THE controversial Panama Papers have opened a global Pandora’s box and exposed a long-held secret: How the world’s rich and powerful have dodged paying taxes. So far, the exposé forced a prime minister to step down. Iceland’s embattled prime minister, Sigmundur Davíð Gunnlaugsson, became the first major casualty because of mounting public outrage, after revelations showing his family had sheltered money offshore.
According to World News, the Panama Papers are an unprecedented leak of 11.5 million files from the database of the world’s fourth-biggest offshore law firm, Mossack Fonseca. The records were obtained from an anonymous source by the German newspaper Süddeutsche Zeitung, which shared them with the International Consortium of Investigative Journalists (ICIJ). The ICIJ, in turn, shared them with a large network of international partners, including BBC and The Guardian.
The documents show myriad ways for the rich to exploit offshore tax havens. Mossack Fonseca data relate to more than 200,000 companies for which the law firm acted as agent. Often used lawfully to anonymously hold property and bank accounts, these companies were registered in a range of tax havens. However, Panama is not the most popular location for its clients. Most of them preferred the British Virgin Islands, where more than 100,000 companies were registered.
It is perfectly legal to use offshore structures, like what Panama offers. There are many legitimate reasons why people do so. For example, businesspeople in certain countries put their assets offshore to avoid criminals, and to get around hard-currency restrictions. Others use offshore for reasons of inheritance and estate planning.
Unfortunately, corrupt government officials, criminals and money launderers also take advantage of anonymous company structures. With the extent of potential tax losses the Panama Papers unveiled, governments are trying to fight back. The British government, for example, has launched a transparency drive. It plans to set up a central register, that will reveal the beneficial owners of offshore companies. Starting in June this year, United Kingdom companies will have to reveal their “significant” owners for the first time.
Thanks to the Panama Papers, a transparency drive has started to snowball in Europe. Under proposals announced by European Union (EU) regulators, multinational companies will soon be forced to disclose profits earned and taxes paid in Europe and the world’s shadiest fiscal havens. The European Commission will require all large companies to publish a country-by-country breakdown of profits, taxes, employees and turnover in all 28 member-states of the EU, as well as some of the most problematic tax havens. Asian companies with subsidiaries in Europe would also be subject to the transparency drive, as the rules would apply to all global corporations with a large presence in Europe.
This is a precedent the Philippines would do well to follow. Like those in Europe, multinational corporations operating in the country could resort to an offshore strategy to shield their income from the Bureau of Internal Revenue. The same goes for the elite and powerful. There’s a general consent that some wealthy people had been using offshore banks to shield their income from taxes.
Image credits: Jimbo Albano