16 October, 2021
Following the Panama Papers (published in 2016) and the Paradise Papers (published in 2017), a threequel called the Pandora Papers is coming. The International Consortium of Investigative Journalists (the ICIJ), the same institution that published the Panama Papers, published the Pandora Papers on 3 October 2021. The publication of these papers creates a bit of commotion in public as they include more than 330 politicians and 130 Forbes billionaires, celebrities, and leaders of religious groups around the world.
This publication will discuss the Pandora Papers itself and whether having offshore entity is common.
Pandora Papers, What is it?
Pandora papers is a product of an investigation conducted by the ICIJ. The investigation is based on a leak of confidential records of 14 offshore service providers that give professional services to wealthy individuals and corporations seeking to incorporate shell companies, trusts, foundations and other entities in low- or no-tax jurisdictions. Following the 2.94 terabytes of data leaked to the ICIJ, they investigated the data that leads to the production of information on the so-called beneficial owners of entities registered in the British Virgin Islands, Seychelles, Hong Kong, Belize, Panama, South Dakota and other secrecy jurisdictions.
In short, the Panama Papers show the wealth of worldwide public figures (including politicians, businessmen and celebrities) that are placed in several countries through a network of trusts and shell/investment companies.
Pandora Papers = Tax Crime?
While reading the list of names in the Pandora Papers, one could easily misunderstand that these people are tax frauds. The next question, is it really that simple to give our verdict? To answer this question, we must grind it out to the basic principle – the difference between tax evasion and tax avoidance. Investopedia defines tax evasion as an illegal activity in which a person/entity deliberately avoids paying a tax liability. While tax evasion is definitely illegal, tax avoidance, on the other hand, is not necessarily illegal. Tax avoidance’s goal is to arrange affairs so that tax was not due. In another way, tax avoidance is similar to tax planning. The purpose of tax planning is to minimize the payable tax legally. Tax planning usually benefited from loopholes in the prevailing laws and regulations.
The acts taken by the public figures whose name are listed in the Pandora Papers is called tax planning, NOT tax evasion. Therefore, these public figures cannot be judged as tax fraud yet until a proper investigation is conducted.
The common structure used in tax planning is carried out through the establishment of shell companies and layered entities structure in tax haven countries. A tax haven country is a country that offers foreign businesses and individuals minimal or no tax liability. The beneficial owner usually purchases assets through these shell companies so that they can enjoy the low tax rate upon earning any capital gain. Generally, this structure is technically legal and does not contain any violations of the laws and regulations, unless it involves money laundering, fraud, and other economic crimes.
Thus, if the tax planning does not contain any violation of the laws and regulations, then from a legal perspective, there is no ground for calling these public figures tax frauds, as they do not conduct any tax crime.
Needs to have Special Purpose Acquisition Company (“SPAC”) and Special Purpose Vehicle (“SPV”)
As stated earlier, the common structure used in tax planning involves the establishment of offshore SPV or SPAC that usually are referred to as shell companies. However, there are many other reasons for setting up offshore SPVs. The following are various samples of such other reasons.
a) Utilizing Regime / Rules that is not available in Indonesia.
Many concepts and rules which are recognized globally have not been recognized in Indonesia, such as the concept of Trust or the GP-LP structure that is well known in the common law-based jurisdictions. Investment in certain class of shares of an offshore entity for particular underlying assets of such entity is also not available in Indonesian legal context. Thus, to enjoy the benefit offered by these regimes, the undertakings need to establish their entity in the offshore jurisdictions that recognized such concepts.
b) Blocking Liability Entity
To hold offshore assets (e.g. participation or interest in oil & gas fields or geothermal working area) may expose the owner to certain legal liabilities or commercial risks. Many outbound investments would need to mitigate this risk thus the investment should be done via an offshore entity. The offshore entity or SPV would also have a role as a party in many contracts with third parties including join venture partners thus the ultimate owner does not need to be directly exposed to various undertakings and risks.
c) Joint Ventures with Foreign Partners
Once an investment is made in a joint venture with many foreign parties, the parties usually need a tax-neutral location so that the same level of tax treatments and treaty network can be enjoyed by all parties during their investment and/or exit. In this regard, the parties usually choose a tax haven country to establish their joint venture company – so that all of the investors can enjoy the same tax treatment.
d) Financing Structure
The main concern of the international financier would be how to recover any bad debt including the mechanism to enforce the collaterals. Many other jurisdictions offer simpler and easier for the enforcement of the collaterals for financing including pledge of shares and pledge of bank account. To bridge this need, Indonesian borrower frequently establish offshore entity either as its subsidiary or indirect subsidiary which issues bonds or as a holding company over an operating company Indonesia. The holding company located in certain jurisdiction would be able to give sufficient level of comfort for international financier to have the collateral package over the shares or assets of such offshore entity.
e) Funds Raising
Aside the financing structure above, certain offshore jurisdiction would better attract international investor or group of global investors for equity investment. Investors are usually more attracted to the laws and jurisdiction that they are familiar with rather than the local jurisdiction of the undertakings. Therefore, many founders or start-up companies set up their offshore holding companies in the jurisdictions that many global investors are familiar with. Various international venture capitalists are investing in such offshore holding companies or offshore funds investing in such offshore holding companies.
Authors Commentary
From a legal point of view, the structure that is commonly used by public figures in the Panama Papers, Paradise Papers or the latest Pandora Papers should not be illegal measures. The rationale of having such structure may be various and to facilitate the needs of having certain protection and legal landscape in other jurisdiction. This structure generally does not contain any violations of the prevailing laws and regulations in Indonesia. We should view and perceive it as a normal business practice until we are certain otherwise.
For further information, please contact:
Freddy Karyadi, Partner, ABNR
+62 818 103 949
fkaryadi@abnrlaw.com
Anastasia Irawati, Senior Associate, ABNR
airawati@abnrlaw.com
The views and opinions expressed in this article are those of the authors and do not necessarily reflect and/or represent the views, opinions, or positions of Ali Budiardjo Nugroho Reksodiputro (ABNR) whatsoever.
