The Paradise Papers show why offshore continues to be a massive problem

Once again, a major leak from the offshore financial centres of the world has been released to the general press. Nicknamed the “Paradise Papers”, these documents mostly contain dealings of the Appleby law firm – their clients come from all over the world, with the only unifying factor being their desire to conceal their wealth from the taxmen of various major states. This leak follows on from the Panama Papers last year, which resulted in the resignation of the Icelandic president, the assassination of a Maltese journalist, and the exposure of Mossac Fonseca, a Panamanian law firm, as a supplier of financial and legal support to some of the world’s most unscrupulous individuals.

These leaks partially reveal the inner workings of the offshore industry, which focus on providing tax havens for wealthy individuals and companies to protect their assets from tax. These companies are centred around geographical locations where tax can be more easily avoided, such as British Crown Dependencies, US states like Delaware, and small countries such as Mauritias or Panama. Firms work out of these locations as they either provide very low tax opportunities, such as the Isle of Man, where inheritance tax does not exist, or allow for the easy creation of shell companies, which make the accounting process more opaque and help to conceal the true extent of how much an individual or company owns. It also allows for the provision of a certain amount of anonymity by allowing the individual or company to disassociate themselves from their wealth whilst still benefitting from it. This is a huge issue for every single individual that does not benefit from these schemes.

The nations and dependencies that tax havens are set up in rely upon the very wealthy depositing their funds with them and then profiting from the legal, managerial, and accounting fees. They cannot envisage another way of doing business that would provide them with a similar GDP and standard of living for their residents. One investigative journalist, Nicholas Shaxson, describes these locations as “captured states,” in which private interest forms the basis of public policy. The British Crown Dependencies have become important tax havens due to their lack of financial solvency. This lack of a second option for many of these tax havens ensures their presence in the world for a long time to come.

“Estimates for offshore wealth vary, from $7 trillion to $36 trillion, but no one really knows”

The very rich paying little to no tax is not a new phenomenon. Individuals with the majority of the wealth have often possessed an undue amount of influence with the body that sets the tax. In today’s world the relationship between the very wealthy and the political bodies that set the tax is very tight – often being the same people – but public scrutiny and influence limits the amount of acceptable cronyism, hence the existence of tax havens. The estimates for how much money is offshore vary wildly, from around $7 trillion up to $36 trillion, but no one really knows for certain. For comparison US GDP is estimated at $18.57 trillion. Of the money concealed offshore, it has been proposed that 0.01% of the world’s wealthiest own 50%, with 0.1% owning 80%. This demonstrates the tiny number of individuals using these tax havens and begins to reveal the extent to which tax havens contribute to inequality.

In an attempt to ethically justify their existence, the companies that run these offshore schemes have posited that they are necessary to prevent government over-taxation. Given that these schemes are exclusively for the very wealthy, I would dispute this, as it does not so much prevent over-taxation as provide an option for individuals and companies to avoid their obligations to the societies in which they operate. The net result of avoiding their obligations is an overall reduction in the funds available to pay for public services and therefore a requirement to increased taxation of those who cannot avoid tax: the poorer members of society.

Offshore finance further damages states by allowing criminals and corrupt officials to easily hide their ill-gotten gains in shell companies, which provide complete anonymity A Met Police investigation in 2015 found that hundreds of millions of pounds worth of property was used by offshore companies to launder money for criminals and corrupt officials. In a market where hundreds of millions is an insignificant amount there is undoubtedly far more wealth hiding from the gaze of officials. A further effect of tax havens is to force other nation states to lower their taxes in an attempt to obtain some revenue from wealthy people. Ireland is an example of one such nation taking these measures, but it was forced to pay $15 billion in back taxes for providing Apple with illegal state aid. This has provoked controversy in the US, as it believes that these back taxes should be paid there and not to the EU.

This raises the ultimate question: how to reduce the use of tax havens? Although various nations around the world now track the amount of wealth hidden offshore there has been no serious attempt by the UK or any other major players to increase the amount of regulation. A proposed solution would be to track all wealth and assets around the world, but the level of transparency required for this is likely unattainable. The only main intervention on the behalf of transparency comes from these irregular leaks. Offshore is a thorny problem, and one that will not disappear as long as wealthy individuals do not fulfil their obligations to society. The net result of offshore has been a contribution to the ever-increasing inequality between the rich and poor. If they don’t pay, we will have to.