Bloomberg Tax
Oct. 6, 2021, 8:46 AMUpdated: Oct. 6, 2021, 6:20 PM

Pandora Papers’ Big Tax Reveal Is Hardly a Shock (1)

Kelly Phillips Erb
Kelly Phillips Erb

According to Greek mythology, Pandora was the first mortal woman in mythology. She was created by Zeus and blessed with gifts from the other Olympian gods. One of the gifts was a beautiful box filled with all of the evil in the world. The gods gave Pandora one piece of advice: Never open the box. But Pandora couldn’t help herself and did so anyway, releasing the collective horror.

The International Consortium of Investigative Journalists, or ICIJ, opened its own Pandora’s box this week when it released a look at how the ultra-rich secretly moved money and assets around. The report, the result of nearly two years of chasing down records detailing secretive financial transactions, was dubbed the Pandora Papers since it, too, reflects “an outpouring of trouble and woe.”

The number of documents involved in the leak, gathered from more than a dozen offshore service providers, is staggering: 11.9 million confidential documents taking up 2.94 terabytes in computer storage. (One terabyte represents more than 1 billion pages of text, and could be stored on roughly 1600 CD-ROMs or 220 DVDs). It dwarfs the 2016 Panama Papers, which were leaked from a single law firm based in Panama, the now-defunct Mossack Fonseca.

But there’s an even more important distinction than sheer size: While the Panama Papers largely focused on taxpayers hiding money around the globe, the Pandora Papers reveal 206 U.S.-sited trusts linked to 41 countries.

For a while, the U.S. was at the forefront of efforts—at least publicly—to stamp out evasion and promote tax transparency. Or so it appeared. But here’s where things get tricky.

Despite what you may see on the news—and hear from politicians—U.S. taxes are low relative to rates in other high-income countries. In fact, when you compare marginal rates around the world, the U.S. doesn’t even land in the top 25. We are, for example, far below Sweden’s highest marginal tax rate of 76 percent.

When you add in deductions, credits, and exemptions at the state level—largely carved out by legislatures to woo out-of-state dollars—the result can be extremely tax favorable. Stashing or settling assets inside these states is attractive, causing them to be whispered about as tax havens. Delaware? Florida? Nevada? They roll off some advisers’ tongues as easily as the Cayman Islands and the Bahamas.

‘Tax haven’ isn’t a particularly flattering phrase. That’s because it’s rarely just about tax rates. A tax haven is often associated with low taxes and big plans for secrecy—think Panama and the British Virgin Islands. And while there’s nothing inherently illegal about tax havens, they often rely on elaborate schemes to disguise asset ownership.

That’s precisely what the Pandora Papers allege is happening. Most of the U.S.-based trusts were based in South Dakota. Other common trust jurisdictions found in the Pandora Papers include Alaska, Delaware, Nevada, and New Hampshire.


For starters, they are low-to-no income tax states: Alaska, Nevada, and South Dakota don’t collect individual income taxes, while New Hampshire collects taxes on dividend and interest income but not wage income.

Converting personal assets to an entity—like a trust—can provide additional tax-favored benefits. In Delaware, for example, as a result of a 2000 law, typically so long as the trust beneficiaries reside outside Delaware, no Delaware income tax is imposed on the trust.

In South Dakota, trusts typically aren’t subject to tax so long as there are no distributions; once the trust’s income is distributed to a beneficiary, it’s generally taxed at the beneficiary’s own rates. It’s no surprise that the South Dakota Trust Co., referred to liberally throughout the Papers, boasts on its website, “South Dakota is a pure no income/capital gains tax state for trusts.”

Also appealing? None of those states impose an estate or inheritance tax.

So, start with those low taxes. Add in a safe and stable government with a dependable, global currency. Mix in state-specific laws aimed at shielding assets from credits and curbing financial judgments—including divorce. Now, layer trusts with other entities, like LLCs, to allow people and companies to conceal ownership. It’s a potent mix. And the Pandora Papers suggest that it’s not unintentional. Bolstered by the influx of dollars, states like South Dakota and Nevada have made it easier for those interested in secrecy to quickly and quietly move money around. It’s reminiscent of steps taken in other jurisdictions—like Puerto Rico, where the IRS recently launched a campaign focused on tax incentives designed to lure high-net-worth individuals and corporations.

That ease hasn’t gone unnoticed. In 2020, the Tax Justice Network ranked the U.S. second in its Financial Secrecy Index, only behind Switzerland. A high ranking, the organization notes, doesn’t necessarily mean a country is more secretive, but does mean that “the country plays a bigger role in enabling wealthy individuals and criminals to hide and launder money extracted from around the world.”

And the ICIJ suggests the evidence bears that out. Nearly 30 of the U.S.-based trusts examined in the Pandora Papers—about 15% of those examined—held assets connected to people or companies accused of fraud, bribery, or human rights abuses.

Tax advisers will argue that there’s nothing wrong with forum shopping for trusts or other entities, like LLCs or LLPs, to shift tax burdens.

And they’re right. Owning an offshore company or creating an offshore trust isn’t illegal. Neither is owning or creating a domestic trust.

But what is illegal is using offshore or domestic trusts to hide assets from known creditors or evading taxation. In the U.S., taxpayers must disclose the ownership of offshore assets and report offshore income. Failure to disclose may subject U.S. taxpayers—and possibly their advisers—to onerous penalties and criminal charges. Interest in compliance has been on the IRS’ radar for years and only heightened with the release of the Panama Papers in 2016. Today, the use of offshore trusts to promote tax evasion remains an IRS compliance target.

U.S. lawyers, accountants, and financial advisers who create trusts and other entities are typically tasked with a certain amount of due diligence. That due diligence ensures that money isn’t being transferred for illegal purposes such as tax evasion, money laundering, or to avoid existing creditors, including soon-to-be ex-spouses or successful plaintiffs.

But holes remain. Schemes that rely on multiple entities to hide ownership may frustrate even the most diligent of planners. And a lack of reporting requirements inside some jurisdictions—like the U.S.—means that numerous transactions could go unchecked.

The U.S. has traditionally resisted calls to reveal ownership of assets inside its own borders, despite our insistence that other countries, like Switzerland, do so. Nonetheless, earlier this year, Congress passed the Corporate Transparency Act, touted as an effort to shore up existing money-laundering laws to prevent bad acts. However, the reporting rules, as written, don’t appear to apply to all trusts and partnerships; the Secretary of the Treasury has until January 1, 2022, to issue detailed regulations.

Don’t expect that to be the last word from Congress or from other countries. With these latest revelations, the ICIJ has appeared to indeed open a Pandora’s box at a time when tax transparency and fairness are very much in the public eye.

(Added information about a recent IRS compliance campaign.)

To contact the reporter on this story: Kelly Phillips Erb in Washington at

To contact the editors responsible for this story: Bernie Kohn at; Rachael Daigle at