What’s with Offshore Accounts, Shell Companies and Tax Havens?
The recent Panama Papers leak shines the spotlight on the murky and obscure world of offshore accounts, and gives us an insight into the financial affairs and tax planning of multinational corporates, as well as some of the world's most wealthy people (including twelve world leaders).
What are offshore accounts?
In simple terms, offshore accounts are bank accounts which are located in a country outside the account holder’s residence country. Offshore savings accounts enable an individual to save money in countries other than the country where he is resident for tax purposes.
Example: If an Indian resident opens a savings account in the United Kingdom, this can technically be termed as an "offshore account", enabling the the individual to save money in Pounds (GBP).
Offshore accounts are illegal in themselves, provided that any income related to them is disclosed to the relevant tax authority. For someone with business dealings outside their residence country, and/or who frequently travels abroad, it is one way of reducing currency exchange risks.
Example: An Indian resident, who travels to London frequently, decides to open an offshore account in the United Kingdom, and transfers money from his Indian (INR) bank account to an offshore account in London (GBP) at a time when tthe INR exchange rate has strengthened vs sterling. In this case, the individual is taking advantage of a weaker pound, and at the same time minimizing exchange rate risk, in terms of any sterling transactions he makes.
If offshore accounts are legal, what is the fuss about?
If we consider another example, let us say an individual opens an account in a tax haven and structures it in such a way as to keep his identity anonymous. This would make it difficult to ascertain who the actual owner of the account is. Since the offshore account is located in a tax-haven, the individual could use this as a way of gaining a tax advantage, effectively avoiding tax due in his residence country.
Structures for the world's wealthy
Not every individual uses the tactic of setting up offshore companies to gain a tax advantage, but there are clearly some individuals who do not want to disclose details of the full amount of assets under their ownership, or of financial transactions related to these. To be clear, for an individual, having an offshore account in a tax haven in itself is not illegal. For example, an offshore structure can be a useful way of protecting an investment or maximising its efficiency. However, income related to this account must be fully declared to the relevant tax authorities (including the individual's residence country tax office, if money is repatriated) so that any tax due can be notified and paid as appropriate.
Multi-nationals and tax planning
For corporates, the issue of having a registered office in a tax haven, or a lower tax regime, is a more emotive topic, particularly if the decision on where to locate the business appears to be driven by tax planning. The political environment has changed in recent years: there is now much greater public scrutiny of the tax dealings of individuals and corporates which look to have secured a material tax benefit from tax structures outside their tax residency country or domestic business market. This change in zeitgeist has come primarily since the financial crisis, and is a function of
Topical examples are US corporations, such as Google or Amazon, which generate significant revenue from their European businesses, but have historically paid relatively limited amounts of corporation tax in Europe.
From a mergers and acquisitions perspective, a practice called tax inversion also an emotive topic. This is the practice whereby, a company, Company A, buys another company, Company B, which is domiciled in a lower tax regime. Company A acquires another company, Company B and relocates the new merged entity to the lower tax country, while still retaining a significant proportion of its revenue in the higher tax country
Exchanging tax information will become automatic
The most contentious aspect of offshore accounts is where they are used illegally with the aim of evading regulatory oversight and/or tax obligations, i.e. to “hide” assets and interest or investment income from these assets. The more sinister use of tax havens is to take advantage of their lack of transparency to move money around in secret to reduce tax or to launder money.
Tax authorities worldwide are increasingly co-operating to combat tax evasion and aggressive tax avoidance. From next year, the majority of countries (by international law) will automatically exchange tax information with each other to increase tax transparency. Only a few countries (of which Panama is one) have yet to sign up to this initiative.
Many countries have implemented a period of amnesty to encourage offshore account holders “to bring their tax affairs up to date” through voluntarily disclosing offshore income if it is liable to tax, with a view to imposing stringent penalties in future on those who have not disclosed, once the amnesty period is closed.
We are reminded of a quote – “Greed, in end, fails even the greedy.” – Cathryn Louis