The Paradise Papers – like the Panama Leaks?

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For the second time in eighteen months, offshore tax havens have been in the public eye – this time with “the Paradise Papers”:

Back in 2016, more than 11 million documents in total of the so-called “Panama Leaks” were leaked by an anonymous source at Panamanian law firm Mossack Fonseca. Then-UK prime minister David Cameron and Russia chief Vladimir Putin were among the names linked with the registration of assets under foreign ownership. to thwart the taxman.

This month, it’s been the “Paradise Papers” – another 13-plus million documents released by the law firm Appleby to the same newspaper as before, Suddeutsche Zeitung.

The range of those caught in the net is arguably even wider this time: Britain’s royal family, F1 star Lewis Hamilton and Facebook are among the notables to have questions raised as to their methods of investment and asset ownership.

So is what these people have been doing legal? Well, that’s the question that attracts all the controversy. Because there’s a fine line between tax evasion and tax avoidance.

Tax evasion vs. tax avoidance: the fine line?

A distinction is sometimes made between the “evasion” and “avoidance” of tax that lies at the heart of the tax haven situation. Although just yesterday the Guardian newspaper was using the term “tax avoidance” to describe illegality, rather than the more commonly-accepted term “tax evasion”.

Tax ‘evasion” is out-and-out illegal. In the UK, it basically means not declaring to Her Majesty’s Revenue and Customs earnings through either a job or returns from a company or asset that should be declared as part of your overall tax position.

Tax avoidance, however, is what makes these Paradise Papers, and the complex legal arrangements in them, possible.  Tax avoidance is considered by some to be the term to describe legal attempts to minimise exposure to tax regulation. This often involves tying up money in a range of global locations as domiciles (the registered location of a person or asset) that have a far lower tax rate than ‘onshore’ UK or elsewhere in EU or North America. People seeking out such friendly jurisdictions – “tax havens” – is what the Paradise Papers reveals. But the result of these efforts can often be something between tax “evasion” and tax “avoidance” as the terms are understood – a grey legal area.

So does “offshore” mean “tax haven”?

Not necessarily. Generally, ALL tax havens are sites of offshore banking, but NOT all sites of offshore banking are tax havens.

You can, for example, transfer your pension “offshore”. Your offshore status will give you pension options that are not available in the UK. If you live overseas, the pension contributions you accumulated in the UK are perfectly allowed to move to another jurisdiction. Domiciled offshore, such as Malta, means that the drawdown of your transferred pension is unconnected to the UK in terms of tax. Which makes sense – since you don’t live in the UK!  Indeed, you may not even end up retiring in the UK, making your requirement to pay UK tax a case in point. Any pension transfer from the UK will remain under the beady eye of HMRC: the pension must be transferring to both a domicile and a structure of which the taxman approves.

You can also have a savings plan or investment bond that is offshore. Again, any tax considerations relates to the fact that you’re not only based personally offshore – such as in the UAE – but also that your investment platform also has tax-efficient, offshore status.

Verdict

What the Paradise Papers reveals is a world of very expensive and complicated arrangements that regular investors simply don’t need. The Guardian’s summary of the celebrities caught in the Paradise Papers makes for entertaining reading, but tax havens are unlikely to be relevant to your own financial planning! What is certain is that, in no-tax jurisdictions such as the UAE, it’s important to really know your tax position and how you can plan your savings accordingly.

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