Ukraine loses wealth as rich, pow­er­ful set up off­shore schemes

Kyiv Post - - Front Page - BY BERMET TALANT BERMET@KYIVPOST.COM

The world’s rich and pow­er­ful peo­ple con­tinue to sur­prise the rest of the world with how se­cretly and un­fairly their wealth is be­ing se­cured.

The Par­adise Pa­pers, a leak of 13.4 mil­lion off­shore doc­u­ments pub­lished on Nov. 5 mostly came from two off­shore ser­vices firms, Ber­muda-based Ap­pleby and Sin­ga­pore-based Asiac­iti Trust, as well as from 19 cor­po­rate reg­istries

main­tained by gov­ern­ments in se­cret off­shore ju­ris­dic­tions.

Among those ex­posed were U. S. Sec­re­tary of Com­merce Wil­bur Ross, pop star Madonna, tech gi­ant Ap­ple, Queen El­iz­a­beth and at least 11 Ukrainian busi­ness and po­lit­i­cal heavy­weights, in­clud­ing Pres­i­dent Petro Poroshenko.

Weeks be­fore the Par­adise Pa­pers be­came pub­lic on Nov. 5, Ap­pleby an­nounced that it had been hacked and that their doc­u­ments were leaked to jour­nal­ists of Sud­deutsche Zeitung and the In­ter­na­tional Con­sor­tium of In­ves­tiga­tive Jour­nal­ists.

Bil­lions gone

It’s hard to say how much de­vel­op­ing coun­tries like Ukraine are los­ing due to off­shores. But the fig­ure is in the bil­lions.

Kos­tiantyn Lykarchuk, se­nior part­ner at Kin­stel­lar, says that Ukraine’s state bud­get is de­prived of at least tens of bil­lions of dol­lars due to off­shore tax eva­sion. The Econ­o­mist sug­gests a sim­i­lar num­ber, es­ti­mat­ing roughly 10 per­cent of the coun­try’s gross do­mes­tic prod­uct, stand­ing at $93 bil­lion in 2016, has been lost this way dur­ing the 1990s and 2000s.

The Tax Jus­tice Net­work, a non-profit ad­vo­cacy group, sug­gests that glob­ally, an­nual tax losses are at $500 bil­lion or more. This rep­re­sents over 20 per­cent of cor­po­rate tax rev­enues which have not been paid. Global es­ti­mates of wealth hid­den by in­di­vid­u­als via off­shores are as­tound­ing, rang­ing any­where be­tween 7.6 tril­lion to $32 tril­lion.

Why off­shore?

Off­shores can be used for var­i­ous pur­poses such as se­cur­ing patents and in­tel­lec­tual prop­erty, but for many the prin­ci­pal at­trac­tion of th­ese tax havens is se­crecy and the low-tax or no-tax busi­ness en­vi­ron­ment. Although set­ting up an off­shore com­pany isn’t nec­es­sar­ily un­law­ful, it is con­sid­ered un­eth­i­cal by many.

“No one would go to the trou­ble of set­ting up an off­shore com­pany if they could do this at home or on­shore,” Ge­orge Turner, a re­searcher at Tax Jus­tice Net­work, told the Kyiv Post. “In this way, off­shores al­low them to do things they can’t do oth­er­wise.”

Off­shore com­pa­nies, of­ten dum­mies, are used not only to avoid pay­ing taxes but also hide cash flow and ill-got­ten prop­erty.

Mov­ing ac­tiv­i­ties off­shore isn’t cheap. One of the firms op­er­at­ing in Ber­muda, Healy Con­sul­tants Group PLC, ad­ver­tises some of its ser­vices on­line for $16,980. This would in­clude of­fer­ing regis­tra­tion of an ex­empt com­pany that would not have to pay taxes or act ac­cord­ing to the usual reg­u­la­tions of its home coun­try. One can reg­is­ter their off­shore in three weeks with a min­i­mum cap­i­tal de­posit of $1. No phys­i­cal of­fice is re­quired and no cor­po­ra­tion tax is ap­plied.

Ber­muda is a fa­mous tax haven, but some Euro­pean coun­tries also of­fer tax re­lief and lit­tle reg­u­la­tion.

Trans­parency In­ter­na­tional found 766 com­pa­nies reg­is­tered in the United King­dom that had been di­rectly in­volved in laun­der­ing over $100 bil­lion out of at least 13 coun­tries, in­clud­ing Ukraine.

This wide­spread use of off­shore ju­ris­dic­tions also dis­torts the sta­tis­tics of for­eign in­vest­ment flow. Ukraine’s top for­eign di­rect in­vestors come from Cyprus, Bri­tish Vir­gin Is­lands, Nether­lands as well as Belize, Panama, Sey­chelles, Lux­em­bourg, and Switzer­land, ac­cord­ing to the State Sta­tis­tics Ser­vices.

