Over the weekend German newspaper Süddeutsche Zeitung dropped the Panama Papers on the world. A leak vastly larger than the Wikileaks cache, these papers offer a glimpse into the inside world of offshore accounting and shadow money. The fallout, from protests in Iceland to a Justice Department investigation, has only just begun.
The image of banking secrecy has been most popularized by the idea of the Swiss banker, punctual men in trim suits who operate vaults beneath the earth where secrecy is more prized than gold. Offshore money has gotten a lot bigger than one mountain country though.
The goal of a shelter is to create a taxable nexus for either personal or corporate assets in the lowest-rate jurisdiction possible.
Take, for example, a T-shirt company. It makes shirts in Peru for a dollar apiece, sells them in Great Britain for $5 and is owned by an American multinational. You, the multinational, would set up three companies: SewCo in Peru, SellCo in England and HoldCo. The last is a piece of paper in a shelter like the Cayman Islands.
SewCo now makes 100,000 T-shirts which it sells to HoldCo for $100,000. HoldCo then sells those t-shirts to SellCo for $500,000. The upshot is that your production company makes no money, it sold everything at cost. Your sales company makes no money for the same reason. Only your holding company is in the black... and it's based in a jurisdiction that won't tax those profits. The really ambitious can try to operate companies at a loss for the associated tax benefits.
It works the same way with individuals, who try hard to park their wealth generation and income sources outside of the country. A portfolio managed in the Cayman Islands, for example, will pay taxes on the islands capital gains. In other words nothing.
Now, this all is much more complicated in execution. Repatriation (bringing the money back into the country) can incur taxes, and regulators keep pushing back on these loopholes. But in essence, that's how a tax haven works: find a way to keep your profits local to a tax-friendly zone, and everything else in debt to that filing cabinet.
The annual Financial Secrecy Index, published by the Tax Justice Network, gives a rundown of the biggest offshore tax havens around the world, ranked by a combination of legal factors and economic impact. Here's where the rich are hiding their assets.
10. Dubai (The United Arab Emirates)
Described by the Index as “unquestionably one of the world’s best known tax havens or secrecy jurisdictions,” Dubai has capitalized on the legendary insularity of many Middle Eastern countries. A major center of trade, making it convenient for financial movement, the UAE is well known to resist pressure from outside governments on issues of disclosure and extradition. Paired with the country’s strong commercial culture, one which prizes transactions above regulation, this attitude has been referred to as “see-no-evil” when it comes to lawbreaking.
This accommodating environment is enhanced by the country’s political stability, a key factor among lawyers and bankers seeking financial havens. Particularly for clients who move hard assets such as cash and gold, it is imperative to find jurisdictions with little risk of coup or nationalization of assets. Dubai has historically delivered, making it a popular offshore destination.