Panama Papers: Onshore or Offshore
By Prof. Robert Anthony
18 april 2016
The last number of years, there has been a trend by the G7 then G20 to encourage transparency and exchange of information throughout the world. The issue of Panama Papers highlights the necessity to differentiate between tax evasion and not.
If one looks in the past legislation has considerably evolved over the recent years. It was common practice to buy properties in Spain by way of offshore companies before the law changed. If one looks at the publicity of Lionel Messi one understands why he may have purchased a Panamanian company before changing his mind. In this case, it does not make him a tax evader!
Owning assets in an offshore company is not illegal. If the income is declared within the rules of one’s country of tax residence this should not be an issue. David Cameron’s attack by the press was over the top except he was personally destabilised initially and whilst he did nothing wrong, was not transparent enough initially when questioned publicly. Unfortunately, politicians are public figures and can’t hide their affairs as the truth will be exposed.
In practice there are people commercialising incorrectly the use of companies to make money. They don’t respect the law nor do they facilitate in their advice to their clients the ramifications of the actions instigated by them. The evolution of using even onshore entities involves real substance. Letter box companies whether onshore or offshores have serious flaws. There has been for many years people carry out tax planning to reduce taxation legally; conferences and fiduciaries companies selling solutions as packages. This resulted in countries passing anti-avoidance tax laws to close loop holes in their domestic laws. The chess game then became how to go round the new legislation. More legislation was passed to make this illegal in several countries. Obviously especially in poor financial climates countries can’t afford to lose their tax revenues.
Governments have put in more controls, created amnesties and renegotiated treaties to ensure people pay taxes, some still exist some have expired. Exit taxes from their countries were implemented to stop tax payers going to lower tax countries. The different governments around the world obviously desire to collect more tax. Tougher legislation in Russia, Britain, USA, Italy and France amongst others jurisdictions enabled substantial back taxes to be recovered. However political corruption especially in certain old Soviet Union countries has created a disparity in the enforcement of their tax laws. The same applies to several third world countries especially in parts of Africa where Politicians are enriched by corruption. The irony is the domestic legislation is often applied to international companies but not their own resident entities held by local nationals. There is considerable work left to live in an equitable world free of corruption. It is hardly surprising a well advised rich minority take advantage of the system. As the net closes bank accounts holding funds become blocked as third party countries refuse to accept the receipt of these funds. Know your client and money laundering rules are applied in the receiving country and whilst one party may not follow them the funds may become unusable. This creates compensation and barter trading by certain illicit innovate people. They risk criminal proceeding to manipulate around the law.
It is hardly surprising that the press finds anomalies in Panama and elsewhere. However, this is no difference to many other offshore centres. The application of law is not efficiently applied and it often suits to turn a blind eye. Foreign investments and deposits can influence administrations as well as certain corrupt officials. The more sophisticated pass legislation to attract inward bound assets legally. One has seen programs for residency and nationality, non-domiciled tax residency etc. the less sophisticated don’t compete in harmful tax completion but simply derogates deliberately from their laws by not respecting them.
So where do all these issues lead us to? Whilst politicians have two rules one for themselves and another for their citizens, corruption to the system continues as well as ambiguities. The enforcement in external countries will however and has already reduced the volume of transactions. Banks for several years do not concentrate only on their core activities and whilst this exists scandals will continue internationally. The conflicts of interest within the banks are many. Their ambition to obtain assets is compromised often by their methods to achieve this. Some institutions have modified their corporate governance and asked clients to close their accounts. Others have simply ignored the problem. In both cases they have not voluntarily denounced their clients hiding under banking secrecy.
It is clear that many are too diversified and lose management control and corporate governance of their employees. All in all, it is inevitable that the offshore jurisdictions will be obliged to conform to international standards. Transparency will be obligatory which will result in the necessity to negotiate tax treaties to avoid double taxation and respect international obligations.
Coming back to Panama, the president has indicated his intention to comply with exchange of information, money laundering rules and to review internal compliance issues; also to enter into talks with the OECD. This whilst shows the future will be better managed does not resolve the past nor the current scandal. Immediate precise action is needed to demonstrate to the international community the serious intention to eradicate any international tax defrauders that have established businesses and accounts with a view to pure tax evasion.
There is no smoke without fire and whilst it may not be on the volume as initially indicated it can’t be ignored. The concern is by their slow reaction it enables records to disappear and evidence to be destroyed. One’s own conclusions can be drawn from this. It is therefore not surprising the international governments and press have their knives sharpened in the circumstances.
This scandal will speed up and start again another wave of anti-avoidance efforts with many countries resulting in further tightening up of legislation as already seen in the USA. Institutions will be targeted as we have seen with Société Générale; whether justified or not, time will tell. Obama has ensured the transparency rules are tightened up on owning entities by non US single shareholders. As to onshore entities clients need to understand there needs to have real substance and not just letter box registered offices. This mean a real single dedicated office with staff to carry out real provable justifiable arm’s length work. I repeat not just a letter box in a fiduciary company or lawyer’s offices. The test of substance will become essential and the definition risks to be more challenging in time. Base Erosion Profit Sharing (BEPS) issues will be introduced little by little into domestic legislation globally as well as tightening of transfer pricing policies.
In other words, this latest explosion of press articles will not only create issues for Panama but offshore centres around the world. If the onshore tax incentive centres think they have escaped, it will depend on their corporate governance and application in respecting their obligations domestically and with their international partners. I can’t emphasize enough the importance of real substance albeit on or offshore and not just letter box entities. Over and above these comments, real transactions need to be in existence which in finality, are not so simple to implement in practice. Look at recent problems with Amazon, Starbucks, etc.
Whether government or private agencies, where they don’t exist already, bodies will be established to ensure that the rules are applied. Fiduciary companies and professionals will have to be regulated and audited by external inspectors to ensure their application of the rules of practice. Yes, unfortunately more policing of one’s liberty, to ensure everyone plays by the rules further complicating professional lives. Does it matter if one has nothing to hide despite only the onerous work involved? Sadly, it will add to the administrative costs once again when already we are drowning in bureaucracy.