In an episode of the American drama “Billions,” which recently aired in the U.S. and Israel, the wealthy and cunning Bobby Axelrod (Damian Lewis) receives a delivery to his office. It’s 18 works of art that had been stored in the vault of a Swiss bank to avoid paying taxes.
However, since the art was sent to the U.S., Axelrod now faces a $75 million tax bill. “The bank decided to surrender to Uncle Sam,” he grumbles – but not for long. He manages to find a way around his problem.
Fiction it may be, but the story of Axelrod and his art is based on the fact that many of the world’s wealthiest individuals – and corporations – use tax havens in creative ways to pay little or no tax.
Many people aren’t the least bit fazed when they hear about tax havens, which are countries or territories where tax rates are little or nothing. They think of them as a luxury for the 1% but not as something that directly affects them.
In fact, tax evasion and the havens that help make it possible deprive governments of the tax money they need to support health or education. “Tax havens have an impact on every ordinary taxpayer,” says Ronen Palan, an Israeli-born professor of political science at City University of London and a world expert on the subject of offshore financial center and tax havens.
“A modern state is an expensive thing,” says Palan. “It’s competing in a modern market and requires costly infrastructure, education, medicine and welfare. Its costs aren’t going down. They’re constantly on the rise. The question is, who pays for this? The poor don’t pay direct taxes like income tax because they don’t earn enough; the wealthiest don’t pay taxes because they evade them by putting the money in tax havens – so it’s the middle class that ends up paying. This can clearly be seen in Israel, but it’s a worldwide trend. The middle class carries everyone on its back. And this creates a huge problem.”
There are dozens of tax havens, such as the Isle of Jersey, Isle of Guernsey, the Isle of Man, the British Virgin Islands, the Cayman Islands and Bermuda.
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For the most part, these are small countries or financial centers lacking highly developed infrastructure. Images of these places usually feature an exotic island with palm trees.
Biggest tax scam
Former U.S. President Barack Obama liked to cite a single building in the city of Georgetown in the Cayman Islands that serves as the official address of 18,000 companies. “That’s either the biggest building or the biggest tax scam on record,” he said.
But these small countries are only part of the story. More developed countries, including Singapore, Hong Kong, the Netherlands, Switzerland and Ireland, have also built tax systems that grant massive tax benefits to corporations or foreign investors. Certain places in the United States are also sought-after tax havens – 300,000 companies are all registered at a single address in Wilmington, Delaware.
Palan, who was in Israel last month for a conference on taxes and globalization at the Interdisciplinary Center in Herzliya, moved to Britain after his army service to study international relations at the London School of Economics. He went on to earn his doctorate in the field there as well.
He came to specialize in tax havens by chance. In the 1990s, while studying political science, he asked himself what was behind tiny countries like San Marino, which support themselves financially by gimmicks – issuing giraffe stamps or other weird niche industries.
“I started reading and looking into it, and I found out that about half of cross-border investment and savings pass through tax havens,” Palan says. “I thought, ‘There’s something strange going on here. This isn’t some esoteric little thing, even if the countries seem esoteric and barely worthy of a dot on the map. I started off with the premise that this is fraud, but I didn’t understand why.”
No one can say just how much money is funneled into tax shelters. It’s said to be in the trillions of dollars, but how many trillions are we talking about?
James Henry, former chief economist at the McKinsey consulting firm, estimated in 2012 that the figure was at least $21 trillion and could be as high as $32 trillion. The young French economist Gabriel Zucman has placed the number at a more conservative $7.6 trillion dollars.
But bear in mind that these are just the financial assets. The figures don’t include the yachts and artworks that are also parked in tax havens.
What do yachts have to do with tax shelters? In certain countries like Bermuda, the Bahamas, the Isle of Jersey, the Isle of Man and Luxembourg, the tax authorities grant benefits when registering boats as foreign companies. This is especially absurd in Luxembourg, which is completely landlocked.
As the plot of “Billions” illustrates, there are countries that don’t tax the purchase of artworks, and then there are people who know how to combine the two and exploit loopholes by storing artwork on yachts.
Panama is among the best known tax havens thanks to a 2016 media expose, popularly known as the Panama Papers, that revealed how politician and their associates – not to mention criminals and celebrities – were using tax havens.
Some five million documents and letters from a Panamanian law firm were leaked to a German newspaper, which shared the information with the International Consortium of Investigative Journalists. Haaretz was part of the investigation.
