Panama Papers: What Stanley Kubrick Can Teach You About Tax Shelters

Stanley Kubrick once wrote the script to a film called I Stole 16 Million Dollars that was rejected by Kirk Douglas as badly written and never got made. Because of the Panama Papers, we now know that Kubrick's millions were concealed in tax shelters, along with the riches of hundreds of other Americans.

Kubrick, a famously eccentric filmmaker, was less known for being savvy with his taxes—but it turns out he was, both in and out of Hollywood. Kubrick moved to the English countryside in the early 1960s while working on Lolita because "there was a tax allowance for American films," according to his wife, Christiane, a German who still lives at their 18th-century country manor in Hertfordshire.

They remained for the filming, then went back to New York. The Kubricks returned to England to film Dr. Strangelove, and this time they stayed. She liked the European atmosphere. He liked the tax regime, which made filming, according to Christiane, as much as 40 percent cheaper. (The English, he found, were also much less judgmental of films like Lolita, as well as of his predilection for the unnervingly risqué.)

When Kubrick died in March 1999, just after filming Eyes Wide Shut (much of it shot at his English country manor), he had an estimated net worth of $20 million. As has now been revealed by the Panama Papers, at least a part of that fortune—and probably a substantial part—was his country manor, purchased in 1978, which was transferred to offshore companies controlled by his family.

According to the Panama Papers, the companies were registered in the British Virgin Islands and consisted of shares that were distributed to trusts held by Kubrick's children and grandchildren. This arrangement is believed to have saved the Kubrick family hundreds of thousands of dollars in inheritance taxes at the low end, and possibly millions at the high end. There's no immediate indication Kubrick was doing anything illegal.

The reason Kubrick took such pains to keep the house in his family is not hard to fathom: He chose to be buried on the grounds of Childwickbury Manor, under his favorite tree. One of his two daughters with Christiane, Anya, who died later in 2009, is also buried on the 1,100-acre estate. Christiane now lives at the manor with her other daughter by Kubrick, Vivian, and a third daughter she'd had prior to their marriage, Katharina, as well as her grandchildren. After shooting scenes there for the end of Kubrick's 1980 film The Shining, which featured some of the grounds, Jack Nicholson once observed that Childwickbury Manor was, more or less, a family compound, and that Kubrick was "very much a family man."

The Panama Papers, more than 11.5 million documents from Panama-based law firm Mossack Fonseca, were brought to light April 3 as a result of an anonymous data leak. The leak shows the firm set up tax shelters for Kubrick and his family as well as thousands of others, including sports stars, business executives, celebrities, politicians and heads of state on nearly every continent.

The leak, first uncovered by a team of journalists at Münich-based newspaper Süddeutsche Zeitung, has already led to fallout across the U.K., Europe, Asia and the Middle East. In the Americas, there have been raids of Mossack Fonseca offices at its headquarters in Panama City this week, in addition to raids in Peru and El Salvador. Süddeutsche Zeitung worked for more than a year on the leaked files, along with 400 other journalists and a Washington-based nonprofit investigative group, the International Consortium of Investigative Journalists (ICIJ). More than 200 Americans have been named in the documents, including Kubrick, but there have been no raids yet of U.S.-based Mossack Fonseca offices, in Nevada and Wyoming.

The controversy has roiled hotly contested elections throughout South America, while in Europe it resulted in the resignation of Icelandic Prime Minister Sigmundur David Gunnlaugsson, who was found to have used tax shelters. It also embroiled U.K. Prime Minister David Cameron, who was forced to admit to personally profiting off tax shelters set up by his family on the island Jersey, a nine- by five-mile U.K. crown dependency stowing an estimated $2 trillion of riches. (The Tax Justice Network (TJN), a U.K. nonprofit group that tracks tax shelters, estimates $21 trillion to $31 trillion is kept in tax shelters on a global scale, with Switzerland, the U.K., Hong Kong and the U.S. among the biggest destinations.)

