PANAMA CITY: Photo shows an aerial view of the financial centre of Panama City. More than a dozen heads of state and government have amassed millions in secret offshore assets, according to an investigation published by the International Consortium of Investigative Journalists (ICIJ). - AFP

PARIS: Offshore companies are a lynchpin in the system used by leaders and the ultra-rich to hide assets that was exposed in the trove of leaked documents dubbed the "Pandora Papers". Some 11.9 million documents from financial services firms, which were obtained by the International Consortium of Investigative Journalists (ICIJ), showed how the elite used tax havens to stash assets worth hundreds of millions of dollars. So what is an offshore company and how are they used?

What is an offshore company?

An offshore company is one created in a jurisdiction other than where its owner is incorporated or resides. The term is usually considered to apply where the company has no business operations in the country where it is registered, and is created to take advantage of the low (or no) taxes, lax regulation and secrecy that the country offers.

While remote, often tropical islands were long the image of offshore havens-think the Caymans or British Virgin Islands-that is no longer necessarily the case. The US state of Delaware has long been popular for creating companies for the secrecy it offers, while South Dakota has emerged as a top spot for creating trusts for the same reason. Offshore companies are big business. According to the latest figures by the European Commission, the capital and bank account holdings of offshore companies accounted for 10.4 percent of global economic output in 2016.

Why use them?

Ronen Palan, an economist and professor at City University of London, told AFP that "the use of these structure is to maintain some sort of secrecy," whether it be from competitors, a spouse, or tax authorities. This secrecy can be used to evade taxes, facilitate corruption and finance criminal and terrorist activities.

Are they legal?

Creating an offshore company is not illegal, but their use can be if the owners do not report their assets and earnings to the authorities in their country of residence, and any taxes due. The "Pandora Papers" contains many instances of assets that have been presumably hidden and not declared to authorities. The documents also contain many cases in which offshore companies have been used to "optimize" taxes in ways that are technically legal.

But the media organizations that participated in the investigation pose the question whether such use is moral as it allows firms to drastically reduce their taxes, aggravating inequality. The use of offshore companies by political leaders has also drawn scrutiny due to transparency and corruption concerns.

What is the role of intermediaries?

Offshore companies could not function without lawyers, accountants, notaries and bankers, and they are implicated in suspected wrongdoing uncovered in the "Pandora Papers". If the 2016 "Panama Papers" singled out the Panamanian law firm and corporate services provider Mossack Fonseca, the "Pandora Papers" faults 14 financial services firms that manage 29,000 offshore companies.

How to better regulate them?

University of California, Berkley professor Gabriel Zucman, believes they ought to be banned. "It seems obvious that shell companies-corporations with no economic substance, whose sole purpose is to avoid taxes or other laws-should be outlawed," he said in a statement provided by the ICIJ. Palan said efforts to clean up the sector have been gamed as professional services firms located in tax havens that tightened their regulations, such as the Caymans or Jersey, have set up operations in less regulated places. "The good tax havens became facades for tax evasion," he said. - AFP