Paradise Papers

Disguising deals erodes the economy

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The Paradise Papers cast a long shadow of doubt on US President Donald Trump’s tax reform. Source: DPA, PR [M].

It’s a giant data leak of tens of thousands of pages showing how international corporations exploit every possible loophole to ensure no money is left for tax authorities to collect. Germany’s former finance minister, Wolfgang Schäuble, admonished the practice as an “outbreak of unfair competition.”

That was back in November 2014 when an international network of journalists exposed tax-saving schemes in Luxembourg in a scandal dubbed the Lux Leaks. Next were the Swiss Leaks, followed by the Panama Papers and now the Paradise Papers. The dimensions of these tax-saving schemes keep growing.

The newest treasure trove, the Paradise Papers, contains 13.4 million documents. The stories hidden within the papers, however, remained the same: Corporations store their profits in tax havens and millionaires and billionaires, including politicians, celebrities and oligarchs, use trusts to hide their assets, sometimes from tax authorities. Much of this is completely legal, but in the eyes of honest, tax-paying citizens and entrepreneurs, whose moral compasses point due north, these dealings are illegitimate.

In all these years of leaks, have any of the revelations, international conferences, government task forces and action plans spotlighting political indignation, prevented this sneaky conduct in tax havens around the world?

Admittedly, there has been some progress. For a long time Switzerland was a haven for illegal deposits by wealthy Germans and others. That business has largely been shut down as a result of US pressure. European Union member states pledged to disclose agreements made with international corporations, and routes for shunting corporate profits between EU member states will be closed. And the Organization for Economic Cooperation and Development (OECD) is developing a system that will automatically share tax data among 90 countries.

Some people consider any tax rate above zero to be too high.

But making progress is a hard slog. As the EU cracks down on complicated dumping methods, like the “Double Irish” or the “Dutch Sandwich”, law firms like Appleby, the firm whose documents comprise most of the Paradise Papers, are developing new concepts. Mr. Schäuble compared the situation to the Hydra, a Greek mythological serpent with many heads. Whenever one tax loophole is closed, offshore firms open two more somewhere else, he said in a report on the Paradise Papers.

This apparent futility is a direct result of national governments’ limited influence in global financial systems. It is easy for the government to catch a wealthy German carrying a suitcase full of money into Switzerland, especially after Swiss banks bowed under the weight of international pressure. But uncovering trust constructs in Caribbean tax havens is another can of worms. When it comes to corporate tax evasion, Ireland or the Netherlands for example, are more susceptible to pressure from EU counterparts than Panama is.

And while progress is certainly being made within Europe, tax evasion is a global issue. It is no coincidence that billionaires and corporations are prominently featured in the Paradise Papers. For someone wanting to smuggle €50,000 ($57,839) past tax authorities, creating a trust is not a worthwhile option. However, if they can invest sums in the triple-digit millions, it is. This reinforces the perception that economic and political elites want to disguise their business dealings and avoid paying taxes, and this behavior is detrimental to globalization.

As Germany’s upcoming government coalition tells citizens that it lacks the funds to alleviate workers’ tax burdens or to invest in dilapidated schools and bridges, a report about untaxed corporate profits is a hard pill to swallow. It makes it even harder when emails show that Apple, that technology bellwether, is searching for the best places to locate its headquarters so as to skirt taxes altogether. It becomes clear that this is no longer about healthy competition, and it casts a long shadow of doubt on US President Donald Trump’s tax reform. Mr. Trump hopes to persuade American companies to bring their billions in untaxed profits from tax havens to the US by offering lower tax rates.

But it seems that some people consider any tax rate above zero to be too high. These tax evaders not only undermine the economy and the system which makes their profits possible, but the very principle of globalization. And the particularly cruel irony is that many of the US president’s closest associates, who campaigned against globalization to secure his election victory, were themselves named in the Paradise Papers.

To reach the author: hildebrand@handelsblatt.com

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