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Paradise Papers reveal lack of reform

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There needs to be change after latest round of tax evasion revelations

Revelations from the Paradise Papers affair, stemming from the leak of confidential documents from law firm Appleby, are raising controversy about the extent of potentially questionable dealings in offshore financial centres.

They follow last April's Panama Papers, which uncovered what looked like massive tax evasion and money laundering.

The Organisation for Economic Co-operation and Development (OECD) estimated that such tax dealings could amount to around 4 per cent to 10 per cent of global tax each year.

This translates into a loss of tax revenue of anywhere between €100 billion (S$160 billion) to €240 billion.

Loss of revenue from individuals keeping their money in offshore trusts or hiding of assets sheltered by bank secrecy rules can be added to the overall figures.

The OECD is leading efforts to confront what many see as aggressive tax-planning by multinationals.

Offshore centres can argue that they often compete with low-tax regimes in places such as the Netherlands, Luxembourg and Malta and US states such as Delaware.

They can claim, too, that they are improving their practices. And they point out how large global banks have had to pay fines for security lapses in their money laundering control systems.

In an era of loose capital controls and low interest rates, investors are always looking for the best returns and lowest levels of tax.

It could be argued that if pension and hedge funds and others putting money in entities incorporated in offshore jurisdictions enjoy better returns, those returns will eventually benefit pensioners who will pay tax on the payments they receive.

Tax-efficient vehicles available in offshore financial centres can play a role in improving risk management.

This can provide sufficient funds for insurance and reinsurance and facilitate financing in crucial areas such as shipping and aircraft as well as energy and life sciences.

They arguably improve the functioning of capital markets by offering investors security against unpredictable and volatile regimes they may face at home. Yet their lack of transparency has encouraged a belief that these centres may play a role in hiding illicit gains or tax evasion.

The ability of amultinational corporation such as Apple to move the place it registers its profits from Dublin to Jersey to reduce its tax bill is exasperating, given how little tax it pays in the United Kingdom despite large revenues.

There are many legitimate reasons for the existence of offshore finance centres, but the mood is changing.

The OECD is overseeing the development of a common reporting standard to ensure the exchange of data for tax purposes between states. More than 90 countries have signed up.

The latest revelations suggest that change is overdue.

The writer is a board member at the Centre for Economics and Business Research and a member of the Official Monetary and Financial Institutions Forum Advisory Board. This article was published in The Business Times yesterday.