PANAMA is perhaps best known for its vibrant culture, tropical escapes and rich history, but now the Central American hotspot is tangled in accusations of corruption, deceit and hiding billions in undeclared cash.
The Panama Papers scandal is already being labelled as the biggest data leak in history. The 11.5 million stolen documents from Panamanian law firm Mossack Fonseca exposes the nation as a global tax haven for the rich and powerful and has since convulsed the world’s media and political sphere.
Iceland prime minister Sigmundur Davíð Gunnlaugsson became the first political casualty of the leak, bowing to public pressure and resigning after his wife was revealed as an owner of an offshore investment company – echoes of the 2008 financial crisis when several Icelandic businessmen were jailed for bringing the country to its knees by using offshore firms to hide their ill-fated investments.
Now, just weeks after the leak, global powers have leapt into action to control the PR maelstrom that surrounds their brow-beaten tax system, pushing through legislation designed to punish tax evaders.
But to what extent is this legislation necessary, and how will it affect businesses and advisers in the long-term?
One eye on the world
Following the furore over his family connections to the papers, David Cameron quickly announced he was fast tracking plans to introduce a criminal offence for corporations that fail to stop their staff facilitating UK and foreign tax evasion, a move which some tax experts feel will affect some sectors more than others.
Jason Collins, partner and head of tax at international law firm Pinsent Masons believes the financial, legal and accounting sectors will be most affected by the legislation, but questions why UK authorities are rushing ahead with the offence without the backing of its international allies.
“It would be better for an offence in relation to foreign tax evasion to be introduced in concert with other major countries, otherwise UK businesses will be under a greater burden than, say, US or German businesses operating in the same foreign markets,” explains Collins, who adds that broadening the global scope of the offence could cause major headaches for UK firms that operate abroad.
“In previous drafts, it was limited to UK companies or branches facilitating tax evasion overseas. Now it includes non-UK companies where any part of the acts amounting to the facilitation happens to take place in the UK.
“A US company could in theory commit an offence in respect of the evasion of Nigerian tax if the employee or agent is based in or travelling through the UK,” continued Collins, warning that this will pose a ‘substantial risk’ for many British companies, advising that they should have ‘close control’ over their tax operations across all jurisdictions.
One tax specialist has even questioned the legitimacy of Cameron’s legislation. David Sleight, criminal law partner at Kingsley Napley considers whether the criminal offence will even come close to filling the UK’s £34bn tax gap.
“Why should the UK be spending significant resources in enforcing the laws of foreign jurisdictions with respect to the tax which is ultimately payable in that jurisdiction?” asks Sleight, who warns the government not to ‘spread its net too widely’, given the number of new initiatives under its Safe Havens campaign, including the introduction of a ‘strict liability’ offence for off-shore tax evasions.
‘Landscape is changing’
Businesses are already reacting to the post-Panama legislation. Chas Roy-Chowdhury, head of taxation at the ACCA, told Financial Director that a number of financial institutions are letting clients go because of the potential tax evasion risks associated with them.
“New legislation will have a big impact on businesses. The people in charge will have to take into account how the landscape is changing,” imparted Chowdhury.
George Bull, senior tax partner at business advisers RSM agrees with Chowdhury’s statement but advises tax authorities and global powers need to assess any new legislation resulting from the papers ‘carefully and slowly’.
He also predicts there will be consequences for those who use offshore services to act discreetly with their finances.
“There will have to be a trade-off for clients who use tax havens [such as the Cayman Islands] for legal purposes.
“To maintain secrecy, they may have to move their financial affairs to black-listed nations, which could cause problems for firms down the road.”
Chowdhury agrees that this approach won’t benefit companies in the long-haul, claiming that they will be ‘shut down’ by an international community that now has its eyes open to widespread tax evasion.
“It seems like that there is a real will in the international environment which is saying ‘enough is enough’ and they will find themselves being blacklisted by the European Union, and I imagine this will be happening around the world as well.”
Whether any other nations are harbouring secret offshore tax information to the extent of Panama remains to be seen, but following the Mossack Fonseca scandal, businesses in the UK and across the globe may well be looking over their shoulder to see if the taxman is lurking behind them.
Timeline (How it all unfolded)
3 April 2016– International Consortium of Journalists reveals the 11.5 million documents leaked from Panamanian offshore law firm Mossack Fonseca. They expose how the company helped its wealthy and powerful clients evade tax.
5 April – HMRC confirm that they’ve requested access to the papers and promise to act on them ‘swiftly and appropriately’.
5 April – Embattled Iceland prime minister Sigmundur Davíð Gunnlaugsson resigns following reports that his wife is an owner of an offshore investment company.
11 April – David Cameron announces plans to introduce a criminal offence for corporations that fail to take adequate steps to prevent the facilitation of tax evasion. PM also sets up a taskforce to investigate financial affairs of companies named in the papers.
11 April – David Cameron, George Osborne, Boris Johnson and Jeremy Corbyn all publish their tax returns after Downing Street urged ‘potential prime ministers’ and chancellors to publish their tax returns in the future.
14 April – European Parliament unanimously backed the setting up of an inquiry committee to investigate Panama Papers.
15 April – Key EU allies Germany, France, Italy, Spain and the UK agree to automatically share information on the ultimate owners of companies and new registers of trust. Osborne describes the agreement as a ‘hammer blow’ against tax evaders.
18 April – Osborne puts pressure on the OECD to list and ‘provide counter measures’ against tax jurisdictions which fail to meet international tax transparency standards.
19 April – Tax haven Bermuda confirms it’s signed the OECD’s Multilateral Competent Authority Agreement (MCAA) enabling the sharing of country-by-country reports with 31 other nations.