The subject of the so-called Paradise Papers is extremely controversial and complicated to say the least. Aside from the extreme embarrassment it is causing the rich and famous, as well as politicians, around the world, does it have any impact on stock markets? We have seen promises to clamp down on tax evasion, new regulations but are governments around the world really intent on closing the door on these tax havens?
Stock market valuations
The likes of Apple and Google are mentioned on a regular basis in relation to the use of perfectly legitimate and legal company structures as a way to reduce their tax liabilities. First and foremost, remember these are perfectly legal strategies and it is not up to the company’s to address these issues it is up to governments around the world. However, when you bear in mind the billions of dollars of tax savings involved, do tax havens have an impact on stock markets?
The simple fact is that if any company is able to reduce their tax liability this means more funds remain in the company leading to a higher valuation. When we look at some of the larger groups such as Apple and Google they handle billions of dollars of revenues each year so any increase in their tax rate will impact their profitability and ultimately their value on the stock market. So, the reality is that any short-term savings in tax liabilities do affect stock markets especially if these savings are unlikely to be constant going forward.
Investment groups and individuals
It also goes without saying that if investment groups and wealthy individuals are able to reduce their own tax liabilities by using tax havens then their wealth and their investment powers are enhanced. Again, these are perfectly legitimate and legal strategies but these huge tax savings create more wealth some of which will ultimately find its way into various stock markets and investment markets around the world.
A prime example mentioned in various newspapers is the acquisition of a private jet by a well-known sports star. The jet was registered in an offshore tax haven, perfectly legally, leading to a refund of the VAT element of the purchase price. In this instance we are talking about millions of pounds so if this is replicated across all of the so-called tax havens around the world for many more individuals, the figures soon become mind-boggling.
Local agendas
Politicians and governments around the world can wax lyrical about working together to stamp out the use of tax havens but ultimately countries and their governments have their own local agendas. Many of the tax havens which have been mentioned in the Paradise Papers would suffer if these tax loopholes were closed so they are unlikely to be very keen to make any major changes. We could see some tinkering around the edges which would keep the voting public “on-side” in the short term but ultimately there will always be ways and means to reduce tax liabilities all within a perfectly legal structure.
All the politicians crying foul of tax havens have at some point been in power themselves in recent times. Why did they not act when they had the opportunity? At the end of the day there is a growing feeling that the rich and powerful will always protect each other to the detriment of the working public.