By Adolphus Aletor
The concept of offshore investment (1)
The movie, Laundromat, was launched on Netflix in 2019. It was crafted from the book “Secrecy World” written by Jake Bernstein and directed by Steven Soderbergh. This is the story of an average business owner that wanted to save on insurance premium and then chose a plan from an insurance company located in Panama with an affordable premium. Unfortunately for the business, when the risk crystallized, the company and the brokers activated clauses that made it impossible for the insured to claim his benefit. Upon investigation on why such clauses would exist, it was discovered that the company that had its address in Panama was a shell company. A carcass! It was never in existence!
Recently, the media was agog with news that certain Nigerians with business relationships offshore have been exposed through what they called Pandora papers and this created a bit of frenzy and later, quickly died down. The reason it died down as quickly as it came could be related to the caliber of people involved as it cuts across clergy, politicians, business owners, etc. So, while the public awaited the government to aggressively act, the Economic and Financial Crimes Commission (EFCC) claimed to have commenced investigations. The public did not also push hard because this was not the first time Nigerians would be reported to have done this, and since nothing was done in the past, they expect nothing this time.
In this article, I will discuss the various reports and how they have affected Nigeria. But first, let me put the concept of offshore investment in perspective.
Why invest offshore?
Investopedia says that offshore investing refers to a wide range of investment strategies that capitalize on advantages offered outside of an investor’s home country. Wikipedia calls it the keeping of money in a jurisdiction other than one’s country of residence. Many businesses use tax expense to determine their profit, so business owners tend to take their businesses to where they can pay lesser tax. Higher returns, availability of diverse investment instruments that speaks to the investors’ appetite in terms of risk, returns, belief and ethics, hedging against currency devaluation, ease of transfer of property to heirs, privacy, amongst others, also form the basis for their choice. While the reasons above are germane, investment offshore can be risky to the investor and a disadvantage to the country of domicile. People lose money every day irrespective of the investment they find themselves in. Brokers and financial advisers globe troth, selling all manner of investments. Some win and some lose. When there is a loss the extent the investor can go in reclaiming his investment depends on several issues, among which is the legitimacy of the source of the fund. Most times these offshore investors lose heavily. Though they claim legitimacy, they usually do not have any regulatory reprieve. It is a case of “OYO” (On Your Own) as we would say in our local parlance.
Wikipedia says that such offshore investments “exploits the advantages created to earn wealth by a taxed economy while not paying its fair share of taxes in that economy. Wealth earned in one economy is taken out of circulation.” For instance, what moral justification does it make for an investor, after making money in his local country, for want of not paying tax, then moves the money to another country where he supposedly (because there is inherent cost of investment in offshore) would not pay tax, thereby denying his country revenue that would have been used for infrastructural development. The ethical issues around it are also of concern as it reduces transparency. It blindfolds regulators in the locale and is capable of encouraging illegal activities to the detriment of customers. Imagine a non-existent insurance company selling premium and then not available to pay at the point of an eventuality. Which regulator is supposed to sanction such an insurance company? Where the investment destination is poorly regulated, it could promote money laundry. The investment destination is called a tax haven.
Where are the tax havens?
Any location that attracts investment based on diminished or eliminated tax is called a tax haven. It is different from a tax shelter. A tax haven is a country that offers foreign businesses and individuals minimal or no tax liability for their bank deposits in a politically and economically stable environment or simply put, a country or independent area where taxes are levied at a low rate. In comparison, therefore, a tax shelter is simply a financial arrangement made to avoid or minimize taxes; for instance, subscription to a pension fund or carrying out a business with pioneer status, that is, operating in an industry that the government has designated a critical sector. The oldest tax havens of our times include Switzerland and Panama. Due to privacy issues, Switzerland is no longer a favourite, thereby creating new havens in the Caribbean countries of Cayman Islands, Bahamas, Bermuda, Costa Rica, Belize, Nevis, Dominica and Anguilla and part of the British areas of the British Virgin Island and Jersey.
