The Panama Papers scandal represents an unprecedented leak of 11.5 million files from the database of offshore law firm Mossack Fonseca. The records were obtained from an anonymous source by the German newspaper Suddeutsche Zeitung, which shared them with the International Consortium of Investigative Journalists. The ICIJ then shared them with a large network of international journalists and other media partners.
The documents show the many (seemingly relatively easy) ways in which certain beneficial offshore tax regimes can be exploited with multi-layered Russian doll-like structures, making it next to impossible to establish where the true ownership of assets lies. Reports indicate 12 national leaders are among 143 politicians, their families and close associates from around the world known to have been using offshore tax havens.
Among national leaders with offshore wealth are Pakistan’s prime minister Nawaz Sharif, ex interim prime minister and former vice-president of Iraq Ayad Allawi, president of Ukraine Petro Poroshenki, son of Egypt’s former president Alaa Mubarak and the former prime minister of Iceland Sigmundur Davio Gunnlaugsson.
And, of course, the UK prime minister’s father Ian Cameron established a fund, Blairmore, through Mossack Fonseca. The fund was apparently incorporated in Panama but based in the Bahamas. No tax was paid by the fund but then neither is it by any offshore fund. To legitimately have no UK corporation tax liability an offshore corporation or fund must not be genuinely managed and controlled from the UK. And as long as the UK resident-domiciled owners pay tax on the dividends and realised capital gains from the structure there is no avoidance or evasion.
The leak is one of the biggest ever, although, clearly, for the overwhelming majority of financial planners its consequences will have no direct impact.
Saying that, the scale of the leak and the public interest (and shock) at what it reveals will no doubt serve to further enhance the global efforts of governments to act against evasion and aggressive avoidance, and to push for greater obligatory transparency and disclosure.
But it will not be easy. And let’s not forget while offshore companies, trusts and funds (and multi-layered structures) will undoubtedly have been established by many to hide money and avoid tax, some will have been done so for legitimate commercial reasons.
In the UK, we have seen the relentless introduction of specific and general anti-avoidance provisions and the clear, resulting positioning of aggressive avoidance as tantamount to evasion.
We have also seen the diverted profits tax introduced and the collective efforts of the countries in the EU/OECD on base erosion and profit shifting.
The structures revealed in the Panama Papers that have no commercial justification for their existence appear to have delivered the end result desired – mainly through the inability of authorities to identify and attach the income and gains arising to the people who establish them.
“Substance over form” is one thing but substantiating who is entitled to the income and gains is often very difficult with multi-layered corporate and trust structures. And the numbers in terms of potentially lost tax are likely to be huge.
Aside from further galvanising nations to accelerate plans for co-operation to stop base erosion and secure greater transparency, the leak has caused uproar among ordinary working people and businesses that do pay their tax.
There will be further pressure on elected governments to act and be seen to act to stamp out this type of tax avoidance and evasion, seemingly only known about and accessible to the rich and famous.
And there may well be resulting nervousness among the clients of financial planners about considering any form of planning involving anything “offshore”, for example, funds and insurance-based investment bonds.
Of course, both these offshore investment structures offer legitimate tax deferment permitted (indeed specifically granted) by the legislation. These products can, in the right circumstances, deliver legitimate, permissible and tax-effective outcomes.
For advisers there is an important job of “non-sensationalist” reassurance required, even with their professional connections. In fact, especially for this group, being able to reference the relevant legislation that supports the validity of the proposed strategy may well be helpful.
The strong message must be just because a course of action (even incorporating an offshore investment) is tax-effective it does not make it likely to be challenged. Especially when it is specifically provided for by the legislation.
Tony Wickenden is joint managing director of Technical Connection. You can find him Tweeting @tecconn