It has been about a month now since the infamous Panama papers were leaked. A devastating revelation of international corporate intrigue, corruption, and tax evasion. But yet one month later, we hardly hear anything about the opaque world of offshore entities.
Offshore entities and special purpose vehicles are relatively uncommon in the North American context, but they are prevalent throughout the international corporate world. Having spent time in Hong Kong, I became aware of these incorporation options and their pros and cons.
There can be legitimate reasons for setting up an offshore entity. With efficient systems in place, many of the offshore domiciles make incorporation and ownership transfer quick, easy and relatively cheap. It is possible to set up or transfer a company in Hong Kong within a week for under $2,000. Something that would be difficult to do in a place like Canada.
When they are used to facilitate an efficient business environment, they have a legitimate purpose. There are however, two important aspects of using offshore entities that can make them suspect: taxes and transparency.
In most cases, these offshore domiciles offer low or even no corporate income tax rates. (The domicile makes money from incorporation fees and administration costs as well as having their citizens employed.) There has been a lot of buzz lately around the idea of inversions and transfer pricing, through which companies seek to minimize their profits in countries with higher tax rates in favour of those with lower rates. While this may be legal, is it moral? Is it moral for a company to benefit from the social and transportation infrastructure of the market, but yet not contribute anything towards paying for that infrastructure? There is a legitimate question of how much tax is “fair” for them to pay, but it that amount is probably not none.
The more contentious of these two aspects however, is transparency. While registering an offshore domicile to lower or minimize taxes may be legal or even moral, in many cases this is not the primary purpose. The main purpose of these domiciles is often to hide the ownership of wealth. It has been interesting to see the names of have been revealed and the papers have gone a long way to raising the profile of international corruption. There is no question that legitimacy of registering an offshore domicile for the purposes of hiding corruption and proceeds from other criminal activity is not one up for debate.
There is a legitimate place for offshore domiciles in the international corporate arena. Not only can they make doing business easier, the competition they provide can push other domiciles to make their own incorporation and tax environments more efficient. Using them however, to evade taxes and hide wealth are both morally unacceptable purposes and there should be a push to increase transparency.