Welcome to Paradise
The air is clean, the grass is green and you never have to pay any tax. Sounds like a dream right. Well if you’re super rich or a multinational business, you could be living that life right now.
You may have seen a few news articles this week about “Paradise Papers”, when I first heard of this, I thought, wasn’t this released already? The answer is both yes and no. Last year we had Panama Papers, this year is Paradise Papers. So what’s the difference?
Not much. Different countries, different legal firm, same issue. Aggressively structuring affairs to take advantage of every tax loophole in every part of the world.
Now let me be clear, most of these businesses have done nothing illegal (I’m sure some have just outright dodged tax) they’ve just pushed envelopes as far as they can. Some of the strategies they use are complex, some pretty standard structuring, just magnified across more tax jurisdictions and with a few more zeros at the end of their numbers.
Sounds interesting right? How do they do it? Who’s doing what? How much are we talking about? But you’re short on time and don’t want to sift through fake news. Don’t worry. I got you. Here is a collection of the videos and articles to get you up to speed, and sufficiently outraged.
Looking for the Dummies guide?
Check this one out from The BBC. If you’ve only got time for one article, make it this one.
So the rich people are minimising their tax so what? This is hardly news Nathan, what does it matter?
Because they’re rich, the dollars of tax they are not paying using these complex strategies add up to squillions and affect your every day life. Potholes not being fixed? No money in the budget for Science? The trillions they have parked offshore have something to do with that which this great opinion piece from ABC News dives into.
So what sort of stuff are they doing to minimise their tax? Can I do it?
Well if you own a business, theoretically you could, but the cost to implement and administer would be prohibitive and I certainly wouldn’t advise you to go down that path so you’d need to find a new accountant.
So what have they done?
Here’s a nice explainer on Nike’s fairly straight forward structure, that gets them their nice little result
As a tax adviser its fascinating stuff, the money involved is unbelievable, and the wider community is again at the point of anger, but also I sense, at a point of resignation. The divide between rich and the rest will keep getting wider and more dramatic as these things carry on. What can John & Jane Citizen possibly do? Vote. Get involved, get interested. This stuff affects you whether you like it or not.
My hope out of all this, is that something is done to close the loopholes. But everyone is looking at the tax haven countries like it’s their fault, but in reality, it’s not. They are usually very small in both geography and population, so they don’t actually need a lot of tax revenue to fund their country, hence they have very little or no taxes. The reason why they allow these businesses to establish themselves there is that it provides employment for their citizens, so why wouldn’t they allow it?
I don’t even think it’s the fault of the advisors or the rich who have used these loopholes, because if you were in the position to use them would you? Or would you take a moral stance and pay the tax for the good of your country?. No, I believe the fault lies in the crafting of tax laws in the major economies.
Let me explain.
The strategy Apple used and explained above (if you’ve haven’t checked that out, do so now) is one of tax residency. If Apple was an Australian business instead of US business that strategy wouldn’t work.
In Australia a company is a tax resident and must report its worldwide income in Australia if it was incorporated in Australia or has its central management and control in Australia. It doesn’t matter where it earned the profit or where the cash is. So if Apple (or anyone else) set up the Irish company, but had central management and control in Australia, then for tax purposes, it’s an Australian tax resident and must pay tax here. So while everyone is looking sideways at Ireland, like they’re at fault, I’m looking at the US, saying WTF are you doing? Change your laws to remove the un-repatriated profits deferral.
“Under current law, U.S.-based corporations are supposed to pay 35-percent income tax on profits worldwide. But companies can defer that tax on active profits left outside the country.
The deferral rule has incentivized multinationals to park profits offshore and about $2.6 trillion in earnings is being held overseas by more than 500 U.S. companies, according to Audit Analytics, a corporate research firm”
Source: Reuters 08/11/2017 https://www.reuters.com/article/us-usa-tax-repatriation/u-s-companies-push-hard-for-lower-tax-rate-on-offshore-profits-idUSKCN18B13Q
What the hell? The US has incentivised businesses to use these strategies!
Make all the money you want but don’t bring it back to the US. Zero Tax. Seems a sensible strategy.
It’s got so ridiculous, that Apple, rather than repatriate some of their enormous cash holdings, are issuing bonds (loans) to the corporate market. Let me say that again, they are borrowing money (the interest on which they will get a tax deduction in the USA – aka reduce their US tax even more), the latest round is $7billion USD, rather than transfer their profits back to the USA where they will be taxed.
This is the part where you shake your head in disbelief.
To its credit the Trump administration in its latest tax plan has proposed a tax of 12% on repatriated profits (rather than the normal corporate rate of 35%) to encourage businesses to bring it back (it’s still just in plan phase), and to its credit the Australian Government has also recently legislated the diverted profits tax to address some of these issues, whether either of those are effective will remain to be seen. There are also at least in Australia, laws regarding transfer pricing and profit shifting, how effective any of those are is questionable, but what we know for sure, is that unless the significant economies of USA, and Euro zone don’t address the issues in their domestic tax policy, nothing will change in Paradise.