Using Offshore Structures Is Not Illegal, But Stealing Private Data Is - Tax Expert

Josh O'Neill, Assistant Editor, 7 November 2017


A leading UK tax lawyer has sounded off about this week's "Paradise Papers", highlighting the legitimacy of the structures showcased in the leaked documents.

Offshore structures used by wealthy individuals to avoid paying taxes are likely not illegal, but the theft of personal documents exposing them is, a leading tax lawyer has said. 

Earlier this week, a "leak" of some 13.4 million documents from Bermuda-based law firm Appleby shone a light on how the ultra-rich exploit complex structures of trusts, foundations and shell companies to obtain tax breaks. Dubbed the "Paradise Papers", the growing scandal is akin to last year’s Panama Papers fiasco.

But using such structures to avoid paying taxes is legal because it does not constitute tax evasion which, on the other hand, is illegal, according to Miles Dean, managing partner of Milestone International Tax

“It would be very surprising if the affairs of those individuals concerned were illegal or nefarious; it is the theft of the papers that is illegal,” he told this publication. “Just because an individual makes an investment that is based offshore does not mean that they have done anything wrong. If they fail to disclose it - and the return they make - on their tax return, then that’s tax evasion. But to make the quantum leap and suggest that everyone from the Queen to Bono is dodging tax because some of their investments are made via Bermuda, Cayman or Malta is stupidity on a grand scale.”

As with last year's Panama Papers, the Paradise Papers were obtained by the Washington DC-headquartered International Consortium of Investigative Journalists (ICIJ) and shared initially with German newspaper Süddeutsche Zeitung. There are now nearly 100 media groups scouring the documents. This publication has not seen the documents, however. 

Last month, Appleby defended itself against the claims of malpractice before the documents were made public. The firm said it had “thoroughly and vigorously investigated the allegations” and found no evidence of wrongdoing in-house or among its clients. 

“We refute any allegations which may suggest otherwise and we would be happy to cooperate fully with any legitimate and authorised investigation of the allegations by the appropriate and relevant authorities,” Appleby said. The firm also has offices in the British Virgin Islands, the Cayman Islands, the Isle of Man, Jersey, Guernsey, Mauritius, Seychelles, Hong Kong and Shanghai.

The ICIJ has not disclosed how it obtained the documents, some of which “relate to matters 75 years ago when the world was a very different place", Dean pointed out. 

UK media is abuzz around claims that that those acting for Queen Elizabeth II made investments in a Cayman Islands fund through the monarchy’s private estate, the Duchy of Lancaster (source: Guardian newspaper). Around £10 million ($13 million) of the Queen’s private money was invested offshore, raising questions about whether the monarch should be using tax-efficient structures. The Duchy said it was not involved in decisions made by funds and there is no suggestion the Queen had any knowledge of investments made on her behalf, according to the BBC

The ICIJ said its trove of data “reveals offshore interests and activities of more than 120 politicians and world leaders” and exposes the “tax engineering” of “more than 100 multinational corporations, including Apple, Nike and Botox-maker Allergan”.

Withholding tax
UK Shadow Chancellor John McDonnell said yesterday that the papers demonstrated the need for the UK to impose a “withholding tax” to ensure its taxman, HMRC, snags its share of company profits before they are moved to tax havens. He also suggested the government should press tax havens to provide a register of companies and trusts using them in a bid to better pursue revenue. 

But according to Dean, McDonnell’s suggestions “are wide of the mark”, and levying a withholding tax on dividends will not stop tax abuse - “it would simply make the UK less competitive as a jurisdiction for large multinationals, at a time when we need to be more competitive than ever,” he said, referring to political headwinds spurred by Brexit negotiations. 

He added: “John McDonnell’s comments illustrate just how magnificently out of touch he is with reality - a worrying thought given he’s likely to be our next chancellor."

The leaks have aroused criticism from those arguing that they show a cavalier attitude towards legitimate financial privacy and taint anyone with offshore accounts, even though many are held for innocent reasons. There is also debate on whether public registers of beneficial ownership of trusts and companies are the most effective way to balance privacy against the hunt for illicit money. (See an example of such analysis here.)

Lord Ashcroft

The papers reportedly show that Lord Ashcroft, one of the UK Conservative party’s biggest donors, remained a non-dom and continued to avoid tax despite attempted by UK parliament to make peers pay their full share. He was domiciled for tax purposes in Belize at a time when it was widely believed he had given up the status. 

Although the peer’s morals have been called into question by the media, “the fact he took steps to mitigate his UK liability (legally) is a matter for him and his conscience, not the media,” Dean said. 

According to Bloomberg, Canadian tax authorities are reviewing reports linking a key fundraiser for Prime Minister Justin Trudeau to offshore trusts in the Caribbean. Montreal-based businessman Stephen Bronfman, son of billionaire Charles Bronfman, was among the individuals cited by news organizations. Another entity mentioned is commodities trader Glencore, a client of Appleby. Silicon Valley investor Yuri Milner, one of the early financial backers of Facebook, reportedly partnered in two investments with the Russian state-controlled bank VTB Bank PJSC before it was sanctioned.

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