Written by Richie Kock Esq at Richie Kock Attorneys
The Panama Papers
About 11.5 million files on offshore clients dating back more than 40 years, were leaked from the database of the 4th biggest off-shore consulting company in the world named Mossack Fonseca, vested in Panama City, Panama http://www.mossfon.com/en/.
The files were leaked more than a year ago to a German newspaper by an unknown whistleblower who ‘wanted to make these crimes public’. The German newspaper shared the information with the International Consortium of Investigative Journalists, which in its turn shared it with other media outlets.
The leak is the biggest in history. Its size eclipses the now infamous Wikileaks and the unauthorized publication of classified NSA information by Edward Snowden in 2013.
The files reveal the following (among others):
● details on more than 214,000 companies connected to people in
more than 200 countries,
● company-owning billionaires, sports stars, celebrities and drugs and arms dealers,
● offshore holdings of 140 public officials from various countries,
● $2 billion in money transaction movements connected to Vladimir Putin, among others $13 million for the wedding of Putin’s daughter at a ski resort,
● an offshore investment fund run by the father of current British Prime Minister David Cameron whom last year, during a speech in Singapore, ironically made a case against ‘corrupt criminals and money launderers’ taking advantage of anonymous company structures,
● more than 15,000 offshore companies established by more than 400 banks worldwide, including banking giants HSBC and UBS to hide money for their clients.
The offshore business
Offshore companies are established in so-called tax havens.
Tax havens are states, countries or territories with a low or no taxation, and with a system of financial secrecy in place.
From the leaked files it appears that Mossack Fonseca favored Panama, the British Virgin Islands, and the Bahamas. Based on data from the World Bank, IMF, UN, and central banks, it is estimated that in small Caribbean islands alone around $21 to 32 trillion are hidden in offshore shell companies.
Legal and illegal offshore practices
It is noted that the accumulation of money in bank accounts of off-shore companies vested in tax havens is in itself a legal activity, provided the goal is tax avoidance and not tax evasion, or other illegal activities, e.g. money laundering or the finance of activities related to terrorism.
The OECD and tax havens
The Organization of Economic Co-operation and Development is currently pushing a policy to battle the problem of global base erosion caused by tax avoidance structures, i.e. the so-called Base Erosion and Profit Shifting, BEPS. Furthermore, the OECD is also combatting tax evasion by promo-ting transparency and ex-change of information through ‘treaties’ (agreements), i.e. the so-called tax information exchange agreements, TIEA’s.
Base Erosion and Profit Shifting (BEPS)
The OECD is heading the Base Erosion and Profit Shifting (BEPS) initiative in an attempt to take on the global problem of ‘base erosion’. Base erosion means that corporations avoid paying taxes in their country of residence by means of tax planning strategies that exploit gaps and mismatches in tax rules, and in doing so shift their profits to low or no-tax locations.
The BEPS-project aims among others to end the use of shell companies used to accumulate profits offshore, and impact tax regimes that seek to attract foreign investors without requiring any economic substance.
An OECD/G20 report found that laws which allow companies to shift profits to low-tax jurisdictions result in between $100 billion and $240 billion in uncollected taxes annually, which represent 4% and 10% of global corporate tax revenues, respectively.
Tax Information Exchange Agreements; TIEA’s
The OECD released a model-TIEA in 2002. The TIEA is meant to address harmful tax practices, among others tax evasion which happens mainly in countries with no agreement for information ex-change of financial transactions in place, i.e. tax havens.
The TIEA-model represents the standard of effective exchange of information for the purposes of the OECD’s initiative on harmful tax practices. Since its release, many countries have signed bilateral agreements on exchange of information which are based on the TIEA-model.
Foreign Account Tax Compliance Act (FATCA)
The US Foreign Account Tax Compliance Act (FATCA) was enacted on 18 March 2010 and went into effect on July 1st, 2014. FATCA requires offshore banks and governments to hand over secret bank data about clients. Non- US banks and financial institutions around the world must reveal American account details.
Common Reporting Standard (CRS)
FATCA helped efforts by the OECD to adopt ‘Common Reporting Standards’ (CRS) for nations around the world with regard to the automatic exchange of information. CRS is an effort to make the automatic exchange of information between tax authorities the global standard which will replace the exchange of information upon request.
In September 2017, the automatic exchanges of information will also start within the European Union.
The end of tax havens?
Hence the question remains whether the OECD policies will eventually eradicate tax havens.
Countries have tried to break through the secrecy of tax havens for years. However, this is a slow and challenging process. Under the system of the provision of information upon request, specific information should be requested.
The nexus lies in identifying this information whilst attempting to trace money passing through anonymous shell companies or other money laundering schemes which may be a hard thing to accomplish.
Furthermore, the government may not have access to said information.
This may all change under the system of automatic (information) exchange. Under this system, countries will be able to automatically exchange information on bank accounts, transactions, and financial flows with each other on a regular/periodic basis.
As mentioned, such a system is currently underway in the form of CRS, and the European FATCA. We will have to wait and see the effect of these systems on tax havens around the world.