Some thoughts on the Panama Papers

In the coming days you will hear a lot about the difference between tax avoidance and tax evasion.

‘Avoidance’ is – whatever your views of its moral quality – lawful. ‘Evasion’ usually involves deception and is unlawful. You go, theoretically at least, to prison for offshore tax evasion. (‘Theoretically’ because HMRC tend not to bring prosecutions for this type of behaviour. As of November 2015 there had been only 11 prosecutions for offshore tax evasion in the last five years.)

In the coming days professional firms and others whose business it is to service or speak for those amongst the wealthy who prefer not to pay their taxes will be out in force in the newspapers and the media channels. Having assets in, or which have passed through, Panama is consistent with avoidance, they will tell you.

They – and, too, the Government which will want to defend its record in this field – will suggest that the outrage you feel about what you read you are wrong to feel. And that people can perfectly lawfully have assets in Panama. And that you cannot conclude from the fact that name X or name Y has appeared in the Panama Papers that X or Y has done anything wrong.

And you won’t be able to contradict them.

You won’t know whether Mr X or Mrs Y have declared their tax liabilities on those assets in the UK. You have no entitlement to know anything about their UK tax affairs.

HMRC won’t tell you. HMRC is bound by a duty of confidentiality – and that duty is so very strict that if I was Mr X I could stand, smiling, on national news, next to HMRC’s Chief Executive and declare that I had paid every penny I owed and even if HMRC’s Chief Executive knew this an outrageous lie she would still not be able to contradict me.

Journalists won’t be able to tell you either. It is hard to have enough information to exclude every legitimate explanation for a fact pattern such that you can positively assert that Mrs Y is a tax evader. You will have had to tell Mrs Y in advance of what you planned to broadcast and Mrs Y’s lawyers will have issued very serious threats about what will happen if you broadcast – sometimes coupled with an almost comedically implausible explanation for the conduct. But the threats are serious and so you will not broadcast.

You may wonder who this wall of secrecy exists to protect. You may wonder whether the explanations of why it exists fairly balance public and private interests.

You will see something that feels very wrong. Yet no one will call it so. And because no one will call it wrong, no one will promise meaningful change. And this will make you angry.

It is true that tax avoidance is – whatever you think of its moral quality – legal. And it is true that people living in the UK might have assets in or that have passed through Panama for perfectly proper reasons. True, but not very likely.

And here’s why.

For the purposes of UK tax law, most tax havens are the same. There is no magic effective in UK tax terms that can only be performed in Panama. Moreover, Panama is not next door. It is not a British tax haven with the comforting familiarity such brings. It does not enjoy an especial reputation for trust and solidity.

People think of these things when they are choosing where to put their money. They are big disadvantages for Panama.

So there has to be a reason why you go there.

What Panama has offered – its USPs in the competitive world of tax havenry – is an especially strict form of secrecy, a type of opacity of ownership, and (if the reports of backdating are correct) a class of wealth management professionals some of whom have especially compromised ethics.

You go to Panama, in short, because, despite its profound disadvantages, you value these things.

And the question you should be asking is, what is it about this Mr X or that Mrs Y and his or her financial affairs that causes them to prioritise secrecy or opacity or (if the reports are correct) ethically compromised professionals above all else?

Perhaps it is not because the behaviour is criminal: tax evasion or money laundering or public corruption. Perhaps it is not. But – and especially in the case of Panama – very possibly it is.

PS: There’s a nice ITV clip of me talking through some of the issues in this Telegraph piece.

30 thoughts on “Some thoughts on the Panama Papers

  1. Jolyon – there is a relatively new way (i.e. post 2000) of undermining those who choose to lie in these circumstances which can be useful for journalists working for ethical newspapers. It is the Statement of Truth. Anyone wishing to issue court proceedings in England and Wales or who wishes to defend proceedings in England and Wales needs to sign a statement that the pleading is true. All witness statement have to contain the statement “I believe that the facts stated in this witness statement are true”Lawyers who are party to making an untrue statement a liable to perjury and contempt proceedings.

    So let’s see how this plays out …

  2. Look at the reasons for flags of convenience in shipowning.Panama was a American state or dependency and after the second world war when Greece was in a state of civil war American bankers would not lend to european businessmen as they had little chance of being repaid if communism took over. However, Panama and Liberia( also American)were under American control hence a better bet.

  3. It’s early days with this story yet but so far it looks like (as you are suggesting) a dodgy law firm (are they lawyers rather than company formation agents anyway?) doing the obviously dodgy things for obviously dodgy people, apparently as long ago as Watergate. Plus the prime minister of Iceland. The question is why have they and their clients got away with it for so long.

    One measure of the stale nature of this news so far is that the ICIJ website includes a paragraph on Ian Cameron’s investment fund, Blairmore Holdings Inc, so that it can make a jibe at his son David. Blairmore was set up at a time when Panama was rather more respectable than it is now (Cayman or Ireland would be the choices now) and, as was pointed out when this same story was in the press about five years ago, was always on HMRC’s list of distributing funds and, subsequently, reporting funds, so that investors in it are taxed in effectively the same way as investors in UK authorised funds.

    This makes me wonder if there is actually very much more that is new to be revealed. We shall see!

  4. Pingback: The Panama Papers Offshore Finance Leaks – Scott Davies

  5. As I understand it, Mossack Fonseca is a law firm that also undertakes company formation, and company and trust administration. It seems to have offices in many of the usual offshore jurisdictions – Bahamas, BVI, Switzerland (Geneva, Lugano and Zurich), Gibraltar, Hong Kong, Isle of Man, Jersey, Liechtenstein, Malta, Seychelles, Singapore. Also London.

