The global financial impact of tax havens in foreign jurisdictions and in the U.S. is no longer an afterthought that major countries intend to address later. Currently, members of the G20 coalition have agreed it’s high time that a universal minimum corporate tax be instituted. While the main purpose is to make investing in tax havens not as lucrative as before, will tax havens also be compelled to prevent the creation of the so-called shell corporations.
The recent Pandora Papers released by the International Consortium of Investigative Journalists, divulged the broad scope of who and how tax havens have been tipping the balance of wealth in favor not only of the elite, but also of political figures, charismatic religious leaders, well-known celebrities and even suspected drug lords.
Will the G20’s Universal Minimum Corporate Tax Eliminate the Adverse Impacts of Offshore Investments?
To be clear, offshore investing in tax havens is not an evil practice, it’s the abuse and exploitation of legal loopholes that have made the practice seemingly illegal.
Many asset managers based in tax havens include mutual fund platform providers that give opportunities for hard-working individuals to invest their money on higher earning investment products. However they are limited to shares of stocks and bonds as considerations are made on clients’ individual tolerance for risks.
Einvestment for one is a Cayman Islands-based mutual investment platform focused on maintaining a well balanced portfolio from which their clients earn extra income regularly.
While an understanding of how tax havens worked first came to the light during the 2008 financial crisis, tax havens did not pose as immediate economic concerns. The general nuance was that big corporations, financial institutions and wealth managers of the elite, were using tax havens as means of reducing investment risks, whilst increasing the potential earnings of portfolios.
However, the Panama Papers, a documentary released in 2017, made it known that governments have been losing as much as $500 to $600 billion in corporate tax revenues from the total funds invested in offshore holdings in all known tax havens. That being the case, the US Congress passed a tax reform in 2017 requiring all resident corporations to pay a minimum tax of 35%. Still, this was cut down to 21% through an amendment passed by the Republican-led Congress under the Trump administration.
Yet the tax reform did not stop other Fortune 500 companies from transferring their funds to tax havens as there are other legal but technically, illegal means by which payment of substantial amounts of taxes can be avoided. This simply required using dummy corporations a.k.a. shell companies established and registered in tax havens.
Why Shell Companies are of Greater Concern?
According to the Organization for Economic Cooperation and Development (OECD) most tax havens are not keen on regulating companies established in their jurisdictions. That is so because the substantial franchise fees collected in relation to their registration and establishment are their main source of government revenues.
Shell companies registered in tax havens have no other purpose but to shield the funds of foreign investors from the prying eyes of tax agencies and financial regulators of their home country. Tax havens turn a blind eye to the lack of economic purpose of shell company, as alternative incentives for foreign investors.
However, the use of dummy companies was further abused as wealth managers have also been using them as asset protection for wealthy clients not only in terms of tax evasion, but also against potential litigation arising from legal problems like divorce settlements.
Gabriel Zucman, an economist devoted to studying the reasons behind the inequality of income and taxes has one simple solution to end the inequities of offshore investing in tax havens. This University of California, Berkeley researcher recommends an international ban on shell companies and similar entities that have no economic contributions in their place of registrations.