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  November 7, 2017

'Paradise Papers' Leak Details How Major Corporations Evade Taxes

The latest leak of documents known as the 'Paradise Papers' provide important details about how the world's largest corporations are evading taxes through a variety of tricks and keep their earnings from being taxed. Economist and investigative reporter James S Henry explains
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James S. Henry is an investigative economist and lawyer, a Global Justice Fellow at Yale University, and a Senior Advisor at the Tax Justice Network. Previously, James served as Chief Economist at the international consultancy firm McKinsey & Co. As an investigative journalist his work has appeared in numerous publications like Forbes, The Nation and The New York Times.


SHARMINI PERIES: It's The Real News Network. I'm Sharmini Peries coming to you from Baltimore. Following the infamous Panama Papers, now we have the Paradise Papers, which are over 13 million documents leaked to the German Suddeutsche Zeitung. Among these documents there are several revealing previously unknown business connections between President Trump's son-in-law, Jared Kushner, and the Secretary of Commerce, Wilbur Ross and the state-owned Russian companies. Secretary of Commerce Wilbur Ross responded to these allegations as such:

WILBUR ROSS: There was disclosure. There is no impropriety and if people draw a contrary conclusion, that's because the papers have twisted the story.

SHARMINI PERIES: Now joining me to discuss all of this is James S. Henry. He's a leading economist, attorney and investigative journalist who has written extensively about global issues related to fraud and these kinds of revelations we are getting leaked to the press. Thanks for joining us, James.

JAMES S. HENRY: Thanks. Good to be with you.

SHARMINI PERIES: Now James, along with the Panama Papers these Paradise Papers unravels a litany of tax fraud, from Apple Computers to the Queen of England, rampant in corporate and private money hiding and laundering. What is your best estimate of the money that is hidden offshore, and sometimes onshore, of these kinds of accounts, and what it's costing the treasuries of various countries.

JAMES S. HENRY: What we see in this latest leak, this is a kind of continuation, chapter 2 of the Panama Papers. That was April 2016. In this case most of the 70,000 or so accounts that we have information on came from two jurisdictions, Bermuda and the Cayman Islands. A lot of the attention is focused on Secretary of Commerce Wilbur Ross and the fact that he was using offshore companies to basically make it hard to find out how much he owned in the shipping company that was doing a lot of business with Russia and is still doing that kind of business. He's had extensive dealings with the Cayman Islands and offshore companies there, none of which is necessarily illegal in the technical sense but it certainly raises questions about whether a sitting US cabinet member should have a stake in the profitability of the Russian economy.

Secondly, Jared Kushner appears to have received some investments by way of some of these same kinds of offshore company structures and Russian investors who are looking at his real estate projects. We also have some investments that were made in Facebook and Twitter by some of the same Russian investors who turn out to have been financed by people very close to Vladimir Putin. Jesse Drucker's piece today in The New York Times went into that. That's three of the stories that have come to light just so far, and there are many more.

But I wanted to highlight a couple multinational companies that stand out here. One is the Swiss giant trading company Glencore. I think the Australian tax authorities are going to have some interesting questions for Glencore, also for Nike about their Bermuda Papers-related tax dodging that's been going on in Australia. And also for Packer, one of the billionaires in Australia that's been investing with the help of some of the offshore companies disclosed in this report. So there are a lot of shoes that have yet to drop, and I'm struck by how well the journalism communities around the world are working together, really, to help reveal this.

Globally speaking, we're talking about maybe $300 billion a year of lost corporate tax revenue to these kinds of structures, much of which comes from the pockets of developing countries, and maybe another 200 to $300 billion a year of lost tax revenue from the more than $25 to $30 trillion of offshore private wealth that is laundered through these offshore structures. So it's a huge wealth gap in the world economy.

SHARMINI PERIES: All right, James, setting aside the Wilbur Ross and Jared Kushner's involvement and all of this and setting aside Russiagate and as you said, these are businessmen, they have dealings and they are connected partly to Russian companies associated with the government. We know all of that. But the corporate tax fraud here is very, very interesting. Give us a sense of, you've outlined the scale of what might be lost in terms of tax revenue but how are they going about doing this? What are the loopholes that allows them to do this?

JAMES S. HENRY: One of the games they play is to transfer the ownership of the exporting companies in the case of, let's say, Glencore's businesses is in Zambia, they export copper from Zambia to an offshore entity in Cayman or BVI, it shows up not as being exported to China or wherever it's supposed to end up, but it's actually booked for tax purposes in an offshore company. That haven where the revenues are booked and the profits are booked has a zero tax rate, so it helps to really radically reduce the ultimate taxes that the corporate parent pays on the sale of commodities.

Another game that they play is to load up the operating companies in the developing world with debt and then pay interest to themselves tax-free to offshore entities not really separate from the corporate parent. That's called asset stripping, and that's another widely used practice.