    There will be bad apples, even in the best regulated of environments, but one would hope that the regulatory regime will catch them eventually.

    Panama may be far away and unfamiliar for UK taxpayers, but there are lots of people in the Americas for whom it is closer and more familiar. That said, even among offshore jurisdictions, Panama has a poor reputation.

  6. Was Panama ever respectable? In my experience, which goes back a long way, the attractions of Panama were solely the ones which Jolyon mentions: uber-secrecy. In particular, some non-doms quite liked to own their expensive UK homes through Panamanian companies …..or indeed Liechtenstein anstalten.

    One further point: for those who perceive themselves and their families to be at greater risk of kidnap or blackmail, such a secrecy regime does offer additional non-tax benefits. Whether all the users of Panama truly fell into this category is of course another question.

  7. Just wanted to chime in on Andrew’s comment above. I’ve worked on a number of very large multi-national tax returns over the decades for a tax consultancy company. And *not once* have I come across a Panama corp as one of the subsidiaries. In the US at least, Panama is mostly viewed as a rouge state, more noted as a cocaine transmission point, a place where dirty money hides and the former home of President Colonel Noriega who gave us some drama when he was on he run. We wish he would have spilled some beans about his nefarious dealings over the decades too.

    Not sure if UK uses the saying “res ipsa loquitur” (the thing speaks for itself), but if you see Mauritius, Cook Islands, Seychelles or Panama as the corporate home for one of the foreign subs, there’s a good chance you’re not getting all the info you need to honestly sign a tax return on behalf of the client.

  8. Robert – agreed. I’m a private client lawyer specialising in offshore tax and in more than a decade in practice, I have come across (I think) two Panamanian companies. That’s it. I certainly wouldn’t recommend the use of Panamanian structures, for all the reasons Jolyon and you suggest. Everyone in the industry knows it’s dirty, and the secrecy brought about by Panama’s corporate registry and fondness of its professionals for using bearer shares is plainly its main selling-point.

    Jolyon is also dead right about Panama having no magical legal status that makes avoiding tax there easier than elsewhere. The only reason for choosing it would be to make obtaining information as to what exactly you’re up to harder. Which, I rather think, is pretty damning.

  9. Pingback: Before the Panama papers… | tiintax

  10. Pingback: Some thoughts on the Panama Papers | Waiting for Godot | Indiĝenaj Inteligenteco

  11. Pingback: What change, if any, might the #PanamaPapers bring? | FairSkat Blog

  12. I’m posting the following comment for its author, whose name is at the bottom.

    “I agree that use of Panamanian corporation or bearer shares is a red flag, but not even ICIJ is saying that all the corporations in question are Panamanian. In fact, several of the headline stories openly mention BVI companies. MF is a law firm which also does incorporations around the world. They have offices around the world. The only consistent Panama element is that the HQ is in Panama.

    David S. Lesperance”

  13. Pingback: How did Panama become a tax haven?

  14. Pingback: How did Panama become a tax haven? - La tienda de JM

  15. Pingback: How did Panama become a tax haven? -RocketNews

  16. Pingback: How did Panama become a tax haven? |

  17. Pingback: Panama Papers: How did Panama become a tax haven? - News

  18. Pingback: How did Panama become a tax haven? | EuroMarket News

  19. Pingback: How did Panama become a tax haven? | Reviews News

  20. Pingback: Panama Papers: How did Panama become a tax haven? | Daily News and Analysis That Matters

  21. a lot of what gets called avoidance isn’t ‘lawful’ – it is indeterminate. journalists call it avoidance because their libel lawyers tell them to but you don’t know unless there’s been a challenge and a resolution. So saying ‘avoidance is lawful’ may be definitionally correct, but it is reckless. avoid (!) the word entirely.

  22. That’s fair. Although another reason they can’t call it evasion is that that hasn’t been established either. I do mean to write on this issue.

  23. Pingback: How Panama became a tax haven – BBC News Feeds

  24. Pingback: How did Panama become a tax haven? – BBC News Feeds

  25. Pingback: ‘Ugly place’ | UK magazine

  26. Pingback: “I’m sorry, I can’t divulge information about that customer’s secret, illegal account”

  27. Pingback: Panama Papers: How did Panama become a tax haven? | news

  28. It is extraordinary how many people are assuming David Cameron must have benefitted from illegitimate tax avoidance, when as Paul pointed out 4 days ago, and as Roger Peston and Graham Aaronson have explained subsequently, the UK has had a tax regime since 1984 to ensure that investors in offshore funds either pay income tax on their entire gain (hardly tax avoidance to pay more income tax) or pay income tax on annual distributions (from a distributing fund, later reporting fund) and then capital gains tax on the gain.

    It is instructive to compare the tax treatment of UK authorised funds, which in broad terms result in little or no tax in the fund, but investors paying income tax on annual distributions of income and capital gains tax on investment gains realised on a disposal.

    What going offshore (that is, anywhere outside the UK) gets you is a lighter regulatory regime, and so the ability to invest in a wider range of investments, more gearing, and lower compliance costs. (That still does not explain why Panama, or the bearer shares, though, but the early 1980s was a very long time ago.)

    It is rather disappointing that Richard Murphy seems to be dismissing anyone who tries to explain how this works as a troll, and then blocking their comments (several of mine over recent days have not appeared). His blog, his rules, I suppose. Perhaps I need to start my own blog…

Comments are closed.