Non-tax rea­sons

Kin­stel­lar’s Lykarchuk says that there are many pur­poses of an off-

shore. One rea­son is to se­cure a busi­ness un­der Bri­tish law since it is more “con­ve­nient and flex­i­ble” when re­solv­ing a dis­pute.

“Most peo­ple, even very pow­er­ful and in­flu­en­tial want to bring their dis­putes out of Ukraine and have them re­solved some­where abroad in Lon­don, Stock­holm or else­where,” Lykarchuk said. This as­sures a higher level of se­cu­rity and sta­bil­ity as well as pro­vides com­pa­nies with more ac­cess to for­eign banks that of­ten will not ac­cept Ukrainian law-gov­erned doc­u­ments.

An­other rea­son would be to se­cure busi­ness op­er­a­tional ac­tiv­ity such as pro­tect­ing patents and in­tel­lec­tual prop­erty.

“From an op­er­a­tional per­spec­tive, you would es­tab­lish struc­tures out­side of Ukraine,” Lykarchuk said. “It’s quite nor­mal.”

It be­comes more con­tro­ver­sial when one struc­tures a merg­ers and ac­qui­si­tions trans­ac­tion. “That’s when peo­ple try to avoid taxes,” Lykarchuk said. This way one can trans­fer large amounts of money im­me­di­ately avoid­ing the need to pay taxes. “That’s when th­ese kind of Bri­tish Vir­gin Is­lands and Cyprus hold­ings kick in.”

An­other as­pect is con­fi­den­tial­ity and the op­tion to hide be­hind trust dec­la­ra­tions such as if an owner of an ex­pen­sive yacht or car would want to avoid declar­ing the ex­pen­sive as­set.

Avoid­ance vs. eva­sion

The dis­tinc­tion be­tween tax avoid­ance and tax eva­sion is clear. Tax avoid­ance means tak­ing ad­van­tage of loop­holes in leg­is­la­tion, while tax eva­sion is an ab­so­lutely il­le­gal ac­tion where an en­tity does not de­clare in­come, prop­erty, or com­mits fraud in or­der not to pay taxes. But both are the same in a sense that some­one de­lib­er­ately sets out to not pay taxes.

“It is im­por­tant to re­mem­ber that both start with the same in­ten­tion and in the end have the same re­sult — so­ci­eties lose money. Both prac­tices are abu­sive and gov­ern­ments need to chal­lenge them,” Turner said.

Fight­ing the sys­tem

The Tax Jus­tice Net­work sug­gests sev­eral ways to com­bat tax dodg­ing via off­shore ju­ris­dic­tions.

One way is to set up an au­to­matic ex­change of bank­ing in­for­ma­tion. If a Ukrainian cit­i­zen sets a bank ac­count on the Bri­tish Vir­gin Is­lands, the off­shore bank would have to pass on the in­for­ma­tion to the Ukrainian author­i­ties.

Full dis­clo­sure of ben­e­fi­cia­ries is an­other step. To­day, most com­pany reg­istries list own­ers and di­rec­tors, who may not be the ul­ti­mate ben­e­fi­cia­ries of the com­pany.

In 2017, Ukraine in­te­grated its na­tional registry of ben­e­fi­ciary own­er­ship to in­te­grate with the global Open Own­er­ship Reg­is­ter. The web- site com­bines data from com­pany reg­is­ters around the world where any­one can search for in­for­ma­tion on spe­cific com­pa­nies.

Fi­nally, multi­na­tional cor­po­ra­tions must pub­lish fi­nan­cial re­ports on rev­enues, sales, staff, taxes paid, losses based on ev­ery coun­try. This way, it will be easy to see the dis­crep­ancy be­tween op­er­a­tions and prof­its of a com­pany in the par­tic­u­lar coun­try in which it op­er­ates.

Source: Ukr­stat By Yu­liana Ro­manyshyn, Kyiv Post

The ma­jor­ity of for­eign di­rect in­vest­ment comes to Ukraine from coun­tries known for be­ing cen­ters for cor­po­rate tax avoid­ance like Cyprus, the Nether­lands, the United King­dom, the Bri­tish Vir­gin Is­lands, Switzer­land, and Lux­em­bourg. This means the in­vestors may well be Ukrainian com­pa­nies with Ukrainian ben­e­fi­cia­ries reg­is­tered in those ju­ris­dic­tions.

Peo­ple walk past the Roshen con­fec­tionary shop be­long­ing to Pres­i­dent Petro Poroshenko on Khreshchatyk Street in Kyiv on June 26. Roshen ap­pears in the lat­est leak of off­shore doc­u­ments, the Par­adise Pa­pers. (Kostyan­tyn Ch­er­nichkin)

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