The clever steer clear of Panama
In one case, associates of Russian President Vladimir Putin were found to have transferred at least $2 billion via companies and banks registered in tax havens. Other names that came up in the investigation were Chinese President Xi Jinping, the children of the president of Azerbaijan, the Saudi king and the prime ministers of Iceland and Pakistan.
The documents also included about 600 Israeli companies that had been making use of tax shelters (which is legal in Israel, as long as it is reported). Their shareholders included the late attorney Jacob Weinroth, attorney Dov Weisglass, billionaires Idan Ofer and Teddy Sagi and diamond mogul Dan Gertler.
Panama is regarded as the Wild West of tax havens because there, says Palan, “they don’t ask questions.” It’s a tempting place to safeguard your millions but Palan says that “clever people know not to touch Panama.”
A 2015 OECD report found that since the 2008 world financial crisis, large multinational companies have been paying less and less tax despite a crackdown on tax avoidance. For the last six years, OECD has been fighting the avoidance problem through a project called Base Erosion and Profit Shifting.
Does it stand a chance of success?
“The way the OECD works is, they announce that a certain undertaking was successful and then immediately launch a new undertaking, so apparently the previous one wasn’t really all that successful,” says Palan. “That’s how they started with BEPS, and in a couple of years or so we’ll be hearing that it was a tremendous success and then they’ll roll out BEPS 2.0 – which means the first one didn’t succeed, but it also shows that they’re not giving up.”
Multinational corporations have heaps of lawyers and accountants to overcome any rules. “The bottom line can be played with, which is why I’m skeptical. And I say this even though we’re talking about public companies that report their financial information, where supposedly everything is clear and in the open,” he says. Apple is a case in point.
“Apple is built from about 400 subsidiaries and related companies, each of which is a separate legal entity,” Palan explains. “Most of these companies have other shareholders aside from Apple. We developed a method that enables us to map out this complex structure and get a visual picture of the complicated holdings. We took the complicated reports from each country and were able to use this to discover the general picture. We searched for patterns that repeated and have various uses, including tax-related ones.”
The study addresses the new strategy Apple adopted after it came under fire for using Ireland as a tax shelter in order to preserve its high profits.
“The company exploited a loophole in the tax laws and transferred part of its intellectual property in an Irish company to its subsidiary in Singapore, which has a low tax rate,” he explains. “Even though this was a significant transaction registered with the Singaporean company, it did not appear in the American company’s full annual report [K-10].
“A sophisticated taxpayer like Apple exploits the tax arbitrage – the differences between the tax laws of various countries – to achieve a tax benefit that isn’t even transparent. The activity conducted by the Singaporean company is does not need to appear in Apple’s American financial reporting.”
One haven closes, another opens
While big companies are still gaming the system, the use of tax shelters among wealthy individuals is on the decline globally, prompted in part by rules requiring financial institutions to report to other countries about accounts belonging to their residents, as well as by harsh measures taken against banks accused of aiding tax evasion.
In Israel, for example, Bank Leumi paid $400 million to settle charges with U.S. authorities after it admitted to helping American customers avoid taxes. Other Israeli banks are currently in negotiations with U.S. authorities, and are likely to end up paying large fines.
“The big banks have closed clients’ accounts in tax shelters on a massive scale because they’re afraid. They are also requiring customers to provide confirmation of their reporting to the tax authorities. They’ve come to the conclusion that the risk is just too big for them,” says Palan.
However, when one haven is closed, another one opens. Palan says that cryptocurrency and financial technology are rapidly emerging as virtual tax shelters. People who hold capital in cryptocurrency can be confident that tax authorities and law enforcement authorities have no way of identifying them.
Palan says the effectiveness of the fight against tax evasion will depend on what the big three world economies power of the 21st century – the United States, the European Union and China – do. These are the players who make the rules.
“The basis for success going forward will be the relations between the three. All the rest can make noise, but they have no choice but to respond. Israel, too, will respond to what the world decides for it. Everyone sees things from his own angle and thinks he’s running things, but for Israel, things are really being run elsewhere,” Palan says.
He believes that Israel doesn’t sufficiently appreciate Europe’s power and assumes everything is led by the United States alone. “Israel is just as dependent on Europe as it is on the U.S., and the laws there affect it. If Israel fails to grasp this, it will be making a mistake.”