With the “Panama Papers” having been released to a great amount of media attention, I thought it might be worthwhile to write a post discussing offshore tax havens. I have some knowledge of these places due to my overall interest in the Caribbean region, which is home to many tax havens. I have even heard of the law firm, Mossack & Fonseca (also known as “Mossfon”), which is at the heart of the current scandal.
The British Virgin Islands are one of the smallest countries in the world, with a population of only a meager 33,454. More than a third of the islands’ population is in Road Town, the capital. Due to both the tiny size of the islands and the low population, the economy is quite small. The country is described as having two “twin pillars” of the economy. One of them, like most of the other Caribbean islands, is tourism; the Virgin Islands are a popular vacation destination and are known for their natural beauty.
The other is offshore financial services.
The Brtish Virgin Islands are the world’s largest offshore financial center. The choice to develop this particular economic sector makes sense for the islands. Since the BVI are so small, opportunities for economic development and growth are quite limited. And it’s not just the BVI that have seized upon this opportunity; the Bahamas, Barbados, St. Kitts & Nevis, and the Turks & Caicos Islands, Bermuda, and Belize have all also established themselves as significant offshore financial centers. Outside of the Caribbean, Panama is also a very significant tax haven, as are the Seychelles. Luxembourg, Ireland, and Lichtenstein are also notable tax havens.
Wealthy individuals and large international businesses freely avail themselves of the services of these tax havens to hide their money, to avoid the grasping hands of rapacious welfare states and undemocratic states, and of course to conceal financial crimes. When one registers a company in the British Virgin Islands, the prospective business owner goes through a corporate registrations firm. Mossfon was one of the largest of these firms, and while it was headquartered in Panama, they also had significant operations within the BVI and the Caribbean.
The registration process is anonymous, and offshore financial service companies protect their clients’ data rigorously. As one might imagine, trust is critical in this kind of business. Even if Jürgen Mossack and Ramon Fonseca Mora don’t go to jail, Mossfon as a business is certainly ruined and will never recover.
A long article from the Guardian, worth reading in its entirety, discusses what happens after the company is registered:
You don’t have to put your wealth itself in the tax haven. It is the legal structure that owns the wealth – the shell company, the trust, or whatever – that usually matters. The asset itself – the thing you own – can be anything, anywhere. It could be a painting or a Learjet or a Swiss bank account, or a luxury home in Mayfair that the owner – let’s say a Ukrainian oligarch – is currently using for the benefit of his daughter. Instead of owning the house directly, the oligarch owns the house via an intermediate structure in a tax haven. The land registry records won’t list the oligarch’s name, but the name of some anonymous offshore shell company. And when you go to find out who owns that company, you’ll come up against a brick wall.
This is how it works. Let’s say a corporation picks and packs a container-load of bananas in Ecuador, and it costs the company $1,000. It sells them to a French supermarket for $3,000. Which country gets to tax the $2,000 profit – France, Ecuador? The answer is, “Where the multinational’s accountants decide.”
The multinational sets up three companies, all of which it owns: EcuadorCo, HavenCo (in a zero-tax haven) and FranceCo. EcuadorCo sells the container to HavenCo for $1,000, and HavenCo sells it on to FranceCo for $3,000. That’s basically it. (The bananas themselves don’t go anywhere near the tax haven: this is all just paper-shuffling in New York or London.)
If you blinked, you may have missed what happened here. It cost EcuadorCo $1,000 to pick and pack the container, and they sold it on for $1,000. So EcuadorCo records zero profits, meaning no taxes. Likewise, FranceCo buys it for $3,000 and sells it to the supermarket for $3,000. Again, no profits, and no taxes. HavenCo is the key to the puzzle. It bought the container for $1,000 and sold it for $3,000 – a $2,000 profit. But it is based in a haven, so it pays no tax. In short, all the profits have been stripped out of France and Ecuador, and shovelled into the haven. Hey presto!
NPR also has a great, 20 minute podcast on how setting up offshore companies works, and the potential for fraud and criminal activity inherent in them.
Another article from the Toronto Star mentions:
Each tax haven has a specialty: the Cayman Islands have secret bank accounts; the Cook Islands have private trusts; Luxembourg attracts opaque “foundations.” In the BVI, it’s the cheap and easy incorporation of anonymous offshore companies.
The same Toronto Star article also mentions just how much money the BVI are making from offshore financial services:
As any bank card user knows, those fees add up. The BVI government collects more than $200 million in corporate fees every year, paying for a $100-million hospital and a massive pier, capable of docking the largest of the world’s cruise ships.
Financial services account for up to 80 per cent of BVI’s government revenues, yet there are no income taxes, no sales taxes and no corporate taxes for commercial activities that occur off the island. The only cost is an annual corporate registration fee.
Tougher regulation has made it harder for these tax havens to function. The issue occasionally leaks into the press and prompts public anger. The Financial Times has been reporting on the issue of tax havens for some years:
Christopher Bickley, a partner at the law firm Conyers Dill & Pearman, said banks were now making it “torturous” to open BVI accounts, spurring companies to incorporate in Samoa and the Seychelles. Fiona Le Poidevin, chief executive of Guernsey Finance, which promotes the island as a financial centre, said it was “quite a telling story” that HSBC was refusing to open BVI accounts.
Before the 2007 global financial crisis, BVI boasted roughly 750,000 companies, or 34 incorporations for each of its 23,000 residents. Incorporations plummeted to 404,000 in 2007 partly as a result of the crisis – but also because dormant companies were no longer included on the register – before climbing to a post-crisis peak in 2011, but they have fallen each year since.
The BVI suffered a blow last year following a mass leak of investor names that hit its reputation for confidentiality. France also put the BVI on a black list for sharing information with regulators too slowly. Ms Donovan said the BVI had taken corrective measures and hoped to come off the list soon.
However, I don’t think we will ever see action by Western governments to really change too much, because the leaders of these governments themselves are tax evaders:
The leaked documents show that the prime minister’s father, who died in 2010, was one of five UK directors who flew to board meetings overseas.
There were also three directors in Switzerland and three in the Bahamas to help ensure the fund would not have to pay UK tax.
This is perhaps one of the reasons the Western elite have no problems treating their citizens like sheep to be fleeced with tax and fee increases. After all, many of them – perhaps even most of them – have their money protected by offshore tax havens, granting them immunity to their own laws… immunity that you and I do not and never will enjoy.