Pandora Papers: the 'legal' way to avoid taxes | Sidebean

0:00This episode is brought to you by Pal Molliv. Family time isn't just the big moments. It's weeknight dinners, sitting around the table, everyone talking all at once. So when the plates are empty and the sink is full, use Pal Molliv Ultra. Pal Molliv's most powerful formula removes up to 99.9% of grease, leaving your dishes sparkling clean, and the new convenient pump makes cleaning even easier, so you can spend less time tackling dishes and more time together. Shop now at PalMolliv.com. This episode is brought to you by State Farm.

1:03Listening to this podcast instead of doom scrolling? Smart move. Another smart move? Getting help from one of State Farm's 19,000 local agents when you choose to bundle home and auto. Bundling. Just another way to save with the personal price plan. Prices are based on rating plans that vary by state. Covered options are selected by the customer. Availability, amount of discounts and savings, and eligibility vary by state. Follow the money defines investigative journalism, and the Pandora papers are probably the largest leak in the last decade. The main problem with these leaks is that you can question the morality of the people involved, but in reality, this is just a spectrum of grays with only a few of them actually crossing the line of legality. New data is coming in every single day, but as of shooting this video, this is October 7, 2021. Here's what happened. Who was exposed and more importantly, how Tox Havens are probably not going away and will continue to be used by those who can afford it to reduce their taxes. Most people cannot do the same thing. More than 100 billionaires in the world whose name show up in the Pandora papers.

2:09What are the Pandora papers? So we don't know precisely when the ICIJ began to get the info that led to many of these investigations, but we do know that it's been happening since 2013 at least. They followed the money. This phrase gained popularity after the Watergate scandal, but tracking money has been vital for uncovering who's behind the shittiest businesses in the world since long before Nixon. The problem is that power, greed, and corruption can sweep even the deepest trail. Four decades, journalists have dedicated countless hours to following the money. And one important player is the international consortium of investigative journalists, the ICIJ. So this is a global organization that gets a lot of info from a lot of people. They even have a leak to us tab on their home page. The ICIJ is behind some of the most important investigations. They release the Mauritius leaks, China cables, Spanima papers, and the Pandora papers. So this latest leak is the biggest in history. 11.9 million documents totaling almost three terabytes of information. And tell the story of how the rich hide their wealth, avoid paying taxes, and yes,

3:11laundered money. So the Pandora papers investigation required the work of 600 journalists from 117 countries. They went through the records of 14 offshore service providers. Back checking, digging into these files. It's up to the authorities to decide what to do. Our job is journalists, but that point is done. And what came out of this was, has devastating implications. Let's think of it as this parallel secret financial world where the rich and powerful safeguard their wealth. One way to do so is through offshore accounts. And these are outside the country that generates the money. In countries with low or no corporate tax. But then they create this network of corporations so complex that it's almost impossible to keep track until there's a leak, of course. And who does this? Well, big names. The Pandora papers include 35 current and former heads of state, 300 politicians, and many celebrities for more than 90 countries. So if you want to know more about the people involved, you should check out Jake Tran's killer video on the topic. He's going to deep dive a lot more into that while we're going to talk a little bit about how these havens work.

4:12Offshore companies and tax havens aren't necessarily illegal or wrong, but they can be. So the key is how people end up using them. Why do tax havens exist? So a tax haven is a country with a specific set of characteristics that makes it compatible with reducing your tax burden. So the reality of it is that as much as the Panama or the Pandora papers are scandalous and cause public revolt, most of the activities these companies or individuals are doing are strictly barely legal. Shady, gray, but in the context of the law, legal. So it's not as rare as you might think. It's estimated that 15% of all countries in the world have a legal system designated to motivate tax optimization. Normally they're small, stable republics that don't have a lot of domestic activity. And because they're small, maybe they don't have a lot of national resources, so they see this foreign investment as a way for the company to thrive. So the most obvious policy that these countries implement is a reduced tax rate for non-residents. Essentially, if you're a non-national and you establish a company in their jurisdiction,

5:14you can get a marginal tax rate. So this varies from 0% taxes on capital gains. That's the money that you make if you invest in stock market or if you invest in a startup and that investment increases in value to extremely low corporate taxes, 0 to 5% rate. So just the low tax rate for foreigners is not enough to get that tax haven title. So other policies where tax havens have are legal or administrative practices that prevent foreign authorities from getting data about their companies, their investors. Think Swiss specs. So tax havens also don't require a local company presence in order to do businesses. Means that a company can simply have a paper operation in the country without a single employee. Low transparency is another trait where governments negotiate custom taxes with specific companies that certainly doesn't apply equally to all businesses. And finally, tax havens need to market themselves as a stable, democratic economies. Nobody wants to put money in a country with a government on the verge of collapse. So marketing, quiet marketing, aka country branding is absolutely essential.

