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The Pandora Papers, Explained: How the Rich Evade Taxes, What are Offshore Tax Havens, and Pandora Papers India Angle

Editor, TRANSFIN.
Oct 6, 2021 5:38 AM 8 min read
Editorial

Five years after the Panama Papers and four years after the Paradise Papers, another tranche of reportedly explosive documents has found its way into the hands of the International Consortium of Investigative Journalists (ICIJ).

The latest exposé has been dubbed the Pandora Papers. It has been described as the “largest-ever journalistic collaboration” and the “largest leak of offshore financial data” in history.

The Big Revelation? How some of the world's most powerful and richest individuals hide their assets and the secret deals that help them reduce their tax burden - or evade taxes altogether. 

Broad Basics of the Pandora Papers

An ICIJ-led investigation, reporting on the Pandora Papers began on October 3rd, with more findings expected to be revealed in the coming days.

How Much Data Are We Talking About?

2.94 TB of it. (For context, that’s enough data to stream Netflix in HD for 41 days.)

What Kind of Data?

11.9 million files in the form of documents, emails, spreadsheets, images, memos, share certificates, compliance reports etc.

Who Studied this Data?

Over 600 journalists from 151 media organisations in 117 countries and territories. Organisations involved include The Guardian, BBC Frontline, Le Monde, Indian Express, The Washington Post, the Australian Broadcasting Corporation etc. Full list of media partners here.

And For How Long?

For over two years.

Where Did the Pandora Papers Data Leak From?

14 offshore firms from different countries, including Switzerland, Panama and the UAE.

Who Leaked the Pandora Papers?

As of today, ICIJ has not revealed the name of its source. However, this is usually the modus operandi in the world of investigative journalism - whistleblowers don’t want their names publicised for obvious security reasons. The source of the Panama Papers, for instance, is still the elusive “John Doe”.

The Pandora Papers, Explained: How the Rich Evade Taxes, What are Offshore Tax Havens, and Pandora Papers India Angle How Many Names Have Been Named in the Pandora Papers?

The Pandora Papers claim the existence of c. 29,000 offshore companies propped up by at least 35 national leaders (current and former), 330+ politicians/high-level bureaucrats and 100+ billionaires, among others. These are the numbers for the first set of reports since Sunday - more names may be revealed going forward.

What Are the Allegations Levied Against Them?

That they exploited a complex network of shady cross-border companies, often to hide ownership of money and assets, and often in violation of the law. (More on this later.)

Who Are Some of the Famous Names?

They include Abdullah II (King of Jordan), Uhuru Kenyatta (President of Kenya), Volodymyr Zelensky (President of Ukraine), Tony Blair (former PM of the UK), Dominique Strauss-Kahn (former MD of the IMF), and Vladimir Putin’s close aides. Also named are celebrities like Elton John, Ringo Starr, Swedish House Mafia and Shakira, as well as organisations like Apple, Nike and Abbott Laboratories. Here’s a list that’s being constantly updated.

Pandora Papers India Names

Hundreds of Indians feature on the list. Anil Ambani, Vinod Adani, Kiran Mazumdar-Shaw, Niira Radia, Sachin Tendulkar, Jackie Shroff and Satish Sharma are some of them. (Indian Express report.)

How Much Money Is Hidden in Tax Havens?

It’s difficult to settle on a single number, since these deals are mired in secrecy. Estimates range between $5.6-32trn. (FYI: Tax havens collectively cost governments $500-600bn annually in lost corporate tax revenue.)

Where Is This Money Hidden?

The Pandora Papers’ tax havens are straddled across the world, from Vietnam to the US state of South Dakota. However, more than two-thirds of the offshore companies in this leak were set up in the British Virgin Islands.

What’s the International Reaction to the Pandora Papers Been Like So Far?

Some governments have outright rejected the allegations. These include Jordan, Russia, Ukraine, Ecuador and Lebanon. Some, like India, Pakistan and Mexico, have stated they will probe the claims and take appropriate legal action.

Now that we understand the brass tacks of the Pandora project, let’s try to answer the trillion-dollar question...

 

How Do Rich People and Big Companies Avoid Taxes?

Many countries' tax systems are notoriously filled with sufficient loopholes to let the elite get off the taxman's hook. Essentially, this creates a two-tiered system, with one set of rules for those at the top, and another set for everybody else.

These loopholes include focusing primarily on taxing income over wealth, lenient capital gains levies, and estate deductions. There’s also profit-shifting. Then there are the offshore tax havens, the so-called “secrecy jurisdictions”.