Are offshore investments free of tax?
There is a misconception that investments in a tax haven are to lower costs. Globally, there are costs common to all tax-havens. They have ways of recovering what they lost through tax waivers. These costs include; 1) Payment of duties: this is between 22% to 27% of the value of goods brought into the country. It is also on record that the cost of living is high in these locations. For instance, there are about sixty-five thousand people in Caymans Island, but it has over one hundred thousand companies. It charges as high as 27% on most goods, while Bermuda charges about 25% on personal goods and about 15% on food items. 2) Registration and Renewal fees form a source of recurrent revenue for these countries. New business registration and annual license renewals yielded about $200 million for the British Virgin Islands in 2016, a country with 32,000 residents, but with over 400,000 registered businesses. 3) Departure taxes are paid when you are leaving the country. While they encourage tourists and investors to come in, you are taxed for leaving. Records show that tax havens collectively cost governments between $500 billion and $600 billion a year in lost corporate tax revenue with about $200 billion attributable to low-income economies, which are estimated to be more than the estimated $150 million they receive each year in foreign development assistance. Simply put, if low-income economies were to retain their business and earn the taxes as they accrue, they would not have to depend on aid and foreign loans.
In concluding the first part of this article, it is fair to say that the reason given by business for offshore investment in tVax havens on the basis of tax elimination is unfounded! What we have not mentioned is that some people take their wealth out when they lose respect or trust for the government in their locale, others just simply steal and stack abroad. Either way, permit this school of thought that defines tax havens as to “escape rules you don’t like”, you “take your money elsewhere”, offshore, across borders. This is the true definition because these havens affect far more than tax, they provide an escape route from financial regulations, disclosure, criminal liability, and more.
The federal government should take a stand against lost revenue attributable to Nigerians who have continuously shipped our commonwealth offshore. Offshore investment is tax evasion in the real sense (no matter how it is coloured) and this is punishable under the Nigerian constitution. It is different from tax avoidance. While tax evasion means concealing income or information from tax authorities (this is illegal), tax avoidance means legally reducing your taxable income. While Nigeria is unwilling to recover the losses arising from Nigerians investment in tax havens, the USA recovered $780 million in 2010 from the Union Bank of Switzerland (UBS), inclusive of its commitment to identify about 19,000 US tax evaders who have accounts with it. On another occasion, HSBC was held complicit for aiding two US citizens in a multimillion-dollar tax evasion scheme; the two men were arrested and indicted for tax evasion.
Government should therefore, beef up dwindling revenue using the following strategies:
1. Call for offshore proceeds of Nigerians with offshore accounts who do not have proof of local productive source of such funds.
2. Nigerians with appetite for offshore investment for the purpose of averting diminution in currency could maintain domiciliary accounts locally.
3. Local banks should be mandated to creatively develop similar financial instruments or clone investment instruments attracting investors to tax havens.
4. Those disclosed to already maintain accounts abroad should be issued demand notices to pay up the tax that ordinarily should have been paid were those investments to have been located in Nigeria.
5. As a matter of specific disclosure (separate from that required by code of conduct bureau), all politicians and public servant should be made to voluntarily disclose relationship in any tax haven before and during their official status, previously held but now not held investment, investment held with or for or jointly held with family members; family investment, provided it is located in a tax haven and the reason for such is to minimize tax, ease of transfer to heirs etc.
The collective wealth of Nigerians is held by a few abroad. This wealth was generated by the ingenuity of the business owners (assuming all of them are of legitimate sources) and it is commendable, but the tax accruing from such is the collective wealth of the nation. Whether a government is responsible or not, frugal or extravagant, it does not justify an illegal action which is not only morally wrong, but ethically too. Two wrongs, they say, don’t make a right. God Bless Nigeria!
Adolphus Aletor, FCA, MCIB, a banker and finance analyst, is the managing director/CEO, Rigo Microfinance Bank; he can be reached on +2348033410380 (WhatsApp only) or firstname.lastname@example.org
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