Two years ago, the International Consortium of Investigative Journalists (ICIJ), a global network of more than 200 investigative journalists in 70 countries, released a series of news stories based on leaked files from a Panamanian attorney. Called the Panama Papers, the 11.5 million leaked documents show previously secret information about nearly 215,000 offshore entities. These documents describe fraud, tax evasion, and circumvention of international sanctions on the part of multinational corporations, very wealthy individuals, and public officials. In early November 2017, news stories appeared announcing a new leak of 13.4 million documents obtained by German newspaper Süddeutsche Zeitung and shared with ICIJ. The Paradise Papers take their name from the 19 tax havens where the entities are based.

A considerable number of the revelations in the ICIJ stories involve very wealthy individuals and high-ranking politicians in both developing and developed countries across the globe, including the United States. Criminal money launderers or those with bribery payments they want to hide from the tax authorities depend on the secrecy afforded by offshore tax-haven countries. Others may want to hide ownership of private aircraft or luxury yachts.

Although offshoring activities can be structured to follow the legal requirements of various jurisdictions, the secrecy provided by tax havens attracts organizations that aim to keep some of their operations private. It would seem that ethical companies would opt for policies of full disclosure, having nothing questionable to hide and wanting to follow disclosure guidance.

Apple, Inc. may be a high-profile example of this missing ethical piece. The Paradise Papers disclose that in 2014 it secretly organized a new tax-haven subsidiary in Jersey, Channel Islands, to replace Ireland, where it had paid low tax on profits earned outside the U.S. The European Union disagreed with these arrangements, as revealed in a December 4, 2017, Wall Street Journal story stating that Apple had agreed to pay Ireland $15 billion in back taxes but then kept it in escrow pending the results of an appeal.

ICIJ revelations also show that Nike reduced its effective tax rate from 34.9% in 2006 to 13.8% in fiscal 2017 through the use of tax havens. “U.S. multinational firms are the global grandmasters of tax avoidance schemes that deplete not just U.S. tax collection but the tax collection of most every large economy in the world,” says Edward Kleinbard, a professor of tax law at the University of Southern California.

A New York Times story, “Paradise Papers Shine Light on Where the Elite Keep Their Money,” describes how many of the most prominent U.S. universities are “turbocharging investment returns on their endowments by using offshore companies to avoid taxes.” Nonprofit organizations are required to pay federal tax on unrelated income. Some universities that profess being “green” even used offshore investing to violate this commitment.


Many multinational corporations operate more openly, using offshoring to structure legally complex tax-avoidance schemes that funnel earnings away from high-tax countries. Consider countries that have had a higher corporate tax rate, like the U.S., for example. An American Enterprise Institute publication, “Why does the U.S. make its people richer faster than other big advanced economies?” emphasizes the importance of entrepreneurship in the U.S. It lists factors causing large and increasing per-capita GDP growth in the U.S. compared with other developed econo­mies: an entrepreneurial culture, a financial system that supports entrepreneurial activities, world-class research universities, labor markets that generally link jobs to workers, jobs without large trade unions, state-owned enterprises, or restrictive labor regulations. The U.S. has a relatively open society that guards the value of private property, encourages educational achievement, and provides a structured environment based on enforcement of laws that are enacted openly with democratic input. All of these attributes are costly to maintain.

Offshoring puts aside any consideration of a long-term return on the innovative and risk-taking environment in the country of development that enabled the intangible asset to emerge in the first place. The rise in importance in today’s economy of intangible assets and other intellectual property has made it much easier for assets in a country of development to be licensed to a related corporation in a low-tax country. The company in the low-tax country then charges royalties to the company in the country where the asset was created. Since the royalty income is taxed at a low rate while the royalty expense is a de­duct­ible expense at a higher rate, consolidated taxable income is reduced.


What can be considered to be a “fair share” of the tax burden has been debated for decades. According to research by the British Institute of Business Ethics, corporate tax avoidance has become the No. 1 issue that the public, or at least the ethically aware consumer, wants companies to address, at least in Europe. After adverse publicity in prior years, Starbucks made a voluntary tax payment of £10 million in 2013 and 2014 and moved its headquarters to London.

In the U.K., corporate taxes are based on local profits, but Starbucks has shown a loss there due at least in part to 4.7% of sales payments going to its Netherlands subsidiary, where coffee beans are roasted, and another 20% paid to its Swiss subsidiary for buying the coffee beans in the world market. Chris Morgan, head of tax policy at KPMG, said: “This is clearly a voluntary decision despite taxes being collected according to law and principles. Tax authorities might be very nervous about how things are done because their job is to collect the right amount of tax and they don’t want to overcharge people.”

About the Authors