The Paradise Papers- Offshore Tax Shelters

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First it was the Panama Papers where the International Consortium of Investigative Journalists (ICIJ) exposed the inner workings of a Panama-based law firm, Mossack Fonseca, now it’s the Paradise Papers. The lid has well and truly been lifted on the exotic world of offshore accounting, where firms serve some of the world’s wealthiest and most powerful clients.

What are the Paradise Papers?

The Paradise Papers is a set of 13.4 million confidential electronic documents relating to offshore investment that were leaked to the German newspaper Süddeutsche Zeitung.

The newspaper shared them with the International Consortium of Investigative Journalists, and some of the details were made public on 5 November 2017.

The documents originate from the offshore law firm Appleby, the corporate services providers Estera and Asiaciti Trust, and business registries in 19 tax jurisdictions.

They contain the names of more than 120,000 people and companies such as Nike, Apple, Uber and Facebook.

Among those whose financial affairs are mentioned are Queen Elizabeth II, the President of Colombia Juan Manuel Santos, and the Lead Singer of U2-Bono.

The Paradise Papers expose the countless methods by which individuals and companies avoid paying tax using sophisticated and artificial structures, set up in tax havens, that are often difficult or impossible to trace back to the beneficial owner.

Although the vast majority of transactions are lawful, the secrecy of such structures attracts money launderers, drug traffickers and others.


Why is this controversial?

The Firm at the heart of the Paradise papers has stated there is ‘no evidence’ that it has done anything wrong – but the revelation that extremely wealthy people and companies such as Nike ‘hide’ their money in tax havens has caused widespread anger, raising questions of morality and wealth inequality.

It is known that major global companies have exploited offshore schemes to avoid tax since the beginning of trade and “Offshore’ banking” is available to any individual or Companies.

Offshore funds are often used to avoid double taxation and ensure tax neutrality if investors come from different jurisdictions.

What is a tax haven?

Tax havens offer foreign individuals and businesses a means by which to enjoy minimal tax liability in a location that is consider politically and economically stable.

Popular tax haven jurisdictions, as expected, showed up in the leaked documents. Jurisdictions like British Virgin Islands, Bahamas, and Seychelles are known for the 0% corporate tax rate, which make them attractive locations for offshore companies. Of course some offshore jurisdiction such as Bermuda do apply stricter compliance rules for foreign companies.

 What is an offshore company ?

An offshore company  is a company  that is :

  • setup in a jurisdiction where the board members are not resident,
  • or where the main business activities are done outside of the jurisdiction.

Depending on the structure, a properly setup offshore company can be used as a vehicle to minimize tax obligations, legally.

However, some use it for money laundering or other fraud activities by exploiting the loop holes in company laws.

This phenomenon is aggravated by the lack of checks demanded prior to incorporation in foreign countries and the lack of transparency of established companies.

The OECD is trying to fight offshore accounts through common reporting standard (CRS) scheme and many traditional offshore banking jurisdictions such as Singapore and Hong Kong have agreed to cooperate as they do not wish to be associated with fraud or tax evasion.

Common Misconceptions of Offshore Companies:

1)         Offshore Business is illegal

This is false; offshore business is a legal and highly-regulated industry in many jurisdictions such as Singapore and Hong Kong.

An offshore entity is simply one that does not conduct business in the jurisdiction that it has registered in.

Companies and Corporations often use these offshore companies to own offshore subsidiaries and book profits overseas to legally minimize tax and retain more funds for re-investments.

2)         Offshore business is a new trend

The activity has a long history and is nothing new amongst international business owners. Some writers claim that offshore activity began as early as over 200 years ago.

In this day and age, anyone can own an offshore business largely thanks to the Internet and advanced global banking system making it easier and cheaper to conduct business remotely.

In recent times business start-ups such as web design, content creation and business consultancy companies have used the offshore structure to gain significant benefits.

3)        Offshore Company is located in remote exotic Locations

When someone mentions about offshore companies, people often think about far away, lesser known countries such as Bahamas, Cayman Islands, Dominica, Mauritius or Marshall Islands. Admittedly, those countries are some of the best places to incorporate a business offshore due to their legal and taxation systems.

However, you can also register an offshore company in well-established jurisdictions such as Singapore, Hong Kong and Ireland.

Although incorporating an offshore company in these jurisdictions might be subjected to higher level of regulation, it can be more appealing to foreign clients since the company is from a reputable country.

Where to incorporate your offshore company would generally depends on the location of your customers and suppliers, how they perceive the country and specific activity of the business.

4)         Tax reduction is the only benefit

Tax reduction and minimization is one of the major benefits but not only that is considered by Companies setting up these structures.

Other benefits include:

  • diversifying economic and litigation risk
  • Protection of assets
  • Holding company for intellectual property or investment;
  • Greater exposure to worldwide markets and customers
  • Low minimum capital requirements leading to a reduction in operation costs
  • no stringent rules on incorporation ( ie. requirement to be local in the county)



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