Last week, the Paradise Papers leak made news headlines around the world, revealing that some of the world’s biggest businesses, heads of state and globally renown figures have been sheltering their wealth in offshore tax havens. Some of these are being investigated, and the general consensus is that the actions revealed are terrible and should be punished. However, what are the facts and how can we logically assess what has taken place? Here Chris Harte, CEO of independent law firm Morton Fraser, discusses with Lawyer Monthly the lessons we can currently take from this ordeal.
Tax avoidance is legal. There, I said it.
Tax evasion, on the other hand, most certainly isn’t. Indeed, our embattled Prime Minster wants to hold companies criminally liable if they fail to stop their employees from facilitating tax evasion.
The difference between evasion and avoidance neatly encapsulates the careful path trodden by businesses and their legal advisors on a daily basis.
The Paradise Papers, and the Panama Papers last year, have put that path under global scrutiny once more. The law never exists in a vacuum, which means even the simplest of questions can prompt the most complicated of answers. “Is it legal?” rarely returns a straightforward answer when it comes to tax affairs.
The ripple effects of the Paradise Papers are being felt on these shores, and not just in the corridors of law firms and prosecutors.
The impact has, for example, increased debate in Scotland about Scottish Limited Partnerships (SLPs), which are themselves exempt from tax as legal entities. Despite SLPs being around for a century, the Panama Papers have prompted questions about whether they make Scotland an offshore haven of its own, in the same guise as Panama itself.
The question has to be asked: is there anything wrong with that? Companies and other legal vehicles created for a special purpose are common everywhere – there’s nothing inherently, legally or morally wrong about that. Plenty of companies will reap the rewards of such structures.
If reassurance were needed, anti-money laundering rules require law firms to verify the identity of our clients, including, where such a corporate structure is being used, the identity of the beneficial owners sitting behind that structure.
The nub of the debate is transparency. Being open about one’s financial structures is a rare thing in business, particularly amongst privately owned businesses, which constitute such a large portion of our economy. That very requirement to reassure others has not hitherto been needed, but is now a consideration.
That said, it is important not to demonise perfectly legitimate models of business by dint of a particularly broad brush with which to paint special purpose vehicles. The Paradise Papers have again sharpened everybody’s focus on the difference.
What has long been an established balancing act between pragmatic commercial judgement and a legalistic examination of a business decision has become much more black-and-white, and rightly so. There should be little room for debate about what is illegal, or immoral, even if the law itself does not always offer the clarity required to make a clear-cut judgement.
It is in these legal cul-de-sacs that legal liability meets reputational risk, and it is often down to lawyers to offer their clients a legal roadmap out.
After all, this is a business matter, not a political one, even if party leaders have started publishing their tax returns.
Furthermore, business owners who are closely following the Paradise Papers fallout will no doubt recognise the international response required to actually crack down on malpractice. No single country has the tools available to really make a difference.
The truth is that anyone willing to break the law can and will manipulate the systems of finance available to them internationally. The world has never been smaller in that respect. Regulation won’t change this.
However, if the Paradise Papers achieve anything, it might be to help us better define where the acceptable boundary lies between avoidance and evasion of tax.