6:19Get it? No, it's not an Africa stricco. Anyway, most tax havens will deny being tax havens for reputation reasons. But more international pressure is forcing these countries to have less secrecy. So tax havens like Switzerland have lost some of their popularity. And they make this tax revenue, not Switzerland, but any tax haven. They make it up with different types of tariffs, like departure taxes or high import taxes on goods. If you look at countries like Bahamas or Monaco, they thrive precisely because of these policies. The thin gray line. So the whole controversy with the Pandora Papers leak is not necessarily the legal aspect of it or the criminal aspect of it. Because a lot of this tax optimization activities, companies and individuals are doing are honestly 100% legal in the jurisdictions where they're operating. A huge company would not risk losing a legal battle over these practices. That's what I think makes people very angry. This sense of impotence on how the rich and corporate can avoid taxes and get away with it. Because it's somehow legal. So should these havens be allowed or can they be avoided?

7:20I think that's a question that would take a whole other YouTube channel to try and answer. But let me focus on some examples of how. This episode is brought to you by Palm Olive. Family time isn't just the big moments. It's weeknight dinners. Sitting around the table. Everyone talking all at once. So when the plates are empty and the sink is full, use Palm Olive Ultra. Palm Olive's most powerful formula removes up to 99.9% of grease, leaving your dishes sparkling clean. And the new convenient pump makes cleaning even easier so you can spend less time tackling dishes and more time together. Shop now at Palm Olive.com This episode is brought to you by State Farm.

8:30Listening to this podcast instead of doom scrolling? Smart move. Getting help from one of State Farm's 19,000 local agents when you choose to bundle home an auto. Bundling. Just another way to save with the personal price plan. Prices are based on rating plans that vary by state. Covered options are selected by the customer. Availability, amount of discounts and savings and eligibility vary by state. Different companies are using these offshore entities all the way from white legal where we would like to place ourselves to black illegal. So SlightBane is a US corporation. Most of our customers are in the US. Stripe our billing system is in the US and our investors are in the US. So we need it to be a US corporation and that's where our headquarters are based. By the way, if you don't know what we do, we have this suite of tools for startup founders to help them with their fundraising. From a pitch deck builder to an investor finder to financial modeling and expense tracking for their early stage companies. We felt a little bit like a press room as we were making this video.

9:30But we're not. We're storytellers and we help founders present their company stories to investors so you can go to SlightBane.com to sign up to our tools. Also the first five comments on our videos get a free invitation to my weekly office hours. So make sure you hit that subscribe button and that bell button to get notified. And the spot. Anyway, all of the SlightBane IP belongs to the US entity. So the US entity employs our engineering team so that the code that they write and the technology actually belongs to the US company. But we also have a subsidiary in Costa Rica. It's a legal company established in Costa Rica. We established it there because 25 plus over team members are based in Costa Rica and we needed to be compliant with the local regulations. So in the eyes of the law, these are two separate companies. Essentially, the US company pays the Costa Rican company for its support, marketing, and design services. Now to be compliant, we can't simply transfer what the other company spends. We have to include what's called a transfer price. So it's illegal for the Costa Rican entity to sell services to the US entity at cost.

10:31And that applies to a bunch of different countries. So this could be considered unfair competition by an interest group. So this Costa Rican entity needs to charge a market rate for the services it provides. This is true, by the way, we have to run a study every year on how much that market rate is. And the company needs to have a profit margin that's comparable to other companies in the country that are providing similar services. Again, this does not apply to Costa Rica alone. This is like a worldwide thing. And that tax revenue goes to the Costa Rican government at a hefty 30% rate. So yeah, pretty much it's the opposite of a tax haven. It's just a price of compliance. So Apple is one of the largest companies in the world. And we all know that. When you buy an iPhone in the US, the revenue goes to Apple Inc. That's the legal entity in Cupertino that we all know of. But when you buy an Apple device abroad or when you're distributed by a batch of devices to sell abroad, they aren't paying the US-based Apple Inc. They're paying Apple operations internationally. That's an Irish company that has no employees, no physical presence, but they're wholly owned by Apple Inc. They've been for over 30 years. So between 2004 and 2014, Apple Ireland received a run of 110 billion euros in revenue in

11:36that entity and paid a low 2% tax to the Irish government. This was a bit of a scandal. The European Union started an investigation. They sued Apple and their rule that they had received illegal discounts and benefits from the Irish government. They should have fined for 13 billion euro. And after years of appeals, Ireland and Apple managed to overrule the verdict and avoid the fine. But this case was not about the offshore entity. That was okay in the eyes of the US and the EU. It's not illegal. The lawsuit from the EU was on the tax discount that Ireland seemed to have given them. Now if this is all legal, why would anyone complain? Well, the case the IRS makes is that Apple benefits from the US. They're talent, the government's stability, and the legal protection. And they should pay all of their taxes there. Apple defends by saying that no company pays more US taxes than them, which is technically true if you count the dollars, not the effective percentage rate. Now, is this ethical? Is really up for you to say in our comments below. And if Apple collected all of that revenue in the US at the 35% corporate tax rate, Apple

12:36would owe the US government $85 billion in taxes. Is that white hat worth $85 billion? I'm honestly not sure. The only small downside of doing this is that the money is stuck in Ireland. They can't bring it or spend it in the US unless they pay every patriation tax, which is 35% lower to 15% for a while than the Trump government. Now, Apple can spend their money from their subsidiary or they can use it to leverage to obtain loans from the US banks. So it's honestly not a big problem for them. Now, a darker tactic many companies use is transferring an intellectual property to foreign subsidiaries. And Facebook did it in 2010. So they transfer some IP to Facebook, international holdings, unlimited lock company, the Irish entity. And a second advantage of a legal glitch called the Double Irish Loophole. So the assets transferred could have been code or branding, logos, and since these assets are owned by the Irish entity, the US entity then needs to lease them. So in 2018, Facebook islands saw revenues of $15 billion, which paid a comfortable tax bill of just $101 million. It could have been $500 plus million in the US.

