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Paradise Papers leak: A breakdown

  News recently was abound with the Panama Papers leaks, and the celebrities and companies named in the leaks were from across the world. Why do such leaks occur, what do they plan to achieve? And of course, do these leaks really have any consequences?  

Dr Suresh Srinivasan

We often hear about tax havens situated around the world through which global companies route their investment around the world.
Back in the early 1990s, Vodafone, for example, entered the Indian telecom business by acquiring shares from the Hong Kong-based Hutchison Group which had invested in India along with Essar. Hutchison’s investment from Hong Kong in India was routed through Cayman Island, and then through Mauritius, to eventually land as investment in India. The purpose of such a complicated structure was to ensure Hutchison’s profit earned in India was most efficiently transferred back to Hong Kong with minimal withholding taxes, across national borders.

Avoiding vs evading
Multinational corporations, large corporate houses and high net worth individuals route investments or park their funds in tax havens in order to legally ‘avoid’ taxes. Avoiding taxes is different from ‘evading’ tax. The latter is illegal, while the former is a means to intelligently reduce or eliminate exposures.

What is a tax haven?
A tax haven is a jurisdiction, which includes countries or provinces, where there is a favourable tax structure with an objective to attract investors to park their funds. Countries like Switzerland, Luxembourg and the Netherlands are, in certain cases, considered to be tax havens. Jersey and Isle of Man, a part of the United Kingdom, are popular tax havens. Other British overseas territories that are popular tax havens include Bermuda, British Virgin Islands and the Cayman Islands.

Panama Papers
Recently, a German newspaper secured more than a crore files containing classified and undisclosed information from tax haven registries, law companies providing such services to clients, on many such investments. Such confidential information was subsequently leaked through International Consortium of Investigative Journalists which has many partners, including the likes of BBC and the New York Times.
The amount of information that has now been brought into the public domain through Paradise leaks is much bigger than the earlier leaks, including the Bahamas Leaks and Offshore Leaks of 2013. The Panama leaks, of course, had a larger data size, but it is reported that the relevance of exposure by the Paradise papers is considered to be far more ‘high profile’.

Persons ‘caught in the act’
The nature of leaked information is quite sensitive, and describes such tax avoiding investments of well-known celebrities from close to two hundred countries. Information on Indian personalities is prominent, and it is in the nineteenth position in terms of the number of names released.
The list of high profile persons involved include the British queen and her private estate, some members from US President Donald Trump’s cabinet, Russian President Vladimir Putin’s close relatives, large companies like Apple, Twitter, Facebook and global private equity investor Blackstone.
The files released also contain information about seven hundred Indians, including many politicians, company heads and celebrities. Some of the known names include Amitabh Bachchan, Vijay Mallya, Niira Radia (famous for the Radia tapes during the 2G scam), Sanjay Dutt’s relatives and ministers of the current Union Government in India. Indian names also include information about Kerala chief minister Pinarayi Vijayan and Karti Chidambaram, son of former minister P. Chidambaram.

Why such a leak?
In the case of Paradise Papers, investigative journalism and more than a year’s efforts of the International Consortium of Investigative Journalists, the news agency that has been gathering such information is the primary source of the leak. The major source of such data on offshore was actually hacks of law firms like Appleby that provides offshore investment advisory services to high profile clients.
From the perspective of the offshore investment advisory firm’s perspective, they have clarified that there is no evidence of their having acted contrary to law or illegally, and the data released by the hackers are the general advice that they provide to clients, in the normal course of their business.
The fundamental issue here is that the public is not aware of the magnitude of such investments that are stashed around the world, most or all of which have a prime objective of denying tax to the various governments, albeit within legal ambits. Especially since most of these powerful men and women advocate for global cause and its well-being, such information is a paradox. This can possibly be a reason why such investigative journalists are focused on leaking such information.

In the public interest
The investigative journalists are of the opinion that their exposé is in the public interest, and the public needs to be aware of such wrongdoings (although tax avoidance is legal) because data leaks have repeatedly exposed wrongdoing.
The magnitude of such investments and transactions is mind boggling! If we consider the overall household wealth at a global level, close to 10% of that is stashed away in offshore vehicles. This is pegged at around $8 trillion. Annual loss of global revenue, if these were paid as taxes, will translate to around `14 lakh crores, which is more than half of India’s total budgetary spend. More than the financial implications, such funds could be put to illegal use in the form of financing arms, drug rackets and terrorism.

Earlier leaks: Consequences
In the past, such leaks play out well in the hands of the respective national regulators and investigative agencies, and provide them with ammunition to initiate proceedings against such individuals if they deem appropriate.
More than a mere exposé of offshore tax avoidance investments, such leaks bring out many transactions that may be unethical. For example, it is being reported that the Paradise Papers leak has exposed Prince Charles, who seemed to have been campaigning to alter climate-change agreements that were in his interest and in the interest of his private estate. The other example is the Sun TV-Aircel-Maxis case, which involves high profile ministers from the Indian cabinet, and the courts had recently pronounced its ruling. These are examples of extremely sensitive matters, and when information contrary to what the public is aware is released, more than sensationalisation, these could potentially be a strong weapon in the hands of regulators and investigating agencies.
In the last US presidential elections when Hillary Clinton lost to Donald Trump, WikiLeaks released sensitive emails and other documents suggesting her unethical stand on many issues, including her views on her fellow Democratic Party candidate Senator Bernie Sanders. These leaks, allegedly done primarily by Russian hackers, are the main reason for her defeat and that of the Democratic Party.
But, looking at the history of such leaks, whether the regulators and tax agencies take ‘suo moto’ concrete actions on such information is debatable. First of all, the authenticity of such information in the first place could be questioned, as it is an outcome of an illegal hacking process! Then, what purpose does it serve? At the most, more than mere sensationalisation, it does highlight the reality to a certain extent, but more importantly provides some tooth to the regulators to go after individuals, if they are serious in doing so!