pakistan and Iceland, and sparked many criminal investigations into tax evasion and money-laundering, including 66 in Britain alone. But already there have been calls for official inquiries and investigations, including into the business links of Mr Ross, who was revealed to have had an indirect relationship with Russian figures with Kremlin ties, through an oil-transport firm. (He says he was unaware of these.) Several national tax agencies, including India’s and Spain’s, have launched probes. European Union finance ministers called this week for a blacklist of tax havens to be drawn up by next month.

The revelations about multinationals’ creative tax-planning will add to pressure to fix the patchwork of rules and treaties governing cross-border business taxation. The OECD, a think-tank, has led attempts to close the loopholes, which it estimates cost up to $240bn a year in lost tax revenue. But getting lots of countries to agree on a fix is like herding cats—especially when America and the EU are at odds over American tech giants’ tax arrangements.

More broadly, the leak will fuel a debate raging since the global financial crisis, over the pros and cons of offshore finance for the world economy. Detractors—among them Angus Deaton, a Nobel prize-winning economist—say tax havens serve no useful purpose, merely allowing a financial elite to dodge regulations and financial obligations that apply to everyone else. Defenders say they oil cross-border investment by, for instance, offering individuals from different countries “tax-neutral” venues in which to make pooled investments; and offer a legitimate financial refuge for citizens of countries in turmoil.

This defence elicits little public sympathy. But it is true that small offshore centres have got little credit for clean-ups over the past decade. On some measures of tax and corporate transparency and combating money-laundering, Jersey, the Cayman Islands and some other havens score better than many rich countries. Plenty of dubious or downright nefarious things happen offshore. But it would be a pity if the Paradise Papers were to reinforce the cliché that the culprits are palm-fringed islands, when it is the much larger, onshore financial centres, such as London, New York and Miami, that offer the most attractive combination of respectability and secrecy—making them magnets of unparalleled power for the world’s tainted money.

This article appeared in the Finance & economics section of the print edition under the headline "Sun-kissed stories"

America’s global influence has dwindled under Donald Trump

From the November 11th 2017 edition

Discover stories from this section and more in the list of contents

Explore the edition

Discover more

China’s banks have a bad-debt problem

As is becoming increasingly obvious

Which country will be last to escape inflation?

A new dividing line in the global fight


How the “Magnificent Seven” misleads

Forget the supergroup of stockmarket darlings