Runner Run-Down: Offshore Businesses and Tax Havens

Understanding the significance of the Panama Papers

The release of the Panama Papers serves as a stark reminder of what the elite will do to remain wealthy. The 11.5 million-file leak includes four decades worth of documents listing the names of individuals and companies that have invested in offshore tax havens with the advice of Panamanian law firm, Mossack Fonseca.

Offshore tax havens are jurisdictions where foreign investors can store monies with little to no taxation. Most of them exist in the Caribbean, although some remain in Switzerland, the U.S. state of Delaware, Belize, Liechtenstein and more. Outposts in Barbados are particularly popular with Canadians, as there is a tax treaty to avoid double taxation between the two countries. Companies that invest in these havens are known as offshore businesses or shell companies, which are relatively inactive but used as vehicles for business transactions.

According to the Organization for Economic Co-operation and Development, between $5 and $7-trillion are hidden from tax authorities in offshore banks worldwide. In Canada alone, almost $200-billion is invested per year. That results in an estimated $8-billion lost to tax evasion under the Canadian government.

All that must be done in order to invest in an offshore tax haven is setting up a company or trust with the assistance of financial advisers. Applications for these organizations can be approved in less than a week if nominal fees are paid, and typically all correspondence and payments are managed online. Even non-profit companies and the corporations that they own can invest in offshore tax havens. It is common for these accounts to be run by agents with aliases, who approve company documents on the company owner’s behalf.

Those who invest in offshore tax havens are often celebrities, politicians, and high-ranking business people. Some of the people found in the Panama Papers include Iceland’s former Prime Minister Sigmundur Davíð Gunnlaugsson, actor Jackie Chan, and associates of Russian President Vladimir Putin.

Some of the individuals listed in the document were supposedly unaware of how their money was being handled by advisers. In separate cases, family or friends opened accounts with their names attached, unbeknownst to the individual.

Others, who were aware that their money was being kept and transferred in offshore tax havens, argue that it’s their fiduciary responsibility to avoid paying high taxes as it allows them to spend their funds on more useful company initiatives and raise shareholder value. Furthermore, if the money is earned abroad, there is some question as to why governments at home should have the right to a cut of the profits. Offshore companies can also be used to register intellectual property rights or conduct e-commerce.

Offshore businesses in tax havens are technically legal, which partially explains why only 50 people have been convicted of offshore tax evasion since 2006, according to the Canadian government. Whether the 550 Canadians mentioned in the Panama Papers will be excused or convicted remains uncertain.