Unlike Wikileaks’ exposes, the recent Panama revelations were quite selective, targeted, edited and carefully managed. Most observers attribute this to the political agendas of its mainly American funders. Nevertheless, the revelations have highlighted some problems associated with illicit financial flows, as well as tax evasion and avoidance, including the role of enabling governments, legislation, legal and accounting firms as well as shell companies.
The political tremors generated by the edited release of 1.1 million documents were swift. Nobody expected Iceland’s prime minister to resign in less than 48 hours, or that the British prime minister would publicly admit that he had benefited from the hidden wealth earned from an opaque offshore company of his late father.
Panama Papers
The Panama documents are from the law firm Mossack Fonseca, which has worked with some of the world’s biggest banks — including HSBC, Société Générale, Credit Suisse, UBS and Commerzbank — to set up 210,000 legal entities, often to circumvent tax and law enforcement authorities worldwide. Just one law firm in Panama is still the tip of a massive iceberg hidden from public view as many such firms in other locations provide similar services.
High net-worth individuals and corporations thus secure a far greater ability to evade taxes by paying tax advisers, lawyers and accountants. Not surprisingly, Mossack Fonseca insists it has never been accused or charged in connection with criminal wrongdoing, only underscoring that Panama’s financial regulators, police, judiciary and political system are part of the system. Similarly, many clients of such firms claim that they have not violated national and international regulations.
‘Offshore’ Tax Havens
Total global wealth was estimated by a 2012 Tax Justice Network (TJN) USA report at US$231 trillion in mid-2011, roughly 3.5 times global GDP of US$65 trillion in 2011. It conservatively estimated that US$21 to US$32 trillion of hidden and stolen wealth has been stashed secretly, ‘virtually tax-free’, in more than 80 secret jurisdictions, with two thirds in the European Union, and a third in UK-linked sites.
After the Panama Papers leak, Oxfam revealed that the top 50 US companies have stashed US$1.38 trillion offshore to minimize US tax exposure. The 50 companies are estimated to have earned some US$4 trillion in profits across the world between 2008 and 2014, but have only paid 26.5 per cent of that in US tax.
More so now than ever before, the term ‘offshore’ for tax havens refers less to physical locations than to virtual ones, often involving “networks of legal and quasi-legal entities and arrangements”. Private banking ‘money managers’ provide all needed services to facilitate such practices, making fortunes for themselves in doing so. Thousands of shell banks and insurers, 3.5 million paper companies, more than half the world’s registered commercial ships over 100 tons, and tens of thousands of ‘shell’ subsidiaries of giant global banks, accounting firms and various other companies operate from such locations.
Reforming Tax Havens?
In recent years, the global tax-haven landscape has shifted under increased public scrutiny. The OECD (Organization of Economic Cooperation and Development) club of rich nations has been developing a global transparency initiative but Panama is refusing to participate seriously, with the OECD tax chief calling it a jurisdiction “that welcomes crooks and money launderers”.
To get on the OECD’s list of approved jurisdictions, almost 100 countries and other jurisdictions have imposed minimal disclosure requirements. Hence, subject to certain conditions, the Swiss government allows information-sharing about illegal or unauthorized deposits with other countries. Consequently, the flows have moved to new destinations.
Panama, US exceptions
Only a handful of nations have declined to sign on. After all, many countries and institutions actively enable—and profit handsomely from—the theft of massive funds from developing countries. The most prominent is the US. Rothschild, the centuries-old European financial institution, is now moving the fortunes of wealthy foreign clients out of offshore havens subject to the new international disclosure requirements, to Rothschild-run trusts in Nevada, which are exempt. As Panama is another, a large number of accounts have been moving there as well from other signatory tax havens.
The US does not accept a lot of international standards, and can get away with it because of its economic and political clout, but is probably the only country that can continue to do that. To its own advantage, the US has taken steps to keep track of American assets abroad, but not of foreign assets in the US. In his 5 April speech, following the US Treasury’s crackdown on corporate tax ‘inversions’, US President Obama criticized ‘poorly designed’ laws for allowing illicit money transfers worldwide, and noted that “Tax avoidance is a big, global problem…a lot of it is legal, but that’s exactly the problem”.
Following the Panama revelations, most Western government leaders have pledged tough action against tax evasion and avoidance, especially from developing country locations. But since they receive most of the funds in the tax havens in the world, the OECD has limited its efforts. Hence, these same governments have blocked efforts to give the UN a stronger mandate to advance international cooperation on taxation. Meanwhile, as major users of such facilities, many developing country leaders have been conspicuously silent in the face of recent revelations of what they have long enabled and practiced.
What Can Be Done?
Does it really matter that tax avoidance schemes are legal? Just because they are not illegal does not mean it is not a form of abuse, cheating and corruption. To tackle the corruption at the heart of the global financial system, tax havens need to be shut down, not reformed. ‘On-shoring’ such funds, without prohibiting legitimate investments abroad, will ensure that future investment income will be subject to tax.
If not compromised by influential interests benefiting from such flows, responsible governments should support international tax cooperation efforts under UN auspices and enact policies to:
• Detect and deter cross-border tax evasion;
• Improve transparency of transnational corporations;
• Curtail trade mis-invoicing;
• Strengthen anti-money laundering laws and enforcement; and
• Eliminate anonymous shell companies.
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