Another set of leaks is now in hand and it is quite massive. Dubbed Pandora Papers, some 11.90 million documents on financial transactions and taxes, it has exposed how the wealthy and the powerful in different countries use the global financial system to hide their wealth and avoid taxes. They are politicians, current and former world leaders, public officials, sports and entertainment celebrities. They have either siphoned off or parked billions of financial assets in the shadowy shell companies mostly in tax havens.
Though this is not a new phenomenon and the world has been observing the practice over the decades, the Pandora leaks further unveil the extent of the wealth accumulations and transfers to offshore jurisdictions. Pandora Papers have been preceded by the Paradise Papers in 2017, the Panama Papers in 2016 and the Luxembourg Leaks or LuxLeaks in 2014.
The International Consortium of Investigative Journalists (ICIJ), a network of around 150 newspapers and media outlets globally, in the first week of this month,unveiled the documents of 14 companies in tax havens with ownership details of 29,000 offshore firms and trusts. The records date back to the 1970s, but most of the filesspan a period from 1996 to 2020. "We call the project Pandora Papers because this collaboration builds upon the legacy of the Panama and Paradise Papers, and the ancient myth of Pandora's Box still evokes an outpouring of trouble and woe," said ICIJ.
Naturally, the leaks create a public outcry in different countries as the newspapers and different media outlets are publishing several stories in this connection. When the world has been gradually recovering from the wrath of the deadly coronavirus, and when there is a call to increase global solidarity to fight the pandemic, the Pandora leaks is a big blow to all. It has challenged the integrity of many global leaders and public officials. It has also raised questions about the lifestyles of many celebrities.
The leaks send a strong message to the global citizens - the so-called tax havens or offshore jurisdictions are no more acceptable to the world. No matter whether these jurisdictions are only for the purposes of secrecy, or for concealing illegitimate assets, or for exploiting any legal ambiguity on tax, the tax havens provide the strongest support to tax injustice and fiscal distortion, especially in developing countries. There is an argument that wealthy people who live in politically unstable countries where corruption is rampant and criminal activities are widespread may use offshore jurisdictions for protecting their wealth. This kind of argument is flawed.
Some politicians and public officials accumulate a bulk amount of financial assets and other resources in these countries mostly through illegal means thanks to their strong connection with the power structure. As they are aware of the fact that it is difficult to keep all the assets in their own countries, they resort to tax havens to park their assets earned through rent-seeking and cronyism.
Tax havens do not question the source of assets and also provide much-needed secrecy to the parked assets mostly in the form of investment. No doubt some of the offshore assets are disclosed and used for legitimate business purposes. Still, it cannot be an argument for allowing tax havens perpetually.
Again, these politicians and public officials along with many policymakers in the developing countries create barriers to reform or update the country's tax structures. There are two major intentions behind creating the barriers. One is to keep the tax structures complicated so that it becomes difficult to track the illegitimate earnings and transactions. Another is to compel tax authorities to become tough on regular and new taxpayers who want to comply with the existing tax rules.
In some cases, these policymakers and politicians revise and reform the tax rules and structures in such a way that a window can be opened to get back the siphoned off assets as legitimate earnings. Round-tripping is the most popular way to get back a portion of illegally transferred assets from offshore to the same country in the name of foreign direct investment (FDI).
For instance, Mauritius is one of the top sources of FDI in India and it is widely believed that most of the FDI from Mauritius is nothing but money illegally transferred to the island country with a population of around 14 million and gross domestic product (GDP) of US$13 billion. Taking advantage of the double taxation avoidance treaty, some Indians are parking their assets, mostly illegitimate, in Mauritius and creating shell companies in a partnership with citizens of the island. Later the companies invested in India as a foreign entity through which the illegally transferred assets come back to the origin as legal earnings. The top-20 sources of FDI in Bangladesh also included tax havens like the British Virgin Islands, Mauritius and Bermuda. It points to the round-tripping potential of wealth illegally-earned in Bangladesh.
All these are possible due to the existence of tax havens or offshore jurisdictions. If there were no such places or if there were strict regulations to check parking of money in the tax havens, it would be difficult for many to transfer the funds. No matter whether it is legal or not, using offshore entities for purchasing properties or investing in business, the core issue is stashing illegal or even legal wealth and money through laundering.
The tax havens have already created a dual taxation system across the world where some people pay substantial taxes in compliance with their legal obligations, and others bypass the law and evade tax and still legalise their illegal incomes and assets. Developing countries are losing a good amount of their domestic resources, needed for development work, due to the illegal transfer of assets to tax havens. The practice also turns some politicians and public officials unaccountable. Pandora papers thus call for subjecting public officials to a rigorous process of accountability and making it effective and impartial.