The Paradise Papers Continue to Shed Light on the Use of Offshore Tax Havens

In FATCA, FBAR, Offshore Tax, OVDP by Jason Freeman and Spencer BanksLeave a Comment

The Paradise Papers represent the latest large-scale leak of financial documents believed to link thousands of companies and individuals to hidden offshore accounts and secret tax havens.  The leak was massive, totaling some 1,400GB of data—that translates to an estimated 13.4 million documents covering a period from 1950 to 2016.[i]Nearly half of the leaked documents come from corporate registries in Caribbean jurisdictions.[ii]The leaked documents reveal information about the world of offshore finance and implicate a number of the world’s “elite” and ultra-wealthy.[iii]

The leak’s timing is particularly interesting in light of the IRS’s recent announcement that it will soon be ending the Offshore Voluntary Disclosures Program.  For insight, see our prior post, Last Call: The Offshore Voluntary Disclosure Program to End.

Origin

Similar to the 2016 Panama Papers leak (see our prior posts, A Brave New World: The Panama Papers and the United States’ Role as a Tax Haven), A Brave New World: The Panama Papers and the United States’ Role as a Tax Haven) an anonymous “John Doe” leaked data to the German Newspaper Süddeutsche Zeitung.[iv]The paper then called on the International Consortium of Investigative Journalists (ICIJ) to lead the investigation.[v]Currently, hundreds of media groups from at least 67 countries are investigating the papers, and governments have opened criminal and civil investigations as well.[vi]

Importance?

Offshore tax evasion is a significant contributor to the estimated annual “tax gap.”  One study, for example, found that the United States loses about 16.6 percent of its total corporate tax income due to tax avoidance and other loopholes annually.[vii]Other countries show lost taxes of up to a third.  The IRS estimates that a very substantial amount of taxes go uncollected each year because of unreported offshore activity.

The Paradise papers have further exposed the underworld of the offshore finance industry and have triggered hundreds of investigations worldwide.[viii]These investigations have put a number of companies and political figures in the crosshairs.[ix] The leak’s timing is particularly interesting in light of the IRS’s recent announcement that it will soon be ending the Offshore Voluntary Disclosures Program. For insight, see our prior post, Last Call: The Offshore Voluntary Disclosure Program to End.

Gerard Ryle, of the ICIJ, put the Paradise Papers leak in perspective: “This leak is important because it is the high end of town. People have dismissed the Mossack Fonseca [,the law firm specializing in offshore accounts that was at the heart of the Panama Papers leak,] Leaks as they were rogue players who would take any client. Most of the offshore world is not like that at all, here you have the gold-plated company[, Appleby].”[x]

Taxpayers with unreported foreign accounts and entities face substantial penalties, and even criminal, exposure. For instance, failing to file a FBAR can result in penalties equal to half the balance of the account. Other information forms may be required as well – such as Forms 5471, 8938, 8621, and 3520. Failing to file these reports can result in significant additional penalties.

Findings So Far

According to reports, the Paradise Papers have so far exposed the “offshore interests and activities of more than 120 politicians and world leaders, including Queen Elizabeth II . . . .[xi]” Reports also indicate that the papers expose the “tax engineering” of more than 100 multinational corporations and a number of multinational companies in Africa and Asia who “use shell companies in Mauritius and Singapore to reduce taxes.[xii]” It is important to keep in mind, however, that there is nothing inherently wrong with owning and maintaining foreign accounts or entities.  So showing up on the list should not, in and of itself, be viewed as scandalous. Either way, though, the leak shines a light on an issue that has been a top enforcement priority for the Department of Justice and IRS for several years now. It has prosecuted or civilly audited thousands of taxpayers and collected billions in fines for unreported offshore accounts and assets over the past several years.

Concluding Thoughts

As some commentators have noted, the Paradise Papers demonstrate the continued—if not increasingly—widespread use of offshore vehicles, and indicate that offshore tax evasion is likely to continue to be a top enforcement priority for U.S. tax administrators.  There will undoubtedly be future—and still larger-scale—leaks to come.  In a world of increasing transparency, international tax compliance is more critical than ever.

[i]Everything you need to know about the leak, BBC.com, November 10, 2017, http://www.bbc.com/news/world-41880153 (last visited Mar 28, 2018).

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[v]Id.

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[vii]Gabriel Zucman, Annette Alstadsæter & Niels Johannesen, Tax Evasion and Inequality, http://gabriel-zucman.eu (2017), http://gabriel-zucman.eu/files/AJZ2017.pdf (last visited Mar 28, 2018).

[viii]Id.

[ix]Id.

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[xi]Paradise Papers Expose Tax Engineering, Mondaq Business Briefing, November 22, 2017, http://www.highbeam.com/doc/1G1-515315417.html?refid=easy_hf (last visited Mar 28, 2018).

[xii]Id.

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