Wed, Jun 24, 2015 - Page 9 News List

Follow the money: inside the world’s tax havens

There are many tricks used to shift money offshore, and a pinstriped army of accountants and lawyers to help people do it

By Nicholas Shaxson  /  The Guardian

It should be noted that everything these companies are doing is legal: it is what we call tax avoidance or planning — not evasion — but the point I want to make is that tax havens are everywhere. It is like The Matrix. I cannot stress strongly enough how everywhereish they are and, until recently, who even noticed?

Tax havens’ defenders say they smooth the flow of capital around the world, removing roadblocks and red tape, but what are those roadblocks? Taxes, regulation and democratic laws.

Havens are places where you can put your wealth in order to escape the rules at home. Those rules might be around tax, or criminal laws, or rules about transparency and disclosure, or financial regulations. (It is not always about the tax.)

You do not have to put your wealth itself in the tax haven. It is the legal structure that owns the wealth — the shell company, the trust or whatever — that usually matters. The asset itself — the thing you own — can be anything, anywhere. It could be a painting or a Learjet or a Swiss bank account, or a luxury home in Mayfair that the owner — let us say a Ukrainian oligarch — is currently using for the benefit of his daughter. Instead of owning the house directly, the oligarch owns the house via an intermediate structure in a tax haven. The land registry records will not list the oligarch’s name, but the name of some anonymous offshore shell company and when you go to find out who owns that company, you will come up against a brick wall.

This can all take a bit of getting used to, even for people with wealth. When Hurricane Ivan headed towards the Cayman Islands in 2004, it sent a stream of light aircraft racing to Miami. They contained computer hard disks, relating to a large slice of the world’s Cayman-held wealth. (Banking assets in Cayman account for nearly a 15th of the world’s US$30 trillion in banking assets.) When the storm passed, they flew them all back again.

There are many tricks used to shift money offshore, and a pinstriped army of accountants and lawyers to help people do it. The commonest technique is one called transfer pricing, employed by pretty much every multinational.

This is how it works. Let us say a corporation picks and packs a container-load of bananas in Ecuador and it costs the company US$1,000. It sells them to a French supermarket for US$3,000. Which country gets to tax the US$2,000 profit — France, Ecuador? The answer is: “Where the multinational’s accountants decide.”

The multinational sets up three companies, all of which it owns: EcuadorCo, HavenCo (in a zero-tax haven) and FranceCo. EcuadorCo sells the container to HavenCo for US$1,000 and HavenCo sells it on to FranceCo for US$3,000. That is basically it. (The bananas themselves do not go anywhere near the tax haven: this is all just paper-shuffling in New York or London.)

If you blinked, you may have missed what happened here. It cost EcuadorCo US$1,000 to pick and pack the container, and they sold it on for US$1,000. So EcuadorCo records zero profit, meaning no taxes. Likewise, FranceCo buys it for US$3,000 and sells it to the supermarket for US$3,000. Again, no profits and no taxes.

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