An accident in Paradise

06/11/2017

Charlie Ansdell, Managing Director

An accident in Paradise

The Paradise Papers tax affairs leak – 13.4 million documents covering the fiscal and financial affairs of the super wealthy – presents unique challenges to communications advisers to those named or implicated. 

From a reputation management perspective, it is a perfect storm of the newsworthy and salacious, weaving together a Bond-esque plot of celebrity, wealth, royalty and exotic island havens.  Moreover, the story is playing out in the febrile post Brexit and Trump era, where trial by media and social media is completed long before any legal or criminal action is bought.

Distinguishing Avoidance v Evasion

Most newspapers, and a fair number of politicians, have reacted with outrage at the revelations.  Jeremy Corbyn thundered of “a super-rich elite that holds the taxation system and the rest of us in contempt”.  The BBC’s Robert Peston described the Queen’s offshore investments as “an insult to millions on low and stagnating incomes.”

Of course, the Queen, or indeed many of those named in the Paradise Papers, may not have done anything illegal.  There is a fundamental difference between “Tax Evasion” – which is illegal and “Tax Avoidance”, which is legal.  Many of those in the Paradise Papers are facing moral outrage at their arguably prudent tax avoidance measures (let us not forget that the ISA and Pension are also tax avoidance measures), making it appear more like tax-evasion.  It is unreasonable to assume that all offshore investing is morally dubious. 

Many (though not all) overseas territories and countries have strong compliance/ anti-money laundering measures and high transparency.  Equally, investing in offshore funds is commonplace.  Many of the largest pension funds in the UK – including, it should be noted, the Guardian and the BBC – invest their assets in both offshore and onshore investments. There are many valid reasons for doing so.

Once again, it is unlikely the BBC, the Guardian or indeed many pension funds are likely to face criticism and public opprobrium for this.

The politics of Tax and the new moral compass

So, if the people named in the Panama papers aren’t doing anything wrong, why are they coming under attack?

Firstly, it is important to state that some of those named might have done something illegal such as evading tax. Where this is the case, they must be prepared to face scrutiny and criticism both in the media and potentially legally.  There will be others who have done nothing illegal, yet they face equal media scrutiny, reflecting fundamental changes in society and the way people perceive the super wealthy.

Over many years, the conflation of tax evasion and tax avoidance in the media has muddled the distinction between illegal and legal activity.  Failing to understand this important nuance has fuelled a belief that all tax planning is inherently wrong – those acting totally legally may still find themselves subject to public vitriol.  

The financial crisis – and the inequality and politics of austerity around this – has led to a recalibration of the general public’s moral compass. The super wealthy – and in particular the banking sector – were held to be both responsible and immune from for the financial crisis. Many people now believe that while most people in the UK and across Europe have suffered austerity the rich have continued to benefit from unethical business and tax practices.

Finally, the strong anti-establishment orthodoxy that underlies the recent Brexit and Trump votes, has led to a great distrust of authority figures – particularly those with wealth and power. This translates, pragmatically, in scepticism around the use of any tax planning vehicles by the rich.

Why tax complexity fuels suspicion

In other words, using perfectly legal tax avoidance that might be considered fine for the majority of the population will not be fine for the rich. In part this is because the tax avoidance schemes used by the rich are different to those available to the general population. 

For example, those on a very high income can put a maximum of £10,000 a year into their pension. They therefore invest in other schemes. The vehicles they use – VCTs, EIS schemes, offshore shell companies – can seem opaque and mysterious; most of the population will never come across, let alone invest in these schemes.

In turn, this leads to a sense that the rich are not “playing fair” – that there is one set of rules (or schemes) for them, and another for the man in the street.

Furthermore, the offshore industry still suffers a poor reputation from its past, when it was renowned for tax evasion, money laundering and linen-clad criminals sipping cocktails on the beach.  Although, compliance, regulatory oversight and transparency have improved enormously in offshore jurisdictions, this reputation still lingers.

Privacy v. Transparency

There is another interesting side-issue to the Paradise Papers story. The leak itself contains a vast amount of private and confidential information on the private financial matters of individuals. This is the fifth major leak in recent years, only surpassed by last year’s Panama Papers.

While newspapers will no doubt claim “public interest” in publishing this information – and this is certainly true for many of those affected - it will not be the case for everyone.

One could argue that some people named in the papers have faced a significant breach of their privacy. If, say, middle income earners in the UK had their tax affairs and investments published, it would cause public outcry – and rightly so. 

This would indicate that different standards are applied to the transparency of the affairs of the super-rich versus what the general public would find reasonable. In part, this backlash results from the association of privacy with opacity - and therefore tax evasion. That said, one can legitimately claim that some privacy is required to guard assets and family from potential criminals.

What this means practicality is that the rich must carefully weigh up privacy versus transparency in their financial and tax affairs. Demonstrating greater transparency can prevent misunderstanding, and also show a positive tax contribution. Indeed, both politicians and business leaders are increasingly asked to publish their tax affairs.

Against this they have to balance genuine privacy concerns.  Once again, by explaining why some matters need to be kept private, and being as transparent as possible with other disclosures, the wealthy can both protect their reputation and their privacy.

Leadership is key to transforming reputations

It may ostensibly seem unfair that the rich are subject to a greater degree of scrutiny or a greater demand on their standards of behaviour than the general public, but this should be seen, to some extent, as a cost that comes with increased wealth.

The reality is that a decade of austerity, a failure of mainstream politics and a significant increase in inequality means that people are more acutely attuned to perceived unfairness.  The traditional protection that the rich have had from status and power does not exist in the court of public opinion, especially in a world fuelled with the immediacy and divisiveness of social media.

In such an environment it is only through leadership that the wealthy can truly protect their reputation. By showing leadership in their commitment to transparency, by showing leadership in committing to paying a fair amount of tax, the super-rich can navigate the choppy waters around this delicate and polemic issue.


 

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