Year end: offshores indispensable for the world economy

HomeNewsYear end: offshores indispensable for the world economy

Who owns offshore businesses?

Most offshore businesses belong to the US and the UK elites, rather than Russians.

Last month, the International Consortium of Investigative Journalism (ICIJ) published a report through a number of international media on the offshore companies around the world. The paper reveals 120 politicians and executives to use offshores, including the PM of Canada, members of Trump Administration, the court of the Queen Elizabeth II, as well as Apple and Uber.

A set of materials, the so-called Paradise Papers, includes about 13.4 million files covering a period of over 50 years, and, possibly, including the papers by Appleby, a Bermuda-registered law firm.

ICIJ, a Washington-based consortium, previously published the so-called Panama Papers with information on offshore accounts of a number of politicians worldwide, both acting and retired. A little over a year ago, 380 journalists from the world’s leading publications received by mail the documents of the Panama-based law firm Mossack Fonseca. The messages contained information on thousands of beneficiaries of the offshore companies and their transactions. In Iceland, the Prime Minister was forced to resign following the publication of the Panama Papers.

Appleby, the firm whose archive was exposed to the public eye, was founded in 1898 in Bermuda, a British colony. To date, Appleby is one of the most prestigious and large law firms providing offshore registration services, tax planning and corporate governance.

On top of this, Appleby was considered one of the ’safest’ offshore managing firms in the world: the company had a strict screening process for each customer. Thus, many Russians were refused the registration of an offshore company by Appleby due to their ties to the officials or the managers of public companies, or given mentions of their names in media in the context of corruption scandals. Hence, a significant difference between the Panama Papers and the Paradise Papers.

While there were many names of both officials and criminals among the Mossack Fonseca clients, Appleby served transnational corporations (such as Nike, Apple, Facebook) and the royalty worldwide (for instance, the Queen Elizabeth II Foundation). Russia is not even in the top ten in terms of citizens who used Appleby’s services. The most clients in the list are of the US origin (more than 31,000 clients), the second is UK with more than 14,000 customers.

UK broadsheet The Guardian took an interest in the data published on the financial transactions of the Duchy of Lancaster, which manages the personal wealth of the Queen Elizabeth II. According to the report, in 2004 and 2005, some 10 mln Pounds Sterling were invested in the Bermuda and Cayman Islands trusts.

Some of the investments turned out as inappropriate for the royalty. Thus, for instance, part of the Queen’s money went for the promotion of the financial firm BrightHouse, known for its microloans to the British nationals on the overpriced terms. Following the scandal, the company had to reimburse 14.8 million Pounds in compensations to almost 250,000 customers concerned.

The Duchy of Lancaster claims that they had no idea about investing in BrightHouse until the day when the journalists started asking questions. The share belonging to the Queen, officials described as ’insignificant’, claiming that they had long since disposed of the foul asset.

«Investing in offshores is not illegal in the UK, however should the information be confirmed, this will almost certainly cause a scandal. Last time when a similar leak occurred, David Cameron nearly lost the PM post. The Queen is certainly in no such danger: clearly, she does not deal with the financial issues personally, however, the story might leave a negative trace», a source close to the British government commented speaking about the results of the investigation.

The same source believes that the Duchy will have to address some very unpleasant questions and publish documents that would convince the British public of the absence of any wrongdoing.

According to the BBC, the Duchy of Lancaster manages a wealth worth 500 million Pounds Sterling. The Duchy’s CFO Chris Edcock assured reporters that the investment strategy is based on the recommendations by experts, and only a small proportion of investments goes in the foreign funds.

«All of our investments are audited and comply with the law. Her Majesty willingly pays taxes on all income received from the Duchy,» he assured.

Paradise Papers shook the wallets of some other famous Brits. Thus, as it turned out, Bono, the leader of the U2 band and a well-known defender of the underprivileged, used a Maltese company to secretly invest in a shopping mall in Lithuania while using the reduced taxation scheme. According to The Guardian, as a result, the musician paid income tax at a rate of 5%. Bono’s representative commented saying that the musician was not an active investor and owned only a small share in the mall until, in 2015, the Maltese firm ceased its activities.

Two years ago, when a Nobel Prize nominee was accused of financial fraud in the Netherlands, he got angry, saying that he had paid a ’fortune’ in taxes.

Another secret investor, The Guardian writes, is Lord Ashcroft, one of the top contributors to the UK Conservative Party. He has hidden away in the Punta Gorda offshore trust some USD 450 million. According to journalists there is nothing illegal in the fact there is such a trust, however its existence puts the conservative leader Theresa May in an ambiguous position, as Lord Ashcroft used to be the party treasurer.

Nevertheless, some well-known Russian names are also found in the Paradise Papers. Rich Russians often turned to Appleby for registration of their private jets. The law firm would set up schemes for the jet-set from Russia with the registration of planes on the Isle of Man, which made it possible to avoid paying VAT when importing jets to the European Union.