While Britain announced Friday it would be joining the European Union's largest economies—including Germany, France, Italy and Spain—in sharing information about the secret owners of businesses and trusts that may be avoiding taxes, it does not appear Britain's agreement extends to its overseas territories and crown dependencies, where much of the offshore wealth is hidden. In addition to Jersey, these British territories and dependencies include Bermuda, Gibraltar and the British Virgin Islands, which is home to the Kubrick family fortune.

Tax shelters tend to be legal vehicles, such as 401(k)s or nonprofit groups (even the ICIJ and TJN, for instance, are technically tax shelters), but because they can shield financial activities from view, they also are capable of concealing illegal behavior—like tax dodging, bribery or serious financial crimes.

Mossack Fonseca vehemently denies any wrongdoing in setting up hundreds of thousands of tax shelters and shell companies—including hundreds in the U.S. It has stated it believes its data were hacked by an unknown third party (the files were predominantly emails—4.8 million of them, to be exact—though the files also include PDFs and database files from the firm going as far back as 1977).

Documents from Mossack Fonseca show Kubrick created tax shelters to protect not just the value and ownership of his home, but also profits from some of his movies through a complex network of offshore companies. Others who were named included Hong Kong entertainer Jackie Chan; TV personality Simon Cowell; the ex-wife of Paul McCartney, Heather Mills; and a billionaire American DreamWorks co-founder, David Geffen.

Since the Panama Papers first came to light, there's been widespread revulsion toward those who attempt to shield their riches from taxes—not just those abusing offshore tax havens for criminal or money-laundering purposes. "We've had another reminder in this big dump of data coming out of Panama that tax avoidance is a big, global problem," President Barack Obama said last week, calling on Congress to do more. "It's not unique to other countries. A lot of it is legal, but that is exactly the problem. It's not that they're breaking the laws, it's that the laws are so poorly designed."

In fact, what the scandal really shows is that the laws are poorly designed for everyone—the poor, the super-rich billionaires and those somewhere in between, like Kubrick, whose millions place them well within the 1 percent, but not in the same league as Bill Gates.

In both the U.S. and the U.K., inheritance taxes effectively take nearly half a person's wealth above a certain threshold. In the U.K., it's 40 percent after allowing for a tax-free deduction of 325,000 pounds. In the U.S. it's also a top-tier rate of 40 percent, but the tax-free deduction is much higher, at $5.43 million, meaning that the vast majority of people don't pay any taxes on inheritance.

As an American, Kubrick would have had to pay U.S. taxes in addition to U.K. taxes, subject to treaties, even though he had lived in the U.K. since the 1960s. While billionaires like Geffen will still have some billions to pass down to family members after inheritance taxes, the heirs of someone like Kubrick might have to sell his home to pay the tax bill. And yet the two are in the same bracket for inheritance tax.

As the Cato Institute writes, "The higher tax rates go, the greater the incentive people have to change their behavior in ways that will reduce their tax liabilities—and almost always the result is less tax revenue collected."

In other words, once you have more than $5.43 million in the U.S. or 325,000 pounds in the U.K., you have enormous incentive to start looking into tax shelters. Although many start looking into them sooner. This is how money is drained from the broader global financial system, chipping away at public services and, ultimately, raising the tax burden for those who cannot afford the accountants and lawyers required to arrange tax deals that, as Obama said last week, are "gaming the system."

For someone like Kubrick, the question becomes, if you don't shelter your assets from taxes, are you prepared to potentially see your family lose its home?

This brings us back to the original question: Was Kubrick maybe writing about himself when he wrote I Stole 16 Million Dollars? (The screenplay's protagonist was not a filmmaker, but a safe-cracking Baptist minister.)

Probably not. But considering the hefty tab Kubrick would have racked up to pay either the U.K. or the U.S., or both, moving his fortune to an offshore tax shelter probably didn't feel so much like a choice as a necessity. And it probably did save him as much as a few million. In addition, it likely secured the financial future of his wife, his children and his children's children.

Unless the tax system is devised in a way that does not incentivize avoidance, the vicious cycle is unlikely to end anytime soon.