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PAX, LUX ET VERITAS SINCE 1965
Post Panama Papers; David A. Westbrook in "USA Today"
Created by John Eipper on 04/22/16 4:00 AM

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Panama Papers; David A. Westbrook in "USA Today" (David A. Westbrook, USA, 04/22/16 4:00 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:

http://www.usatoday.com/story/news/world/2016/04/12/eu-proposes-new-disclosure-rules-after-panama-papers/82939844/

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?


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