This is set to run and run. The reputation of Mossack Fonseca and Panama may be irreparably damaged. The reputation of the offshore industry generally may also suffer but most of the expert commentary has been off the mark and informed by moralistic hubris.
The Panama Papers are information which has been obtained by hacking. In most countries that is illegal and so is using or receiving stolen information. Nobody seems to be commenting on that.
It is clear that some of the structures set up by M.F. were beneficially owned and set up by persons with high level political connections. Such persons are known as Political Exposed Persons or PEPs. Financial institutions who deal with such persons are required to undertake the highest levels of due diligence and be particularly inquisitive about source of funds to ensure that monies received by the structures are legitimately earned and not from corruption. It seems no or little care was taken. Other structures were used for blatant tax evasion.
But the exposure of these persons has simply been brought forward by a year. By the end of next year the Common Reporting Standard (CRS) will have been introduced. This will require all financial institutions, so that includes banks and offshore service providers, to exchange information about anybody and everybody who does business with them who is not resident in their own jurisdiction. The mechanism for the exchange is yet to be worked out entirely but for sure every tax authority anywhere in the world will be able to get this information and use it to ensure that it is no longer possible for persons within their jurisdiction to illegally evade tax by failing to declare taxable income.
CRS does not mean that offshore structures will no longer be effective or useful. Responsible advisors should be telling clients that if they cannot afford to have details of the structures they are setting up revealed to their home tax authority, they should not be setting them up. In some countries, simple offshore structures can still be used very effectively to reduce taxes. Or the structure may not be tax led and might set up for many other purposes. Many countries attribute income earned by offshore companies and trusts to the owners (if there is such a thing as an owner of an offshore trust). These so called attribution or Controlled Foreign Company (CFC) rules mean that offshore structures will not be effective in reducing taxes for many unless they illegally “forget” to declare the underlying income on their tax form. The tax offence occurs when the taxpayer signs an incorrect tax form. There is still nothing whatsoever which makes it in any way illegal or wrong for the taxpayer to set up an offshore structure or for M.F. to assist them to do this.
In fact M.F. rarely deal with the end user client. They are a wholesaler who habitually provide companies to other financial intermediaries, particularly the Swiss banks. The Swiss banks have many clients whom they knew or suspected were not declaring the income from their Swiss bank accounts correctly. That became a major problem with the advent of the EU Savings Directive which required Swiss banks to automatically reveal details of any EU tax resident who had accounts in Switzerland. But, the directive only covered individual accounts. The solution or suggestion of the Swiss banks was to avoid the report having to be made by transferring the account from an individual name into a corporate name. Later the directive was expanded to catch accounts beneficially owned by EU residents even if the account was held in the name of a trust or company. The suggested solution to that problem was to transfer the accounts to Singapore.
M.F. knew why Swiss banks were ordering large numbers of companies for their clients. But they were not advising the clients so were not encouraging them to sign an incorrect tax form. It could be argued that the Swiss banks were complicit in tax evasion but ultimately the taxpayer is responsible for their own tax affairs and neither M.F. nor the Swiss banks have any duty to check that the client is signing their tax form correctly. They are not agents for foreign tax authorities. If they ask the taxpayer to show them their tax forms they would probably refuse. And in any event, it is by no means certain that they could tell whether the income earned on the Swiss bank account had been included in total income or not.
Of course it could be argued that both M.F. and the Swiss banks were complicit in a conspiracy to defraud foreign revenue authorities. That is undoubtedly arguable and different levels of guilt could be attributed to both.
Where the argument has now moved on, is whether it is appropriate for any taxpayer to attempt to reduce the amount of tax they pay. The media are clearly taking a stance that any arrangement which saves tax is morally reprehensible even if totally legal. For them, it is not sufficient to rely on the law. A tax saving arrangement may be legal but is surely wrong and should be outlawed. And nobody should be entitled to keep their financial affairs private. There is even talk of moving to a Scandinavian type system where the tax returns of every individual are a matter of public record. The right to privacy, has already largely eroded, with many are arguing that it should completely disappear. Their argument is: if you are not doing anything wrong, why would you mind taking your pants down in public. Shades of 1984, I think…
David Cameron is now being criticised because he has received a gift from his mother. UK inheritance tax regulations mean that if his mother left the money to him in her will it would be subject to UK IHT at 40%. If she gives it to him during her lifetime and survives 7 years, no tax is payable. She has found a way of avoiding 40% tax on a capital sum by making a gift to her son. This is being criticised. This is surely taking the argument too far. If the UK government wished to tax such gifts, it is perfectly able to do so but has chosen not to. Should Mummy Cameron be forced to hang on to all her wealth until she dies so that the tax take can be maximised? The press seem to believe so. The dictum of Lord Tomlin in the Duke of Westminster case that “Every man is entitled, if he can, to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be” seems to be long forgotten. It now seems that every taxpayer must arrange their affairs to maximise the amount of tax payable or face heavy press criticism. I think it could be pointed out to anybody who regards tax efficiency as fundamentally wrong that any good advisor will be able to arrange their affairs in such a way that the amount of tax they pay is increased. I doubt there would be a rush of takers for that service.