After the financial meltdown of 2008, it was assumed that the offshore system has been weakened, but the recent turn of events involving the Panama Papers have revealed quite the contrary.
The crackdown was a whitewash and the offshore system is still thriving. But while the media is busy compiling a miscellany of spurious anecdotes about how rich politicians became super-rich through creative financial engineering, it is interesting to note that biggest beneficiaries of such schemes are not politicians but multinational companies.
Offshore financial dealings: Iceland premier the first casualty of Panama leaks
Pfizer-Allergan proposed merger
In 2015, the US-based pharmaceutical giant Pfizer Inc disclosed plans of a merger with the Ireland-based Allergan Plc to create the world’s biggest drug company. The news drew strong public reaction and prompted renewed scrutiny.
The proposed $150 billion deal involved the reincorporation of Pfizer in Ireland, an alleged tax haven, while the management and corporate headquarters would stay in the US. Such an arrangement known as “inversion” was projected to save Pfizer over $1 billion in annual taxes.
Now thanks to the Panama scandal, US treasury department has enforced a temporary rule that removes all tax-benefits of the deal by imposing a three-year limit on foreign companies with assets in US for satisfying requirements of an inversion deal.
Shares of Allergan plummeted by 20% immediately when the news broke that the mega merger has been cancelled. Allergan CEO Brent Saunders called the new rule “un-American” — complaining that rules of the game were changed after the game started.
Elite tax haven: Panama leaks trigger global investigations
Taxes paid by Fortune 500 companies
Fortune 500 companies including Google and Amazon are a constant headache for regulators and tax authorities. In UK, sales by Google amounted to over $6.5 billion but the corporate tax paid by the giant was a mere $0.046bn. It is estimated that Google cuts its taxes by more than $3 billion annually through various tax evasion strategies.
So how does Google get away with paying so little in taxes?
The answer is that Google pays billions in royalty to its offshore companies in Bermuda using a complicated structure known as ‘double Irish’ to transfer income from a higher-tax country to a lower-tax one.
In double Irish, a US firm transfers its intangible assets like patents to a holding company in Ireland. The Irish holding company is tax resident in Bermuda to claim 0% corporate tax rates; as according to Irish laws, a company is tax resident where its core management is – not where it was incorporated.
This holding company in Ireland has many Irish subsidiary companies that sell services to EU countries. However, there is now a Dutch subsidiary to avoid Irish withholding taxes which are not charged from EU companies. The Dutch company collects royalties from its sales subsidiaries and transfers them to the holding company without paying a dime in taxes.
Panama leaks: France ‘wrong’ to designate Panama as tax haven, says Varela
Directors of multinationals, business owners, doctors and Wall Street executives normally use their debit card to pay directly from their offshore accounts – thanks to global financial systems run by Visa, PayPal and MasterCard. So any unreported income that lands in their accounts in Bermuda gets spent with an offshore Visa debit card in US without raising any red flags.
In the wake of the Panama scandal, US government has already taken stringent steps to control capital flight and tax evasion schemes under directives of the US President but whether US congress would support his anti tax-evasion policies is still a burning question. Ireland has already closed many loopholes in its financial system for new incorporated companies, but will not crack down on existing companies till 2020.
For Pakistan, the biggest problem is capital flight to Dubai - a tax haven that is only 90 minutes away. Many technology companies and consultancy firms are now reincorporating their businesses there since FBR launched a comprehensive tax collection drive to target the services sector of our economy as well.
The writer is a Cambridge graduate and is working as a management consultant
Published in The Express Tribune, April 11th, 2016.
Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.