A third is to locate the haven entities, which under the international tax system as it exists now can be basically recognized as separate from the corporate parent even though they have no physical activity or reality at all, in low tax places like Bermuda or the Caymans, or the Netherlands, for example. And then they take advantage of tax treaties that have been written to put real sharp restrictions on the level of taxation that can be imposed by developing countries. In all these ways, companies like Glencore and Nike can shift revenue and become essentially citizens of nowhere for tax purposes.

SHARMINI PERIES: I understand Apple is involved in this as well. Give us a sense of what they were up to, since it's a corporation that all of us have to deal with in one way or another in any given day.

JAMES S. HENRY: Apple's at an all-time peak in terms of stock market value and profitability, so it's not clear that they need these tax dodges but they've set up holding companies in places like Bermuda, the Netherlands and Ireland, in particular, to essentially be citizens of nowhere for tax purposes on their offshore income. So, they basically can transfer the ownership of their intellectual property, their patents, their brands and trademarks, to these offshore entities and then pay themselves royalties tax-free. And since in the IT business that they're in royalties are a big share of value, that radically reduces their global tax to less than 5% on their offshore income.

SHARMINI PERIES: James, off the top we showed a clip of Wilbur Ross defending himself, saying there was nothing wrong with what he had actually done. Will his defense hold up?

JAMES S. HENRY: Well, we're going to have to see to what extent he actually declared these ownership interests with the Russians before. During his hearings he may not have been transparent but he's trying to use the standard apology for these kinds of offshore holdings, saying that they are technically legal. When it comes to these things, we don't really know whether they're legal or not. There's so much secrecy involved, and secondly, the countries involved have such a stake in this kind of business model, helping the world's elites avoid taxes, that they don't have laws that sanction. In fact, that's the problem, that many of these practices really may be legal. We need to change the law, but at the moment, the burden of proof is on Ross to show that he complied with the Senate's investigation when he sat before the committee and discussed his offshore holdings. Also, I think we'll look a lot closer at the extent of these over the next few days and come back to you with some more information about whether he has really complied with the law.

SHARMINI PERIES: James, when it was Swiss bank accounts that used to hide money for the ruling elite and the wealthy, where they would put their monies in Swiss bank accounts that was not revealed that was the tax haven. But after a lot of pressure, particularly from the United States, the Swiss stopped doing that and now this has gone offshore and into paradise, as the papers say. The governing parties in these islands and so on say that it's not their problem, it's really the problem of the countries where the people reside or the companies reside that are trying to evade taxes. They basically say, "It's your problem to deal with this and to rein it in." What's your response to that?

JAMES S. HENRY: First of all, it's not true that Switzerland is not a big player in this. They've just invented other ways to, a lot of the money is actually ultimately ending up in first world countries like Switzerland and the United States, the UK. But if you really want to hide money, you can put it in a Delaware company. There's no beneficial ownership registration. So, this myth that the havens are all offshore I think is one of the problems with these kinds of stories, but it is the case that sort of a spider web of mainly British havens offshore, like the Caymans and Bermuda, Hong Kong and Singapore, have played a major role in this. But if you go back to the 1970s, you see maybe 15 havens playing any kind of significant role. Today, it's more like 90, so this business has expanded dramatically.

The point about the problem being up to us to fix, well, I think the havens have a point. We really could close this shady business down. It's enormously profitable to the big five or six accounting firms in the world, to many of the major banks, multinationals. The largest law firms are not sitting in the Cayman Islands, they're sitting in New York and London. So, ultimately, the first world does have a lot of responsibility. We've been making progress in the last decade. The Trump administration unfortunately has shown signs of not wanting to continue the effort to clean up the offshore haven industry. In fact, they want, their latest corporate tax bill is a kind of proposal to revitalize it by essentially providing a kind of territorial income tax for the United States. So, havens, I think, are artificial creations. The first world has a lot of responsibility for them, far more than anybody else.

SHARMINI PERIES: All right, James, if it was up to you, what should be done to fix this problem?

JAMES S. HENRY: I think one thing we could safely do is to have much more transparency about who owns these offshore companies and trusts, who owns the onshore companies and trusts. So, we need beneficial ownership registration. We also need country-by-country reporting so we understand where multinationals are actually parking their profits without having to go through all these leaks. We could also use, at a minimum, agreement on fair corporate taxation across borders, so we don't persist in having the kind of race to the bottom competition between major countries in terms of tax rates. We need much fairer tax treaties from the standpoint of developing countries. And we need much tougher laws that punish banks, accounting firms, law firms that engage in this kind of financial chicanery.

That's a short list of things that we ought to get started on doing. Unfortunately, both parties in the United States, major political parties, have kind of dropped the ball when it comes to cleaning up this haven problem, and so we have a kind of banality of exposes. This is the latest. We'll see if it leads anywhere.

SHARMINI PERIES: All right, James. I thank you so much for joining us today and hope we can have you back as this situation unravels.

JAMES S. HENRY: Sure. Good to be with you.

SHARMINI PERIES: And thank you for joining us here on The Real News Network.


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