Trouble in Paradise: Corporates Are Still One Step Ahead of Regulators
The Paradise Papers have revealed a lot, not least the resilience of the ‘offshore world’ and how it evolves after tax loopholes are closed by investigations or EU directives, disclosure requirement, or anti-abuse rules. Corporate tax losses are estimated at £200bn in EU countries, and £45bn in developing countries.
Apple is a good example of what’s at stake. Documents revealed in the Paradise Papers and reported in the Irish Times show how two Ireland-based Apple companies Apple Sales International (ASI) and Apple Operations International (AOI) moved to Jersey as a result of an investigation in Ireland. Apple was caught up in an European Commission (EC) investigation that allowed the company to pay tax at just 0.005% in 2014 by declaring its income “stateless”. The usual rate of corporation tax in Ireland is 12.5% - one of the lowest in any European country. The European Commissioner for competition Margrethe Vestager said: “Member states cannot give tax benefits to selected companies – this is illegal under EU state aid rules” and told Ireland to claim €13bn (plus interest) from Apple for the years 2003-2014 for profits from Europe, as well as in the Middle East, Africa and India. Some of this tax should be owed to developing countries. Ireland and Apple both contest the EC interpretation.
The Paradise Papers shed new light to what happened next as Apple then instructed its lawyers Baker McKenzie to find a new way to dodge taxes with a detailed 14-point questionnaire to a number of offshore jurisdictions. This questionnaire included questions like “Confirm that an Irish company can conduct management activities (such as board meetings, signing of important contracts) without being subject to taxation in your jurisdiction”, and “Is there a credible opposition party or movement that may replace the current government?” Jersey won this offshore beauty contest and Appleby’s offices there allegedly now host these Apple subsidiaries. Jersey doesn’t benefit in any significant way beyond company registration fees and minor job creation in offshore law firms as Jersey does not levy tax on corporations. Apple denies any allegations that it abused offshore tax shelters.
Another example is the fishing industry in the Namibian city of Walvis Bay. The Paradise Papers show how a multinational fishing company Pacific Andes managed to shift most of the profits of a company called Atlantic Pacific Fishing (APF) offshore, despite it being 51% owned by local investors, by way of a clever trick called ‘treaty shopping’. At the centre of this deal is the agreement: “APF signed a deal with a company called Brandberg to manage their affairs, in return for 4% of the company's revenues”, paying $2 in fees in 2013 and 2014 alone, with outstanding bills of $8m. “The structures are geared at stripping profits” from high-tax jurisdictions, said Alexander Ezenagu, a tax researcher from International Centre for Tax and Development at the University of Sussex.
Brandberg was recognised as a beneficiary of the Double Tax Treaty between Namibia and Mauritius, that allows remitting management fees with reduced rates of taxation. In reality, Brandberg is registered in the tax haven of Mauritius, at Appleby offices, and the only managers are Appleby staff. The Namibian tax authorities are also launching an investigation into the parent company. The only long-term option is to either cancel the entire Double Tax Treaty with Mauritius, or spend several years in renegotiating it. Treaty negotiations are based either on OECD or UN model treaties.
Developing countries are affected far more by tax dodging, as they lack powerful institutions, domestic capacity in tax administrations, and regional co-ordination bodies such as the European Union (that on a collective level can close loopholes even when a single member state such as Ireland or the Netherlands objects). The UN should have a much greater role in setting the norms and rules on international tax co-operation, so that developing countries would be better represented.