Pandora Papers: What are they and how can you stay out of them? - opinion

Tax avoidance is getting harder, and using an offshore location is less relevant in many cases, leaked or not.

The tax authorities know (photo credit: REUTERS)
The tax authorities know
(photo credit: REUTERS)

The International Consortium of Investigative Journalists published on October 3 more spicy tales of offshore happenings by famous people in the Pandora Papers. This follows earlier scoops in the Panama Papers. We will not repeat any of the names published as there is no evidence of any wrongdoing.

What is the ICIJ?

The ICIJ says it is a US-based nonprofit organization funded by donations with its own reporting team and a global network of reporters and media organizations who work together. Their website invites whistleblowers to come forward.

What does the ICIJ want?

The ICIJ says it collaborates on investigations that expose the truth and hold the powerful accountable.

Calculating taxes (credit: INGIMAGE)Calculating taxes (credit: INGIMAGE)

What is in the Pandora Papers?

The ICIJ say that nearly 12 million leaked files have uncovered financial secrets of 35 current and former world leaders, more than 330 politicians and public officials in 91 countries and territories, as well as cabinet ministers, ambassadors, fugitives, con artists and murderers.

The leaked records apparently come from 14 offshore services firms from around the world that set up shell companies and other offshore “nooks” for clients often seeking to keep their financial activities in the shadows.

Does it matter?

The ICIJ says at least $11.3 trillion is held “offshore,” according to a 2020 study by the OECD. But the ICIJ admits it is not possible to know how much of that wealth is tied to tax evasion and other crimes and how much of it involves funds that come from legitimate sources and have been reported to proper authorities.

Businesspeople who operate internationally apparently say they need offshore companies to conduct their financial affairs.

But the ICIJ says these affairs may amount to shifting profits from high-tax countries, where they are earned, to companies that exist only on paper in low-tax jurisdictions. Using offshore shelters is especially controversial for political figures, because they might be used to keep politically unpopular or even illicit activities from public view.

Why the name Pandora Papers?

According to the ICIJ, the Pandora Papers provide details about tens of millions of dollars moved from offshore havens in the Caribbean and Europe into US states including South Dakota, which has apparently become a major destination for foreign assets. “As a citizen, I’m so sad that my state was the state that opened Pandora’s box,” a former lawmaker there told the ICIJ.

Comments – general

The ICIJ focus seems to be on individuals more than companies. If so, the ICIJ may be performing a useful service if it is actually exposing corruption by individual leaders and officials. The ICIJ should clarify its purpose.

Also, the ICIJ seems to miss the aim of some corporate tax planning. A legitimate strategy of many multinationals is to hold intellectual property in offshore companies that sell products via websites in the internet cloud. Such strategies are only now starting to be targeted by the OECD’s proposed measures known as the Two Pillar tax package. Pillar 1 proposes to shift some taxable profit to countries where customers are located. Pillar 2 (strongly supported by US President Joe Biden’s administration) calls for a 15% global minimum tax rate.

The two pillar package would only affect the largest multinationals with global revenues over €20 billion (Pillar 1) or €750 million (Pillar 2). Other income tax, VAT and sales tax changes are starting to affect many more e-commerce traders.

Comments – Israel

Israel repealed exchange control in 1998, so Israelis are allowed to hold assets abroad.

Moreover, new residents and senior returning residents (who lived abroad 10 years) are exempt for 10 years from Israeli tax on foreign source income. They are also exempt in that 10-year period from disclosing foreign assets, offshore or otherwise.

When not covered by an exemption, Israeli residents and companies need to comply with a number of Israeli rules that target offshore situations. These include:

Companies controlled and managed in Israel are resident and taxable in Israel;

Israeli tax on deemed dividends out of undistributed profits from passive “controlled foreign companies” over 40%-50% controlled by Israeli residents and paying under 15% tax abroad;

Israeli tax on deemed dividends out of undistributed profits from “foreign professional companies” mainly providing various services and at least 75% controlled by Israeli residents;

Non-arm’s length transfer pricing;

Artificial or fictitious acts;

Israeli banks’ anti-money laundering review procedures;

Automatic information sharing between banks and tax authorities.

To sum up, tax avoidance is getting harder, and using an offshore location is less relevant in many cases, leaked or not.

As always, consult experienced tax advisers in each country at an early stage in specific cases.

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The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd.