Tax Havens - Panama papers

The trending news in Business, Politics and World economy is “PANAMA PAPERS”. The term “ Panama Papers” relate to the data of 11.2 millions files of the World wide corporations, Business houses, Politicians and high profile individuals which were leaked by an anonymous whistle blower to a news paper named “Suddeutshe Zeitung” of Germany. These papers and documents were leaked from a law firm named “Mossak Fonseca” which is based in PANAMA. The Panama based law firm is the consultant for forming the companies, societies / trusts. Thus the name has come for these documents as “PANAMA PAPERS”.

PANAMA & MOSSAK FONSECA:

Panama is a country in Central America situated between South and North America. The economy of PANAMA is free economy with a history of low inflation. The tax system is based on territorial taxation. It means taxes apply to incomes that derived from business carried on in PANAMA itself. The existence of administration office or sales office in PANAMA or re-invoicing the external transactions with a margin/profit does not itself give rise to taxable income, if the underlying transactions take place outside PANAMA. Even dividends paid out of such incomes are also tax free. Thus PANAMA can be said a TAX HAVEN.

MOSSAK FONSECA is a law firm, headquartered in PANAMA, which offers services, as per their website “comprehensive legal and trust services- including research, advice and services for the jurisdictions: Belize, The Netherlands, Coasta Rica, United Kingdom, Malta, Hong Kong, Cyprus, British Virgin Islands, Bahamas, Panama, British Anguilla, Seychelles, Samoa, Nevada and Wyoming (USA)”. It can be observed from the list that some of these countries are tax havens including PANAMA.

Before going into the details of PANAMA PAPERS, let us understand/ review some of the terms.

TAX HAVEN:  Broadly, a jurisdiction may be considered as a “Tax Haven”, if there are "no" or "normal taxes" due to which the non residents can escape high taxes in their country of residence. These tax havens also prevent the transmittance of information about the tax payers to other countries or jurisdictions thus provide secrecy of the financials of the tax payers of offer protection against scrutiny by foreign tax authorities. These tax havens are not transparent in operation of legal, legislative and administration provisions.

OFFSHORE COMPANY: It is a company/corporation incorporated for the purpose of operating outside the country/jurisdiction in which it is registered, which is managed, operated in a foreign country with financial, legal and tax benefits.

TAX EVASION / TAX AVOIDANCE/ TAX PLANNING: Tax avoidance and tax planning are legal and acceptable but tax evasion is punishable. Thus tax havens can be used for tax planning or tax avoidance but not for tax evasions. The benefits of tax havens can be explained with a simple illustration. There is one country, named “ X”, where there is no tax on income if the resident of that country earns income from a foreign country. There is no capital gains tax also in “X” Country. A company, named ABC, registered in such Tax haven. ABC constructs/ buys a hotel building in another country. The hotel building can be given on lease to a shell company, named PQR, which actually runs the hotel, in the other country. The PQR-shell company pays lease to ABC, which can be claimed as expenditure and thus it can pay less taxes in the country in which runs the hotel. ABC company need not pay income tax as ABC does not carry on any activity in the specified tax haven. ABC need not pay capital gains tax also on transfer of the hotel building.

TAXATION and OTHER ADVANTAGES IN TAX HAVENS: Lets’ see what benefits the Tax havens offer and why these places are used by people. The taxes in tax havens are either minimal or nil. There are some tax havens where there are no taxes on capital gains, inheritance and also on income. The procedural matters for establishing a business or company are easy. It may take only a few hours to register a company or business in some tax havens such as Seychelles. These jurisdictions have privacy agreements so others cannot have the information and records of the companies. The companies/businesses need not declare its owners/share holders. The Banks can avoid sharing information of their clients unless there is serious issue of involvement of terrorism. Even the bank officials will be fined upto $100000 for sharing the clients information.

WHAT IS THE ISSUE IN PANAMA PAPERS: After understanding the little things about tax havens and tax avoidance, now the core issue is the leakage of the data relating to 11.5 million files/documents. This data is said to be connected to Celebrities, Heads of the States, Politicians and other business houses. Analysis of the data may not necessarily warrant tax evasions, money launderings or other white collar crimes. But seriously the world will come to recognize the ways how the money/wealth is being accumulated by a small segment of the people.  

Over a year ago, an anonymous source contacted the German Newspaper “ Suddeutshe Zeitung” with an intention to make these documents public and to bring the crime to be known to world. This data consists of e’mails, Photos and other files. The newspaper Suddeutshe Zeitung in turn, shared this data with ICIJ with an intention that International Consortium of Invetigative Journalists (ICIJ) to organize a global reporting collaboration to analyze the files.

The law firm's leaked internal files contain information of about 214000 offshore companies connected to people in 200 countries and territories. The research and analysis done by nearly 370 reporters in 80 countries over a period of one year has uncovered the secret offshore holding of 12 world leaders, more than 128 other politicians and many fraudsters, drug traffickers.

IS IT ILLEGAL: Some celebrities claim that they use tax havens not for taking advantage of lesser taxes but for maintaining secrecy of their wealth to have security from Terrorists or other criminals. Though it is not illegal to have offshore companies and business connections to take advantage of lessr or nil taxes, the methodology is widely being misused to have secret wealth and estates. The secret money from corruption, drug trafficking, scams etc are being taken shelter in these tax havens where the secrecy is guaranteed and transmission of data to other countries is restricted. The legislators of Tax havens, Banks, the consultants who work and provide services to clients have to ensure themselves whether they are rendering services to safeguard the monies or businesses of drug traffickers, terrorists, corrupt or tax evaders. If meticulous care is not taken and professionals follow the morals, ethics to build a healthy society, the disparity between the poor and rich goes further and further.

After the tax scandal has come to light, the country PANAMA has joined around 100 countries list in an agreement to share the financial information to tackle tax evasion as per the Organization for Economic Cooperation and Development (OECD).

(Source: ICIJ, Reuters, Wikipedia)