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PostPanama Papers or Pandora's Box? (José Ignacio Soler, Venezuela, 04/21/16 3:03 pm)
The "Panama Papers" should be called the Pandora´s Box of International Finance.
It is difficult to predict all the demons that will come out of the box. The implications of the scandal are very complex. The worldwide repercussions will be coming for a long time, as tax authorities from the countries involved finish their investigations.
Nobody should be surprised, however. The existence of these offshore companies and tax havens was never a secret. Apparently, tax havens began to be of general use among corporations most likely because of the low cost of financing when there were high interest rates in their own countries. Later they evolved into tax evasion and/or money laundering.
Offshore companies and bank accounts in tax havens have been used regularly by corporations, organizations and individuals for many reasons, not necessarily illegal, unethical or immoral. Strictly speaking, to have business relations with a Panamanian law firm, to hire its professional services or to have an offshore company are not illegal acts. The scandal seems to have demonized this aspect.
I know for a fact there are offshore companies using bank accounts in their original countries, not necessarily a tax haven, with a transparent money flow, and who regularly report income to tax authorities. These accounts might be used to maintain ownership confidentiality of properties and assets, for tax planning purposes, low-cost financing, or for commercial transfer operations. These are all perfectly valid purposes, provided the intent is not tax evasion.
Nevertheless, unfortunately these instruments are common for "illegal" purposes, money laundering or tax evasion, to cover up criminal activities and corruption.
Besides tax evasion, which is a criminal offense in most countries, a very critical issue behind the scandal is that the Panama Papers might reveal financing networks and money laundering covering up some political organizations and/or terrorist activities, caused by the lack of control and effective regulations of these tax havens. Mexican drug cartels, jihadist groups from Syria, political organizations or nation-states subjected to international financial restrictions, such as Zimbabwe, North Korea, or Iran, are apparently among the suspected users of the system. It remains to be seen whether the papers will reveal all illegal networking around the world.
Now, tax evasion is clearly an illegal and economic issue, with severe repercussions to any country with or without budgetary deficits. An enormous amount of the world's wealth hidden in tax havens cannot be fully accounted for and taxed fairly. This has always been the case and probably will continue to be in the future, if the international community does nothing.
There is no consensus on estimates of the world's wealth hidden in tax havens, or the not-accounted-for tax amounts. There is an interesting book by Gabriel Zucman, The Hidden Wealth of Nations, in which he tries to quantify this hidden wealth. I have only read a summary of it, but his figures seem to be well documented.
On the other hand, there is a very thin line between tax evasion and tax avoiding, which is not illegal, or what the corporations euphemistically call the "tax planning" process. This fuzzy distinction makes very it difficult to investigate and prove tax criminal activities.
In conclusion, I believe the real issue we should all pay attention to is the existence of tax havens and the lack of effective international regulations to control them, not the Panama Papers themselves. The problem here is that the international community in many instances has a different definition for a tax haven. It is therefore difficult to agree upon what places should be qualified as such, and consequently to impose an international general regulation.
What really is a tax haven? Why has it been so difficult to regulate such places?
According to the Organization for the Cooperation and Economic Development, there are some factors to determine a tax haven, basically:--It has two different tax systems, one for residents and another for non-residents with tax advantages.
--It lacks transparency and offers strict confidentiality to non-residents.
--They do not have international tax agreements with other countries.--They have no real control over non-residents' bank accounts, the sources and destinations of the funds, or of the offshore company's accounting system.
According to these criteria there are 38 recognized tax havens. The majority (16) of them are former British colonies in the Caribbean or the Pacific. Some are even in the heart of Europe.
Then if they are clearly identified, there is a lack of international political commitment to submit them to international regulations and control. The Panama Papers might have a self-evident explanation for this fact. The Papers have identified the names of 12 heads of state, six of them still in office, and more than 120 politicians or public officials on the job, and more than 500 names of the world's wealthiest people.
Again it remains to be seen if these people have used their companies and their accounts for tax evasion. The assumption that everybody is innocent until proven otherwise is valid.
In any case, the use of such instruments, legal or not, for a politician or a public servant seems to be unethical at least, because a public servant should be free of all presumed illegal activities.
It is not surprising that despite the large number of Venezuelan personalities and public officials in the Papers, the Venezuelan government´s tax authorities are not interested in pursuing an investigation.
JE comments: An excellent and thorough analysis. I wonder where Delaware fits on the tax haven spectrum.
The Panama Papers play right into the public psyche, with the deeply ingrained belief that the world's powerful play by a different rule book. Or more to the point, that they don't have a book and follow the Golden Rule: s/he who has the gold makes the rules.
A question for José Ignacio Soler: have the Panama Papers received a lot of attention in Venezuela, or are the people merely shaking their heads in a "business as usual" sense?
Panama Papers; David A. Westbrook in "USA Today"
(David A. Westbrook, USA
04/22/16 3:28 AM)
Thanks to José Ignacio Soler for his excellent overview of the issues raised by the Panama Papers.
As José Ignacio discusses, the Panama Papers have given added impetus to the idea of multinational reporting for tax. In fact, the European Union has just announced its intention to require multinational corporations doing business in Europe to report their earnings across jurisdiction. The USAToday story is at the link below; a short quote from me is at the end. See:
Journalists tend to pick what they want for their stories; that's how it goes. That said, WAISers might be interested in my full response, which echoes much of what José said.
