Panama Leaks Show Tax Secrecy Ending

The International Tax Monitor delivers daily news and analysis from the world's financial and business centers, with a focus on tax and accounting developments affecting transnational enterprises.

By Alex M. Parker and Alison Bennett

April 4 — An unprecedented leak of millions of documents revealing a web of offshore entities underscores the degree to which corporate secrecy may soon be over.

“The notion that there's anywhere safe to hide your money, that's a thing of the past,” said Mark Matthews of Caplin & Drysdale in Washington. “The notion that there is somewhere safe and secret in the world to hide your money is false. The answer to run and hide and move your money into the next country is a doomed exercise.”

The documents, allegedly leaked from the Panamanian law firm Mossack Fonseca & Co. and distributed among members of the International Consortium of Investigative Journalists, describe a web of offshore shell companies that, critics said, allowed politicians and public officials including Russian President Vladimir Putin to hide billions and shield them from taxes.

Pressure for Transparency

Keeping money offshore isn't illegitimate or a crime—although advocates of an overhaul of global tax rules claim it enables a secretive and opaque system that makes the enforcement of tax laws difficult, if not impossible.

“This is, in itself, a direct assault on the requirement for full disclosure that is necessary for the effective functioning of politics, government, business and markets,” Richard Murphy, founder of the Tax Justice Network, wrote in an April 4 blog post. “Without that disclosure all of these activities that are and have to be built on trust fail, and over time do so to increasing degrees. In that sense offshore, even if supposedly legitimate, is an assault on the way of life we apparently wish to lead. It is nothing less than economic warfare as a result.”

Many said they believe the disclosures will put yet more public pressure on international transparency initiatives, including the OECD's common reporting standard.

Panama, after initially agreeing to participate in the automatic information exchange program, backed out earlier this year, provoking condemnations from OECD officials .

“The extent of apparent misconduct shown by the ICIJ revelations are likely to make civil society, some political leaders, some governments, and international organizations demand better adherence to existing standards and increased enforcement, especially in the way of a level playing field,” said Bruce Zagaris of Berliner Corcoran & Rowe LLP in Washington. “In addition, for prosecutors and regulators, the information contained in the ICIJ report is likely to lead to new investigations and prosecutions for tax-related and other crimes.”

Impact of BEPS

Officials with the Organization for Economic Cooperation and Development said the documents appear to have little relation to the issues discussed during the project to combat tax base erosion and profit shifting completed in 2015, which included new standards for reporting tax information to jurisdictions.

However, the new focus on international cooperation to limit tax avoidance, provoked by BEPS, would likely be heightened even further by these revelations, observers said.

Grace Perez-Navarro, the OECD's deputy director for tax policy, noted that the Global Forum on Transparency and Exchange of Information for Tax Purposes, at its October 2015 plenary in Barbados, formally adopted rules to ensure its 128 members maintain administrative transparency in beneficial ownership for all legal entities and other legal arrangements. In particular, the forum changed its standard on beneficial ownership information transparency.

Under the previous rules, jurisdictions had to have the access to beneficial ownership information, however they were are able to do that. “Now the standard is the standard of Financial Action Task Force, which is you have to require that such information be maintained so that it is available. “This will certainly be a focus of attention” in the next round of Global Forum peer reviews, Perez-Navarro said.

Some practitioners said BEPS has heightened the focus on jurisdictions that don't participate in transparency efforts.

“Nothing in the BEPS Action Plan will directly stop offshore tax evasion, if people are seeking to cheat,” said Peter Barnes, a professor at Duke University School of Law and of counsel at Caplin & Drysdale Chartered. “But BEPS will make non-participating jurisdictions much more toxic than they are today.”

Barnes said BEPS will “sharply narrow” the number of jurisdictions where companies or individuals can secretly park assets.

“If there are 20 offshore havens that participate in BEPS and five that do not, then it will be appropriate to assume that people with accounts in the non-participating jurisdictions are trying to hide something,” he said.

Treasury Deputy Assistant Secretary for International Tax Affairs Robert Stack said the U.S. “leads the way” in requiring automatic exchange of financial information, after the enactment of the Foreign Account Tax Compliance Act in 2010.

“The release of the Panama papers underlies the need to continue the worldwide movement for tax transparency to avoid tax evasion,” Stack said.

With assistance from Kevin Bell and Rick Mitchell in Washington.

To contact the reporters on this story: Alex M. Parker in Washington at aparker@bna.com; Alison Bennett in Washington at abennett@bna.com

To contact the editor responsible for this story: Molly Moses at mmoses@bna.com