The leak of the Paradise Papers, a massive set of over 13 million documents spanning six decades worth of activities in offshore financial centres, has whipped up a media frenzy this week because it exposed some of the financial arrangements of celebrities, politicians and even the Queen’s private estate.
The issue will remain high on the news agenda over the coming days and weeks because the documents having been uncovered by the German newspaper Suddeutsche Zeitung which in turn passed them on to the International Consortium of Investigative Journalists.
Now nearly a 100 media outlets in the UK and Europe are poring over the pages of legal documents and have now launched their own investigations.
The poetically named Paradise Papers were given their name because of they relate to idyllic islands such as Bermuda, the Bahamas, Barbados, St.Lucia and the Caymans. They cover a long period between 1950 and 2016 and more than half of the documents are related to the law firm Appleby which operates in 10 of those locations.
A lot of the headlines which followed the discovery of the documents are fairly sensationalist as they involve big names like Apple, Formula 1 champion Lewis Hamilton, former Conservative party chairman Lord Ashcroft, UK actors and one of Donald Trump’s top administration officials.
But what is typically missing in most of the stories is the mention that the large bulk of the offshore structures set up by Appleby and other legal firms in offshore locations are perfectly legal. Frequently they have been set up for prosaic reasons, such as UK residents living abroad and needing to handle their finance, or they are trusts for children of wealthy individuals.
As long as these financial structures are declared to the UK tax man they do not constitute tax evasion.
“The heightened level of sensationalism is out of control, masking the reality of the situation, and is being fuelled by misinformed politicians out to score cynical political points,” says Nigel Green, CEO of the deVere wealth management group. “The vast majority of international financial centres are now transparency and appropriately regulated. They provide a sought-after service for individuals – and not just the uber rich ones – and organisations around the globe.”
What next for the 13 million Paradise Paper documents?
The leaked documents cover the last 66 years, a period in which much has changed in terms of offshore tax legislation. For instance what became illegal in the early Noughties was perfectly legitimate in the 1950s and 1960s.
Although offshore regulation started becoming much stricter after 2000, since then the UK government has offered those holding accounts offshore a form of tax amnesty, in which, if individuals declared their holdings to HMRC, they would not be penalised for having held money offshore.
Since then a lot of these accounts have been declared to the HMRC and have become legal. Similar arrangements have been made in other countries, like Italy and Argentina.
Reduction of tax bills
Fundamentally there is a difference between using offshore financial instruments for tax evasion and for tax avoidance. Tax evasion is illegal and is punishable with serious financial penalties and a prison sentence.
“Internationally mobile individuals and firms typically find that offshore accounts are a sensible option because of their convenience,” adds Green. “They offer centralised, safe, flexible and worldwide access to their funds no matter where they live and no matter to which country the person or firm might relocate in the future.”
In some cases offshore investments can be sensibly used to reduce tax bills, particularly for higher rate taxpayers who may not cash in an investment until they are a basic rate taxpayer.They are also useful for those who work overseas and may be non-resident for a few years.
Despite the massive furore the Paradise Papers may yet prove to be a storm in a tea cup.