The Paradise Papers — a collection of more than 13-million files unveiled this weekend — helped shed light on the financial practices of some of the world’s wealthiest entities.

The documents, leaked to the International Consortium of Journalists (ICIJ), showed that companies, politicians and even Queen Elizabeth take advantage of tax havens.

While this generated international headlines, tax havens aren’t necessarily illegal. But they are controversial.

Jonathan Farrar, an associate professor of accounting at Ryerson University, says the terms “tax avoidance” and “tax evasion” sometimes generate confusion.

“The confusion results from those two terms, one is perfectly legitimate, and the other is not legitimate at all. And where it gets problematic with international taxes is that it’s hard to know where to draw the line,” he said.

Here’s a deeper look at what the Paradise Papers are, and what is (and isn’t) illegal.

What’s in the Paradise Papers?

The Paradise Papers are the world’s second-biggest data leak, second to a similar Panama Papers leak in 2016. They detail how some of the world’s wealthiest companies (such as Nike, Apple and Facebook), and individuals (such as Bono and other Hollywood stars) avoid paying bulky taxes. The papers were mostly leaked from a prominent offshore law firm named Appleby, which was founded in Bermuda and does the majority of its work in North America.

How do tax havens work?

“A tax haven is a country that has lower tax rates than your own country,” Farrar explains, citing places like the Cayman Islands as an example. Tax havens, commonly referred to as tax shelters or offshore havens, also tend to have few regulations on income.

A legitimate — or legal — use of a tax haven could involve a UK citizen setting up a trust for foreign assets in an offshore country.

“If a trust’s decisions are not made within the UK, income from the trust’s assets is not taxable in the UK,” Farrar says.

Tax havens are legal

While a huge number of UK names appeared in the latest leak, neither the HMRC or any court has determined they did anything wrong. That’s because, technically, tax havens are legal.

“Tax evasion is something that is illegal,” Farrar said, explaining it usually involves someone hiding wealth from the government.

 

If offshore tax havens are legal, then why are they being reported on this way? The ICJJ explains having an offshore account often leads to illegal activity.

“While having an offshore entity is often legal, the built-in secrecy attracts money launderers, drug traffickers, kleptocrats and others who want to operate in the shadows.”

It’s also about everyone paying their fair share of taxes — especially those who can afford to do so.

“It generates some resentment from the majority of taxpayers who are middle class,” Farrar said. “They don’t have the means to afford high-priced lawyers or accountants to set up these offshore structures.”

“It can set up the perception that the wealthy elite have an unfair advantage.”

The documents, leaked to the International Consortium of Journalists (ICIJ), showed that companies, politicians and even Queen Elizabeth take advantage of tax havens. While this generated international headlines, tax havens aren’t necessarily illegal. But they are controversial.

Jonathan Farrar, an associate professor of accounting at Ryerson University, says the terms “tax avoidance” and “tax evasion” sometimes generate confusion.

“The confusion results from those two terms, one is perfectly legitimate, and the other is not legitimate at all. And where it gets problematic with international taxes is that it’s hard to know where to draw the line,” he said.

Here’s a deeper look at what the Paradise Papers are, and what is (and isn’t) illegal – read more on the BBC website, The FT, The Washington Post and SKY News. You can also contact us if you would like any further information into how we can also assist you in protecting your wealth too!