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Will the fallout from the Paradise Papers change accounting?


​By Ian Lavis on behalf of Praxity

Publication of the Paradise Papers sparked calls for global tax reform and increased pressure on big companies to be more open about their tax affairs to avoid a public mauling.

The fallout from the Paradise Papers – the leak of millions of documents exposing the tax affairs of the world’s most rich and powerful – continues to reverberate around the world. 

A World Economic Forum debate on ‘tax avoidance’, held in the aftermath of the data leak, has prompted calls for global cooperation to reform the international corporation tax system. 

The Nobel prize-winning economist Joseph Stiglitz told the Davos panel the global tax system was broken and the OECD was unable to represent developing nations in tax discussions, adding: “The problem is it’s trying to fix a broken system by the guys who are making a profit out of the broken system,” according to a report in The Guardian on 25 January.

The leak of the Paradise Papers from offshore service providers and the company registries of 19 tax havens exposes the complex artificial structures to shelter wealth offshore. There is no suggestion of any wrongdoing or illegal behaviour. Nevertheless, across the world there are moves to clamp down on so-called aggressive or ‘unfair’ tax avoidance, which is basically a legal form of tax planning, as well as illegal tax evasion.

The European parliament has established a new committee on financial crime, tax evasion and tax avoidance. Its remit includes examining how EU VAT rules were allegedly circumvented in light of the Paradise Papers, according to Accountancy Age. The committee of 45 Members of the European Parliament will also monitor the progress of member states in removing tax practices that allow tax avoidance or tax evasion which are harmful to the functioning of the single market.

On the other side of the world, the Australian Tax Office (ATO) has taken action against 19 multinational companies as it unpicks a scheme capable of pushing millions of tax dollars offshore, according to news site ‘abc.net’. The ATO is said to be cracking down on high-profile Australian advisory firms and an international web of offshore law firms suspected of promoting tax avoidance schemes through tax havens.

Yet, in the US, where tax planning is far more openly discussed, the Paradise Papers haven’t caused anything like the same level of outcry as in other parts of the world.

Will James, Transfer Pricing Partner at US accounting firm BKD, says: “In the US, people are not shocked about the Paradise Papers. Everybody is engaged in some sort of tax planning here, from individuals trying to maximize their deductions to large multinational corporations. I think that, especially in the UK and the rest of Europe, when people do tax planning they are a little sheepish about it, but in the US, everyone engages in tax planning and sometimes that can lead to more aggressive forms of tax planning.” He adds: “I think, in the US, companies will still engage in complicated tax strategies. There is no shame in doing that if the tax planning is within the confines of the law.”

No right-thinking, professional accounting firm or its clients would want to risk their reputation by being involved in any form of tax evasion. But tax avoidance is clearly something companies and individuals will seek to benefit from and, while legal, offshore tax havens are likely to remain popular with some.

As the European Parliamentary Research Service (EPRS) points out: “With the support of intermediaries and facilitators, tax optimisation schemes are adapted to stay ahead of regulatory provisions, namely by setting the tax residence accordingly.” These schemes work in part because of the opacity provided by structures such as trusts or similar arrangements. This “shields the ultimate beneficial owner and makes it impossible to assign assets to taxpayers” the EPRS says.

The question is will companies want to put their reputations on the line by being associated in future with the type of tax avoidance schemes which are viewed by many as secretive and unfair?

Judith Teichman, Professor of Political Science and International Development at the University of Toronto, says: “A perusal of most reports on the [Paradise] Papers leads to the conclusion that minimizing or escaping taxation has been the major objective of the world’s global elite in using these financial services. While in most cases channelling your money into offshore companies out of the reach of domestic tax regulations is not illegal, it arguably should be. It is certainly unfair.”

Commenting on her blog, she says: “Tax havens and the failure of governments to take measures to mitigate the practices associated with them are major contributors to intra-country inequality, which has been increasing almost everywhere in the world in the last few decades.”

As pressure grows on companies to be more transparent, it is likely to lead to greater caution about adopting a more ‘aggressive’ form of tax planning or tax avoidance, but just how open companies will be about their tax affairs remains to be seen. 

Commenting on the US situation, Will James says: “Looking at transparency and disclosing tax planning, that is something that under the current administration is never going to happen. I just don’t think it’s possible.” 

However, there does appear to be a sea change under way. The BKD transfer pricing expert explains: “There is a feeling among US tax advisors I have spoken to that they are reluctant to do something aggressive in terms of tax planning. The old days of setting up an entity in the Cayman Islands and having no people on the ground to operate it are long over.”

He adds that if companies do want to take advantage of offshore opportunities as part of their tax planning, they need to think hard about the risks involved and economic contribution needed in terms of setting up apparatus on the ground.

“It’s about setting expectations with clients upfront. If a structure is dependent on putting people on the ground in Ireland, for example, the client needs to follow through to properly implement the structure and place the appropriate amount of substance in that jurisdiction in order to protect their own reputation and the integrity of their structure. The tax advisors that established the structure have a duty to audit that structure to ensure it was properly implemented as the accountancy firm’s reputation is also at risk. It’s very complicated, the tax planning that we do. There are a lot of steps involved and we have turned people away where they were not willing to create the necessary steps.”

As a member of Praxity, the world’s largest alliance of independent accounting firms, BKD shares knowledge and expertise on tax planning with other participant firms worldwide to help international clients understand and implement tax planning initiatives for maximum benefit while protecting reputation. 

“We work extensively with Praxity affiliates in different countries. We look at how can we structure operations and supply services to companies. We cannot do tax planning in a vacuum,” Will James explains.

For the time being at least, offshore tax havens and other aggressive forms of tax planning are here to stay, but they are increasingly frowned upon by the non-corporate world. With the pressure for transparency on corporate tax affairs likely to increase, companies will increasingly need to balance their commercial interests with the interests of stakeholders, and accounting firms will be pivotal in helping companies make informed, rational decisions to minimise the risk of reputational damage.

You can read our previous coverage of this issue here​

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