13:37This is shadier, of course, but a lot of companies do it and they get away with it. Different countries have established regulations to make sure that the prices paid for this IP are fair, but it's a complex topic to navigate. Facebook didn't get in trouble for doing that. They got in trouble for the price at which they sold this intellectual property to the Irish subsidiary. Facebook reported that it's $6.5 billion. The IRS thought it was a $21 billion thing, and that's how they built the case for a lawsuit. The trial was postponed because of COVID, but Facebook recently announced that they were closing their Irish subsidiaries. Other companies like Google also have them and they're doing it as well. Under the EU, you sort of crack down in this loophole and wrote, wrote, and you law it to forbid it. The point is this tactic was shady. It was taken advantage of a loophole, but up until like a year ago, it was perfectly 100% legal. Now, both examples I've given you so far are pretty well-known, great taxics, many, many companies across the world used to pay fewer taxis. Notice how I haven't used the word tax evasion because tax evasion happens when you cross

14:40this legality line, and when you commit a crime. So it's still early to tell which of the individuals or entities exposed in the Pandora papers will actually stand trial because of illegal activities. The line is thin and oftentimes- This episode is brought to you by Paul Molliv. Family time isn't just the big moments. It's weeknight dinners, sitting around the table, everyone talking all at once. So when the plates are empty and the sink is full, use Paul Molliv ultra. Paul Molliv's most powerful formula removes up to 99.9% of grease, leaving your dishes sparkling clean and the new convenient pump makes cleaning even easier so you can spend less time tackling dishes and more time together. Shop now at PaulMolliv.com This episode is brought to you by State Farm.

15:57Listening to this podcast instead of doom scrolling? Smart Move Another Smart Move? And help from one of State Farm's 19,000 local agents when you choose to bundle home an auto. Bundling. Just another way to save with the personal price plan. Prices are based on rating plans that vary by state. Covered options are selected by the customer. Availability, amount of discounts and savings, and eligibility vary by state. It's an argument in court by lawyer that determines if you stand on one side or the other of this line. Now in the interest of showing an actual example of an illegal use of these tax havens, let me grab an example from the Panama Papers, which is Pandora's older brother. A blockbuster release. It turned out of the banking bombshell causing shock waves around the world. Edward Snowden calling it the biggest leak in the history of data journalism. For context, the Panama Papers exposed 200,000 plus offshore entities, which cost a backlash and hit the reputation of many, many companies and many wealthy individuals. But only a handful of people have seen jail time.

16:57Again, most of the activities are just barely on the right side of the law. So the US has charged four people in relation to the leak and only two have been sentenced so far. This is five years after the leak. Some leaks from the Panama Papers really, really pushed the line on the gallery. Iceland's former prime minister, for example, whose name I will not dare pronounce. So he sold a shell offshore company to his wife the day before he had to reveal his public records to become prime minister. And this shell company stood to benefit from some of his own policies as prime minister. He was forced to resign, but quite remarkably, did not stand trial. The only case in the US tied to the Panama Papers with an actual conviction was a venture capitalist called Harald Wunder Golds and his accountant Richard Gaffey. So he started a film called Boston Capital Ventures, which actually funded a few early stage startups. Wunder Golds created a complex scheme of shell companies and bank accounts to hide his assets from the IRS. And hiding your assets is a big no-no in the eyes of a tax man.

17:59So doing business abroad is not illegal. Paying for foreign IP is not illegal. Notice my air quotes. As long as it's declared to the IRS, do you see how thin this line got? So what's going to happen now? The Panama Papers did lead to some public office or resignations, some awareness and some new legislation. And five years later, convictions are very, very few. The firm that handled the creation and the management of all these offshore accounts and all these shell companies, they did have to close down and they did face trial. Many politicians were forced to resign, mostly because of the political pressure. But again, feel of them have actually phased criminal charges. Some banks and some financial institutions were raided by the police and in the end, some legislation was passed. But if this has happened again, it feels that few people have actually learned a lesson from it. And being named in one of these leaks is mostly a PR crisis for you. That some people can manage to overcome.

19:00Some didn't. The truth is, it's a scandal more than a criminal investigation. It's taken advantage of legal loopholes and that's not illegal. It's more or less wrong, but it's not illegal. So what should we be doing differently? The Viori Core Short moves with you. With everyday versatility and classic athletic fit, it's the one short for everything your day brings. Invest in your happiness and get 20% off your first purchase at Viori.com slash core 20. That's V-U-O-R-I dot com slash K-O-R-E-2-0.

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