Large companies are likely to face increased scrutiny on their tax affairs due to the Pandora Papers, a collection of close to 12 million leaked files that expose offshore financial dealings in more than 90 countries. While implicated world leaders and public officials make the headlines, the leak also has significant implications for MNEs and tax transparency.
“The sheer size of the investigation is causing much consternation,” said Ali Kazimi, managing director at Hansuke Consulting. “For firms that have not taken the tax integrity agenda seriously, today is a watershed moment.”
As governments continue to reckon with the cost of the COVID-19 pandemic, the Pandora Papers provide another impetus for revenue authorities and the public to question whether MNEs are being sufficiently transparent and tax compliant.
The files were acquired by the International Consortium of Investigative Journalists (ICIJ) and published by news outlets around the world on October 3. They show that wealthy clients hired companies to create offshore structures, often using shell companies or anonymous bank accounts to maintain privacy.
Some of the implicated entities may have been involved in tax avoidance or tax evasion, fraud, or money laundering. The distinction between tax avoidance, which is legal but can be perceived as unethical, and tax evasion, which is a criminal offence, will be critical.
The UK revenue authority HM Revenue and Customs (HMRC) is launching investigations based on the information in the Pandora Papers, and other tax authorities could follow suit.
“HMRC is actively looking to bring high-profile cases to trial under the enhanced powers to criminally prosecute under the Criminal Finances Act,” said Kazimi, whose practice has been inundated with calls from financial firms concerned about the leak since the news broke.
The complexity of financial arrangements and the scale of the Pandora Papers leak means that many financial companies are panicking that they could receive a knock on the door from HMRC. “The worst part is that they are sitting ducks as they do not know where they could be implicated,” said Kazimi.
Similarly to the LuxLeaks (2014), Panama Papers (2016), and Paradise Papers (2017) scandals, the Pandora Papers leak is likely to have far-reaching effects on public and policy discussions about tax integrity and financial transparency.
“[The leak] could have an impact on the political mood and trigger new initiatives to go after the use of SPVs [special purpose vehicles],” said one tax director at a global financial services company.
Calls for global tax reform
The data leak has already set off renewed calls for global tax reform and increased tax transparency. “The Pandora Papers confirm our global tax system has been turned into an ATM for the rich and powerful,” said Alex Cobham, chief executive of the Tax Justice Network.
Advocating for an alternative system that has been “reprogrammed to prioritise the needs and wellbeing of people over the desires of the wealthiest,” Cobham added that global tax reform efforts should be led by the UN rather than the OECD – a debate that ITR has covered in the past.
Policymakers also weighed in on the leak. “The Pandora Papers expose the [tax reform] measures taken so far as merely palliative,” said Paul Tang, chair of the European Parliament Subcommittee on Tax Matters (FISC).
Tang pointed out that, while the OECD’s work on a global minimum corporate tax rate under pillar two will address corporate tax avoidance, other “questionable practices” like those highlighted in the Pandora Papers will be able to continue.
“To really address tax avoidance, financial secrecy needs to be put to an end by radically restricting business within secrecy jurisdictions, and public country-by-country reporting should be implemented globally to allow for public scrutiny,” said Tang.
“On top of that, we need to reform the EU blacklist of tax havens, end the use of letterbox companies, and impose stricter rules to prevent tax avoidance schemes taking place via the EU. Only then will we be able to enhance tax transparency and make sure everyone pays their fair share,” he added.
At the same time, the data leak increases the pressure on countries including the US to ensure that they are not allowing ‘unethical’ tax practices to continue while pushing for an OECD deal on pillar one and pillar two.
“The biggest blockers to transparency are the US, which the Pandora Papers confirms is the world’s biggest peddler of financial secrecy, and the UK, the leader of the world’s biggest tax haven network,” said Cobham.
Most of the headlines about this scandal focus on high-profile individuals, but there are also important takeaways for MNEs. First, the Pandora Papers will lend weight to demands for increased tax transparency and tax regulation, affecting future tax policy from countries and trading blocs such as the EU.
Meanwhile, MNEs should note that governments are becoming less tolerant of perceived ‘unethical’ tax practices. As HMRC looks to criminally prosecute entities whose wrongdoing has been exposed by the leak, other tax authorities may follow. A cautious, risk-averse tax policy is becoming more important than ever.
