There is currently a lot of press on the Panama leaks from leading local law firm Mossak Fonseca. This worries many people in the financial services industry and it should. It should however not worry everyone.
Offshore centers as they are known are not necessarily bad for the taxman or taxpayers. Using them is not necessarily harmful to our community. Every country is entitled to its own laws. You may think that France’s higher corporate tax should apply to every country in the world. Or you may disagree and prefer the more reasonable UK corporate tax rate. Some countries are free to charge no corporate tax, that is their prerogative, even if you believe that the world should act as one. Some people do wish for one global tax system but that is inevitably political and we all know that everyone tends to have different views on taxation. So let that be the premise of this short opinion piece.
For anyone who argues that we have to stop using other countries’ preferential tax regimes, just remember that the UK is an offshore jurisdiction for many Europeans and that most Brits don’t want the same taxation as in France. Remember too that Delaware is an offshore center within the United States of America.
If we agree therefore on the freedom to tax, there is nothing wrong about Panama and Panamian business services and in fact as long as they are law abiding, or for people in Britain or elsewhere to use the place to incorporate companies/funds/trusts that benefit from zero tax. The catch however is, are those companies truly managed in Panama? We have laws regarding the management of offshore companies, and if those legal standards (which are not always very black and white but mostly based on local substance) are not followed then the person abusing the law should be investigated and penalized. That’s the job of the police or tax authority. If we don’t like what our country does with regards to enforcement, we can vote for parliamentarians that would push their powers, but it still has nothing to do with Panama.
What has to do with Panama is that it is easier to hide there. A criminal (including someone looking to evade tax) or a badly intentioned person usually conscious of not being caught prefers to hide. It is true that it is harder to catch the criminal if he or she hides behind offshore companies than if they hide behind French companies. To avoid people hiding we have standards adopted by most countries to carry out certain types of checks to ensure a person coming with money to set up a business is performing legitimate business and brings in clean money. Those are known as anti-money laundering rules or know-your-clients checks. Some countries agree to get together and share the information on clients so that under certain circumstances it can help verify that someone is not evading tax. This is full of good sense but you cannot force every country to do that and Panama has not been a great team player to say the least. It also does not mean, however, that using an offshore jurisdiction with secrecy laws means you have committed a crime, especially when you have set up your activities there years ago before we had all these well intentioned rules. Again, none of this is black and white (as the press often appears to claim).
In fact, there are thankfully plenty of very good reasons why someone may have a trust or a company offshore. You could want to protect your assets from a corrupt regime or one that is badly run (some prime examples in Europe!). You could want to protect a child’s inheritance from a former marriage. You could even protect a lover …it may not make you the most moral person in the world but even popes have had illegitimate children. You may also wish to move to such a country and that is your right too.
So why is Panama causing such a stir? It is probably an exception to most countries in that they have stood out as a country that has resisted taking and sharing information about persons wishing to use the jurisdiction. Panama is not on the OECD white list (in comparison, the BVI and Cayman Islands have been on the list since 2009). This is why the Panama leaks are in part not news, but also why they are probably exceptional and anyone using or working with Panama should have been aware of the risk of potential exposures and publicity at some point.
As long as we are clear on the above we can conclude that the Panama leaks are good in that they will probably make Panama more compliant with international standards but bad in that everyone is pretending that David Cameron is not paying his fair share of tax. The reality is that he will pay his UK tax on his receipts. That is true for millions of people whose investments are run tax free until they are cashed in. It is also true for millions of UK and French citizens using local funds to invest tax free. That is why we have laws for funds and trusts, whether they are in the UK, France, Luxembourg, BVI or Panama.
