The Paradise Papers: When are offshore financial centres okay?

On the day the news of the Paradise Papers broke, the BBC aired a documentary showing the investigations its journalists had done since the data leak. The leak revealed that Queen Elizabeth, the British monarch, has millions of dollars invested in the Cayman Islands and Bermuda. Not illegal per se, but certainly unbecoming for someone in her position. The Panaroma episode also focused on those who had used these offshore arrangements to avoid paying tax in the UK.

There was a lawyer, together with his clients, whose scheme was clearly a sham – they “gave away” all their UK earnings to charities offshore (meaning they paid no tax), those charities then appointed the “donors” as financial advisers. The “donors” subsequently advised the charities to buy luxury cars and homes which they used and lived in, in the UK, and pay for exotic holidays for them. These arrangements existed, obviously, for no other reason but to evade (not avoid) paying taxes in their home country.

In Nigeria, the focus of the leak has been on CBN Governor Godwin Emefiele and his old boss or mentor, Jim Ovia, and the Azura-Edo Power Plant – Nigeria’s largest Independent Power Plant. The accusation levied against Azura as summarised by Premium Times, the newspaper that broke the Paradise Papers story in Nigeria, is that, by setting up corporate holding structures in Mauritius, the company is “…a huge suction pipe set up to siphon millions of tax-free dollars.” The piece details the revelations, none of which justifies the suction pipe assertions. Like monopoly, “tax haven” also seems to trigger a certain reaction, with the assumption being that it is inherently bad. I’m sure the companies involved will respond as robustly as they deem necessary, but it would be fair to examine some of these underlying presumptions and resulting conclusions.

First, it is true that many people choose offshore financial centres to conceal their participation in or ultimate ownership of businesses. This is very attractive when money laundering is the purpose of the venture. However, this is very unlikely to be the case with the Azura-Edo IPP – a public-private partnership involving the Federal Government, with the World Bank providing payment support by way of risk guarantees to the investors. It is also the first full-fledged project-financed IPP in Nigeria. It is extremely unlikely in these circumstances that the promoters of the project are unknown.

Second, that Nigeria’s first project-financed IPP was only able to achieve financial close in 2015, and only then with domestic and international payment support, speaks volumes about the true ease of doing business in Nigeria and the state of the power sector.

While the expose does not suggest that the investors are unknown, it does go on a bit about the complex Mauritius holding structure, and does infer that its purpose is to avoid paying tax in Nigeria (indeed, the piece suggests that Azura will pay no tax at all because of its status in Mauritius). This is a misconceived argument. Very simply, every company incorporated in Nigeria will pay corporation tax unless it is exempt under a tax holiday scheme. All dividends transferred out of Nigeria will also be subject to withholding tax. In Mauritius however, there will be no further withholding tax payable on those dividends, and this ends up being a saving for the investors. Is it tax that is therefore “lost” to the Nigerian authorities? Not really. It’s certainly no more than taxes lost to cement companies claiming pioneer status.

Thirdly, the article also makes a meal of transfer pricing and management fees. To keep it simple, post-investment, local entities typically pay their foreign investors for the expertise and know-how they bring. This is standard global best practice. Ordinarily, this would be a loophole to exploit for getting cash out of Nigeria. However, all such management agreements have to be registered with the National Office of Technology Acquisition and Protection (NOTAP). NOTAP limits the amount that can be paid for management and technical services to 1-5% of net sales/revenue. Companies need to attach NOTAP approval to their bank applications to transfer fees out of Nigeria.

Therefore Nothing on the face of it suggests a lack of transparency or an attempt to create artificial transactions or relationships.
Many legitimate reasons exist for investing in offshore jurisdictions, ranging from maturity of the corporate laws and comparability with more advanced jurisdictions, to qualifying for preferential transaction rates and even receiving payments from foreign individual customers. Like monopolies, it is the abuse of these arrangements that should raise red flags.