The Paradise Papers offer only the most recent look into the widespread practice of tax avoidance. Governments around the world have taken steps recently to block such strategies, but it is unclear whether they will ultimately be successful.
Early this week, the financial world was rocked by the latest revelations about tax tricks used around the world by corporations and the super-rich. The leaks, which included 13.4 million documents and were labeled the "Paradise Papers," were the product of an international investigative consortium including journalists from influential German daily Süddeutsche Zeitung
The cases uncovered are similar to those revealed in the previous leak, the Panama Papers, which triggered global outrage last year. The data describes how the rich and super-rich, international stars and companies try to avoid paying taxes in their home countries. It is a game for the wealthy.
The players are usually multinational corporations seeking to shrink their tax bill using convoluted structures. Tech-giant Apple once again stands accused of skullduggery, as does sporting-goods producer Nike. The accomplices are also largely the same. The deals in question invariably involve tax havens such as the Bermuda Islands, British dependencies such as the Isle of Man or Jersey, and European member states like the Netherlands, Luxembourg and Ireland.
The questions facing politicians are also the same ones that come up after every new substantial leak: How can we continue to tolerate a situation in which tax loopholes still haven't been closed? And why are EU member states still allowed to cheat their partners within the bloc out of tax revenues?
Indignation is understandable, though out of date on many points. Many of the tax avoidance strategies wouldn't work today because numerous countries have joined forces to eliminate tax loopholes. The malfeasance uncovered by the Panama and Paradise Papers is sometimes akin to looking in the rearview mirror.
But it is also true that closing all of the loopholes that exist is an arduous, sometimes frustrating political process, with the economic interests of the countries involved far too divergent to ensure universal satisfaction. There are, though, several positive developments. Cooperation between the fiscal authorities of dozens of countries is now taking place on multiple levels. For example, the largest industrialized and developing countries are working together within the framework of the G-20 on the so-called "base erosion and profit shifting" (BEPS) initiative. Participating countries are no longer allowed to wait until they are asked, but must automatically provide fiscal information to participating partners. The regulation has been in force since September, with 50 countries having already joined and 50 others planning to do so.
Hurdles to Profit Shifting
International agreements will also supposedly make it more difficult for companies to shift profits from one country to another in an effort to pay the lowest tax rate possible. The most popular vehicle for doing so among multinationals is charging inflated "management fees" and brand licensing fees among susidiaries.
An international register has also been introduced to publicize the owners of companies, including those that participate in tax-saving models. That creates transparency, though it doesn't go quite far enough for German Chancellor Angela Merkel's outgoing administration. Berlin had initially wanted to list all companies and individuals who profited from the structures. But the proposal for such an expanded register was blocked by Britain and the Netherlands. Erstwhile German Finance Minister Wolfgang Schäuble and his allies from other EU member states could do nothing since tax issues must be passed unanimously in the bloc.
That also explains why there is no universal minimum corporate tax rate in the EU, an absurdity given that such minimum rates have been agreed on in Europe for tobacco taxes and VAT. In both cases, the taxes levied by EU member states may not fall below a predetermined level. But countries like Malta, for example, prevent the introduction of a minimum corporate tax rate in Europe.
The Mediterranean country is also known for trying to lure the owners of smaller companies to set up shop on the island. If they do so, earnings up to 5 million euros per year are only taxed at a rate of 15 percent. Anything above that is tax free.