As ICIJ noted in its report: “For a few hundred or a few thousand dollars, offshore providers can help clients set up a company whose real owners remain hidden. Or, for perhaps $2,000 to $25,000, they can set up a trust that, in some instances, allows its beneficiaries to control their money while embracing the legal fiction that they don’t control it - a bit of paper-shuffling creativity that helps shield assets from creditors, law enforcement and ex-spouses.”

Often, experienced evaders use a combination of bank accounts, trusts, shell companies, and foundations. Often, these entities are fronted by fictional nominees. And companies - especially the larger, deep-pocketed multinationals - have more sophisticated tools in their arsenals.

FYI: “Offshore” is actually a misnomer. It incorrectly paints a picture of tax havens being tropical island paradises straddled with palm trees and sandy beaches. But many such “havens” aren’t actually tiny island states. Take South Dakota or Florida in the US. Or Switzerland or Ireland in Europe.

 

A Ballad of Blurred Lines

Now, it’s important to note that just because a name is in the Pandora Papers doesn’t mean the person definitely indulged in illegal activity. (Similar to how your name being in the Pegasus leaks doesn’t mean you were certainly a target of the spyware.)

How so? Because tax avoidance and tax evasion are two different things. The former involves reducing your tax burden by using legal methods, such as income tax deductions and exemptions. Tax evasion, on the other hand, involves under-reporting your income or over-stating your expenses. Naturally, this is illegal and punishable.

Similarly, setting up an offshore entity is not in itself illegal. In fact, in some cases it is done for legitimate reasons, such as security or to escape state persecution in autocratic regimes. However, the most common reason for an individual/company to park their assets in a low-tax jurisdiction is to pay less to the community kitty in the country where their profits are actually derived from.

Very often, such arrangements seem legal on the surface; dig deeper, though, and you might uncover criminal activity. Take Anil Ambani. Last year, a cornered Ambani told a London court that his net worth was zero. But the Pandora Papers allege that he owns at least 18 offshore companies that have borrowed and invested c. $1.3bn.

The Pandora Papers, Explained: How the Rich Evade Taxes, What are Offshore Tax Havens, and Pandora Papers India Angle But on a broader level, the “it’s legal anyway” argument is a flimsy one at best. In an imperfectly globalised world, the lines between what’s legal and what’s “right” (and what’s non-hypocritical) are not blurred enough. That’s the argument for billionaires and celebrities who game the system. For elected officials who do so, the dynamics are naturally vastly different.

This is where the discussions about tax havens overlap with concerns about the rising levels of income and wealth inequality, and the escalating climate crisis. A de facto two-tiered tax code should not just be seen as illegal, but also as immoral.

 

What’s the Way Out of This Dickensian Dilemma?

Reforming the tax system to fill the glaring loopholes tends to elicit broad public support. But translating this into political action has proven to be challenging due to the powerful forces lobbying against progressive reform.

There is good news though. Different countries are debating - or have already implemented - supplementary levies on MNCs guilty of profit-shifting (aka the Google Tax). The EU adopted a tax haven blacklist in 2017. The US is looking to double the so-called GILTI tax. And, most significantly, 130 OECD members recently signed up to a complete overhaul of the internal taxation regime for corporations, which includes curbs on tax avoidance and a new global minimum corporate tax rate of 15%. 

 

New World, Old Loopholes?

One must embrace optimism with caution. The Google Tax tends to irritate Uncle Sam. Joe Biden’s plans on BEAT and GILTI tend to make Indian companies jittery. Even the OECD-backed deal on international taxation is imperfect. It has a "substance carve out" provision that in effect allows companies to pay a lower rate than 15% in some countries.

Will the Pandora Papers provide a fillip to change, then?

To answer that question, let's look at the legacy of the 2016 Panama Papers leak. High-level bureaucrats and politicians were tried and/or charged. Protests rocked governments. The Pakistani PM was removed from office. The US charged (and jailed) people linked to Mossack Fonesca with wire and tax fraud. Deutsche Bank AG was forced to pay today’s equivalent of $17.4m in fines to German authorities. (Even a Netflix film was made.)

Most significantly, the Panama Papers prompted a global review of tax systems and offshore entities. They fueled the momentum for long-pending reform, which culminated in the recent OECD accord.

“This is an earthquake,” one columnist had said of that leak.

One can only hope that the Pandora Papers will elicit the same serious and earnest level of response, if not more.

FIN.
 

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