Print Friendly, PDF & Email

Insights into Editorial: Panama Papers explained

Insights into Editorial: Panama Papers explained

05 April 2016

Article Link

Governments across the world have begun investigating possible financial wrongdoing by the rich and powerful after a recent leak of four decades of documents from a Panamanian law firm that specialized in setting up offshore companies.

What are “Panama Papers”?

The “Panama Papers” reveal financial arrangements of politicians and public figures. The Papers are an unprecedented leak of 11.5m files from the database of the world’s fourth biggest offshore law firm, Mossack Fonseca. The records were shared by the International Consortium of Investigative Journalists (ICIJ).

What’s there in that?

The documents show the myriad ways in which the rich can exploit secretive offshore tax regimes. Twelve national leaders are among 143 politicians, their families and close associates from around the world known to have been using offshore tax havens.

Significance of these findings:

There’s a difference between tax evasion — illegally refusing to pay taxes you owe, and then taking advantage of secret accounts to try to hide the money and get away with it — and tax avoidance, which is hiring clever people to help you find and exploit legal loopholes to minimize your tax bill.

  • Panama is a country with no corporate income tax. People set up their companies here to avoid tax. Tax avoidance is an inevitable feature of any tax system, but the reason this particular form of avoidance grows and grows without bounds is that powerful politicians in powerful countries have chosen to let it happen.
  • As the global economy has become more and more deeply integrated, powerful countries have created economic “rules of the road” that foreign countries and multinational corporations must follow in order to gain lucrative market access.
  • Establishing some kind of minimum global standard of taxation of corporate and investment income hasn’t been done, because it hasn’t been a political priority.
  • The leak of the Panama Papers is significant in part because of the specific information the documents contain, but more broadly because they draw attention to what “everyone knows” and may put public pressure on the powers that be to do something about it.
  • Also, while holding money in offshore companies is not illegal, evidence of wealth hidden for tax evasion, money laundering, sanctions busting, drug deals or other crimes is worrisome.

panama papers

panama papers

What are offshore accounts?

Offshore bank accounts are located outside a client’s country of resident, usually in “tax haven” territories chosen because of financial and legal advantages.

  • They can be used to squirrel money away from the oversight of national banking systems, evading regulatory oversight or tax obligations.
  • Companies or individuals often use shell companies – set up purely a vehicle for financial transactions and initially incorporated without significant assets or operations – to disguise ownership or other information about the funds involved.
  • Panama, the Channel Islands and Bermuda are among more than a dozen small, low-tax locations that specialise in handling business services and investments of non-resident companies.

Are they legal?

Yes. Companies or trusts can be set up in offshore locations for legitimate uses such as business finance, mergers and acquisitions and estate or tax planning, according to the global money laundering watchdog, the Financial Action Task Force.

  • But as well as being used to avoid tax, the secrecy they lend also makes them attractive to criminals and terrorist groups wishing to conceal the sources of their funds.

What’s in it for India to worry?

The papers show that some Indians have set up offshore entities through the Panama law firm. Some of them floated offshore entities at a time when laws did not allow them to do so; some have taken a technically convenient view that companies acquired is not the same as companies incorporated; some have bunched their annual quota of remittances to subscribe to shares in an offshore entity acquired at an earlier date. Still, some others have received income earned abroad and deposited it in the entity to avoid tax. Some have opened a bank account to keep payoffs in government contracts, or held “proceeds of crime” or property bought with money made illegally in Trusts/ Foundations.

But, why set up entities in Panama?

It is for the following reasons-

  • Secrecy of information relating to the ultimate beneficiary owner.
  • Zero tax on income generated.
  • In Panama, individuals can ask for bearer shares, where the owner’s name is not mentioned anywhere.
  • It costs little or nothing to set up an entity here. The Registered Agent charges a few hundred dollars to incorporate an entity.
  • It doesn’t take much time to incorporate one either. Companies are available off-the-shelf and can be registered in a couple of days.

Why Indian regulators are interested in this?

Non-disclosure of an overseas asset will be of interest to authorities and regulators in India. Floating these companies and depending on the reason for which they are put to use, could also violate, individually or jointly, the Foreign Exchange Management Act, the Prevention of Money Laundering Act, the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, the Prevention of Corruption Act and the Income-Tax Act.

Also, the Income Tax department will have to probe if there has been ‘round tripping’ of funds i.e. routing of funds invested in offshore entities back to India, and where required, refer the cases to the Enforcement Directorate. It will also have to see if the offshore entities have declared all their incomes and assets to the Income Tax department.

What’s the relevance of The Panama Papers to the black money debate?

Offshore entities can be and have been used by individuals to remit funds abroad. Globally, they carry a reputation of being vehicles set up by individuals and corporations to evade or avoid tax. Companies call this tax planning, the tax man sees it as tax avoidance. With coordinated moves by G-20 countries to introduce stringent anti-money laundering measures, as part of a global crackdown on tax avoidance, there is rising international scrutiny over such jurisdictions and giant company incorporators which facilitate setting up of offshore entities.

About Panama:

Panama is a country in Central America situated between North and South America. It is bordered by Costa Rica to the west, Colombia to the southeast, the Caribbean to the north and the Pacific Ocean to the south. The capital and largest city is Panama City, whose metropolitan area is home to nearly half of the country’s 3.9 million people.

  • Panama was inhabited by several indigenous tribes prior to settlement by the Spanish in the 16th century. Panama broke away from Spain in 1821 and joined a union of Nueva Granada, Ecuador, and Venezuela named the Republic of Gran Colombia. When Gran Colombia dissolved in 1831, Panama and Nueva Granada remained joined, eventually becoming the Republic of Colombia.
  • With the backing of the United States, Panama seceded from Colombia in 1903, allowing the Panama Canal to be built by the U.S. Army Corps of Engineers between 1904 and 1914. In 1977, an agreement was signed for the total transfer of the Canal from the United States to Panama by the end of the 20th century, which culminated on 31 December 1999.
  • Panama has the second largest economy in Central America and is also the fastest growing economy and largest per capita consumer in Central America. In 2013, Panama ranked 5th among Latin American countries in terms of the Human Development Index, and 59th in the world.
  • Since 2010, Panama remains the second most competitive economy in Latin America, according to the World Economic Forum’s Global Competitiveness Index. Covering around 40 percent of its land area, Panama’s jungles are home to an abundance of tropical plants and animals – some of them to be found nowhere else on the planet.