Pandora papers could serve as a signal for business to the abandonment of offshore

Hundreds of thousands of organizations and individuals around the world allocate capital in other states, including offshore. All of this primarily happens to get advantages due to tax exemptions on a legal basis. According to the IMF, there are over 60 countries in the world that are offshore zones. There are also a dozen countries where separate regions and even cities are offshore.

The offshore world consists of dozens of zones. Some of them are very “dubious”. These are mainly island offshore – public companies and persons who value their reputation, try to stay away from such offshore as Panama, Cayman Islands, Seychelles, Bermuda, British Virgin Islands, etc., although they have the most favourable tax regimes and minimum reporting requirements.

But it is precisely such offshore structures that are the subject of recent high-profile investigations like Pandora Papers or Panama papers, published earlier in 2016.

The Pandora Papers is the name given to a journalistic investigation provided by the International Consortium of Investigative Journalists based on a major leak of confidential documents from 14 offshore service providers dedicated to the creation of companies in countries such as British Virgin Islands, Panama, Belize, Cyprus, United Arab Emirates, Singapore and Switzerland. The data was obtained in Washington DC and has led to one of the biggest ever global investigations. More than 600 journalists from 117 countries have looked at the hidden fortunes of some of the most powerful people on the planet. 

Placing assets offshore allows companies to pay less taxes in their own country by placing capital in another law tax jurisdiction. The best-known offshore havens in the world are Switzerland, Hong Kong, Singapore, USA, Channel Islands, UAE, Luxembourg, Great Britain, Monaco, Bahrain.

The scale of offshore zones is impressive, although estimates of the capital held in them vary depending on the calculation methodology. A study published in 2017 estimated that 10% of global GDP was located in offshore companies. If we also count the assets registered with offshore companies, such as art works or vehicles, real estate, and other property, then the amount can be about 20-30 trillion dollars.

However, probably the massive data leakage revealing hidden assets, tax evasion, and, in some cases, money laundering by some of the world's richest and most powerful people is not accidental.

The end of the era of offshore jurisdictions is now increasingly being felt.

Thanks to the revelations that have accompanied leaks such as this one (for example, the OffshoreLeaks scandal revealed the volume of “gray” capital of about $ 32 trillion in a number of companies registered in Hong Kong, Singapore, and the British Virgin Islands) and due to the mistrust and pressure of the world community and international organizations, efforts in the fight against tax fraud and money laundering have been strengthened. Regulations have appeared such as one protecting whistle-blowers in the European Union, while the exchange of fiscal information between countries has been strengthened. 

The Organisation for Economic Co-operation and Development (OECD) is the dominant standard setter for information exchange and bolster international efforts to fight against offshore tax evasion.

The OECD/G20 BEPS Project was born in the wake of the global financial crisis, shrinking public budgets and growing public outcry over tax evasion and tax avoidance practices. In 2015, OECD and G20 countries – along with other stakeholders – created a package of 15 actions and related solutions to tackle BEPS. Since then, the work has continued and the number of countries involved has grown, with over 135 jurisdictions today working together on an equal footing in the Inclusive Framework on BEPS. In addition to implementing the BEPS minimum standards, they are tackling the income tax challenges arising from the digitalisation of the economy to ensure that all businesses – not just those in the digital sector – pay their fair share of tax where they have activities and where they earn their profits. 132 countries and jurisdictions have joined a new two-pillar plan to reform international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate with a minimum rate of at least 15%.

It is no longer possible to operate offshore under previous arrangements. Over the past few years, many offshore jurisdictions have had to overhaul their legislation in the light of the recommendations of international organizations to combat money laundering.  The main results were an increase in the transparency of corporate structures, a tightening of financial and banking regulations, the disclosure of information on the ultimate beneficiaries and the interstate exchange of tax information. The number of offshore companies is decreasing, the cost of doing business offshore is increasing, all this makes the registration of companies in their territories less attractive.

In our view, along with tighter legislation in the field of offshore regulation, there may be measures to legalize certain markets and return capital to the countries of the origin, for example, through tax amnesties.

It is not possible to completely eradicate the offshore business, however, the most likely development will be a gradual tightening of regulations and strengthening the fight against the use of offshore companies for the purpose of money-laundering through criminal and tax minimization.

Thus, the Pandora Papers and similar investigations may become another point towards exposing this injustice and may be another signal for business to move away from offshore activities and return capital to the place where its activities are carried out.