"It's difficult in principle to be against transparent accounting for multinationals, at least at first blush. Which is not to say that the European initiative will work very well. As we've seen throughout the European debt crisis, on both the sovereign and the 'private' side, true transparency is difficult to obtain. Some of this is because politics and regulation are simply difficult, some is for nefarious reasons, and some of this is just the complexity of the world. Seemingly common-sense ideas like 'where money was made' may be subject to very different treatments, and fair minds may disagree. As has been noted in the Panama Papers context, offshore companies may have legitimate purposes. Similar things were said, correctly, about special purpose entities during the Enron scandal, and derivatives during the global financial crisis. Which is not to say that abuses didn't occur (the did) and that regulation wasn't warranted (it was). But like the horizon, the problem just moves backwards.
"Perhaps it is useful to think of the Panama Papers in particular, and transparency issues in general, in terms of 'castles and cannons.' In military history, we see that development of a set of defenses, a castle, leads to development of offensive weapons, cannons, which in turn lead to better castles... We see a similar dynamic in finance: regulation, and the skirting of regulation, sometimes legally, sometimes illegally, which leads to the passage of new and allegedly improved regulation.
"As we learned from Enron, and tried to respond to with Sarbanes-Oxley, financial engineering coupled with modern accounting forges incredible tools for manipulating the perception of wealth, that is, for seeming to be transparent but not being so. In fact, relatively simple corporate forms allow for a great deal of secrecy, as demonstrated by the Panama Papers, but also a great deal of completely ordinary practice in the United States, where beneficial ownership is fairly easy to obscure. And in their sheer size (terabytes!), the Panama Papers reveal just how global and widespread such secret practices are.
"So how are we to feel about all this? The last big leak, Wikileaks, was about government practices, especially spying. The Panama Papers are about evasion of government practices, especially taxation. So what we're seeing with the rise of information technology is castles and cannons, i.e., both vast capacity for surveillance (the dark side of 'transparency') and a similarly enormous capacity for evasion and collusion, even terrorist collusion (the dark side of 'privacy'). Drawing sensible lines in the sand would, of course, be wisdom."
JE comments: Congratulations to Bert Westbrook for the quote. Castles and cannons, yes, or tanks and Panzerfäuste. (I had to look up the plural form.)
Improvements in one lead to advancements in the other, in a symbiotic relationship. In this spirit, I see two outcomes from l'Affaire Panama Papers--offshoring will ooze away from Panama to locales further off the radar, and tax haven brokers will begin to trumpet "leakproof" accounting methods. Not sure what those would look like. An abacus?
- Further Thoughts on Panama Papers (José Ignacio Soler, Venezuela 04/25/16 4:06 AM)
When commenting on my post about the Panama Papers (21 April), John E asked a couple of questions.
First, he asked about Delaware as a tax haven within the US.
It might be difficult to answer this precisely. I expected someone else with more expertise on the subject to give an answer, but I guess it might perhaps depend on who you ask and the definition of tax haven.
According to the Organization for the Cooperation and Economic Development, Delaware is not a tax haven strictly speaking, because it does not fully fit their criteria. However, according to other definitions and critics, even in the USA, it is.
Apparently, the point with Delaware is that it offers legal and tax advantages to large corporations, in term of legal jurisdictional requirements, confidentiality and tax exemptions. For instance, "intangible assets" such as royalty payments are not taxable as well as trademarks, leases, copyrights or interest income. In summary, it seems to be a perfect place for tax avoidance, tax planning and finance engineering.
Yet it seems Delaware might be not a place recommended for tax evasion, money laundering or any other corrupt financial activities. One thing is to have shell companies registered in the state, another is to have an uncontrolled financial or banking system that allows such illegal activities.
However, the system apparently has some weaknesses, according to several financial and corruption scandals that have been associated with Delaware. For instance, the case of V. Bout, a Russian arms dealer, used two Delaware addresses. In April 2012, he was sentenced to 25 years in prison. Another case involved J. Abramoff, a Washington lobbyist jailed on corruption charges; he used a Delaware corporation to hide millions.
You can have companies in Delaware that have no US bank accounts, few requirements for documentation, and a good deal of anonymity. Often no one knows who owns the corporations. Among the US states, Delaware has the least transparency and the most secrecy. I understand many critics in the US say that it serves as a domestic tax haven, like the Cayman Islands, which offers a similar level of tax avoidance.
Regarding John's second question, "have the Panama Papers received a lot of attention in Venezuela?" The answer is--no.
Venezuelans have a long tradition of hidden millions, even billions, of cash or assets in hard currencies, sometimes the product of "honest" work, in companies and banks offshore. Often this is for reasons that have more to do with protecting them from legal risk or systematic currency devaluations than with tax evasion. On the other hand, often it is the product of traditional corruption activities among high government officials, military or private sector businessmen. In the present regime in particular, it is estimated that over 300,000 million US dollars are hidden in many of the tax havens around the world.
The public is not surprised by the Panama Papers. They are much concerned with the day-to-day survival to pay much attention to the subject.
JE comments: I have Delaware in my DNA (both my parents were born there), but I'm all about transparency. Or not...? All I can say is that I appreciate Delaware's advantages as a tax haven for shopping.
I often think of José Ignacio Soler when I read of the daily trials of the Venezuelan people. We're wishing you the best, Nacho! What is the latest from Caracas?
- Further Thoughts on Panama Papers (José Ignacio Soler, Venezuela 04/25/16 4:06 AM)