The paper also tells the story of Roman Abramovich who, back in 2008, tried to acquire over 1/3 of the largest timber holding from the Russian Far east, Russia Forest Products (a Bermuda-registered company), managed by the Appleby lawyers. The USD 168 million deal did not receive a green light of the Bermuda authorities since Abramovich lied on a special declaration about never being a subject to a legal or other official investigation. Lawyers had to sweat, and as a result another offshore company was registered under a less rigorous authority, the BVI.

Russian finance ministry sees no problems with use of offshores

The RF Ministry of Finance sees no problems with the use of offshores by the Russian companies, given that they regularly pay taxes. The Ministry expects, as of the next year, that it will officially receive access to full information about such activities under the framework of international data exchange, Russian Deputy Finance Minister Ilya Trunin said.

Last month, the International Consortium of Investigative Journalism (ICIJ), partly funded by one of the George Soros’ foundations, published a series of materials on the activities of the offshore companies around the world, listing some 120 politicians concerned. More specifically, the Paradise Papers mention the Russian firms VTB, Sibur and Gazprom, as well as the businessman Yuri Milner. They say that Sibur works with a logistics company owned by Wilbur Ross, the US Secretary of Commerce, while the VTB and Gazprom played a role in the financing of Milner’s acquisition of shares in Facebook and Twitter.

According to Trunin, the scandal surrounding the publication of offshore documents is due to the fact that the data was leaked illegally. «As of next year, an automatic exchange [of taxation data] begins. All jurisdictions have already joined in, and we should receive the same information officially,» Trunin affirmed.

He added that the use of offshore companies is not prohibited for the Russian firms, if it is not for the use of the tax optimisation schemes. «We have always maintained that anything that is done with respect of the tax code is not illegal. The only two conditions are the timely reports and paying all relevant taxes,» he said.

«Recently we adopted a law [on controlled foreign companies], which, as we see it, works well enough. Moreover, it creates a necessary infrastructure, so that when someone uses offshore companies, he may as well do so, as long as he declares them duly and pays taxes in accordance with the double taxation treaties,» Trunin told the press. According to Trunin, there are currently no estimates by the Ministry of Finance of the use of offshores by the Russian companies.

France defeats Britain among top 5 economies

The UK is no longer on the list of the top five global economies. The last spot on the top 5 list is now occupied by France. The report came from the Chancellor of the British Treasury Philip Hammond.

For the first time since 2013 France outperformed the UK. The country’s GDP in 2017, according to the IMF, amounts to USD 2.575 trillion, while the UK’s GDP declined to USD 2.565 trillion. While the gap is still small, Hammond did not rule out that in 2018 France’s economic standing may strengthen furthermore.

Recent developments indicate a sharp slowdown in the growth of the UK economy, the Chancellor reported. Experts view this as a consequence of the country’s recent withdrawal from the EU: pound sterling fell sharply right after Brexit. This led to a decline in consumer spending, while the prices in Britain went up.

First in the IMF ranking in 2017 are the United States, with the GDP of USD 19.4 trillion. China is second with USD 11.9 trillion, and Japan is third: USD 4.9 trillion. The forth place is held by Germany with a GDP of USD 3.7 trillion.

As for Russia, the IMF had predicted the growth of the Russian economy in the long run by 1.5% annually.

India and Hong Kong sign a double taxation treaty

Nearing the end of the year, the Indian government made announcements on the agreements on double taxation (DTA).

A statement by the Indian government, chaired by the PM Narendra Modi, announced an agreement to sign a DTA with Hong Kong.

«The agreement will promote the flow of investment, technology and personnel from India to Hong Kong and vice versa, prevent any double taxation and ensure the exchange of information between the two contracting parties. This will improve the transparency of tax issues, help control taxation and prevent tax evasion,» reads the statement.

The Cabinet also reported that the Ministers approved a protocol on amending the Treaty between India and Kyrgyzstan. The Protocol updates Article 26 of the existing agreement which deals with the exchange of information under the new international standards.

Putin reports stable nature of growth of the Russian economy

The Russian economy came out of the period of stagnation, its recovery is steady, and over the past year the economy showed a new capacity: the dynamics indicate an expansion of domestic demand. This was announced by the Russian President Vladimir Putin during the «Russia calling!» business forum.

According to him, the growth of the Russian economy amounted to 1.8% in the third quarter of this year, investments in fixed assets for the 9 months of 2017 grew by 4.2%, real wages in Russia grew by 2.5% in three quarters of this year.

On top of this, in 2019, the Russian authorities plan to reduce the non-O&G deficit from 8.5% to 5.9%, the President affirmed.

In 2017, for the first time, the export of agricultural goods from Russia will exceed the export of weapons, reported President Putin. The export of food items, he said, has grown by 4.9%, reaching USD 17.1 billion, exceeding the export of armaments.