When the extent of the Panama Papers leak was revealed recently, the entire world experienced an array of emotions ranging from anger, to disgust, and finally, to betrayal. This collection of 11.5 million documents that was leaked to the world created an outrage. Not only were thousands of people part of an international scheme of tax avoidance, but also many people implicated in the leak were important individuals or leaders of countries around the world.
With details about foreign accounts opened with a Panamanian law firm, the release of the data gave the public a view of how the rich have conducted business in order to maintain their extreme wealth. Essentially, people with a large amount of wealth went to a lawyer in Panama named Mossack Fonseca. With Fonseca’s help, powerful people opened offshore accounts in order to pay lower taxes, avoid disclosing extensive personal information, or to take advantage of financial opportunities abroad. The problems arose when these tax havens were used to avoid paying a fair share of taxes in the person’s home country.
As information was made available to the world, specific world leaders were named as having accounts with Fonseca’s firm. In Iceland, citizens were furious when they learned their prime minister, Sigmundur Daví∂ Gunnlaugsson, had possibly benefitted from an offshore account through Fonseca. Gunnlaugsson had quietly transferred to his wife ownership of a banking company, Wintris, the day before disclosure laws took effect in his country. Since Gunnlaugsson never disclosed his personal interest during his country’s bank crisis, the public demanded his resignation. Although he steadfastly refused at first, he then relented and stepped aside on April 5, 2016.
Other people that were named in the scandal included sitting government leaders in the countries of Argentina, Saudi Arabia, the United Arab Emirates, and Ukraine. Additionally, many other countries across Europe and the Middle East had former government leaders implemented in the leak. In Russia, although President Vladmir Putin was not named in the papers, many of his close associates were listed as having accounts opened through Fonseca’s organization. Putin’s billionaire friends, including construction kings the Rotenberg brothers, and Putin’s best friend, Sergei Roldugin, a world famous cellist, were indicated as part of the scheme.
photo credited by ndtv.com
The problem with offshore accounts or tax havens is that the wealthy individual’s resident country ends up missing out on a large opportunity for tax revenue. Tax revenue in most western nations goes to improve important social programs for the good of the people or for much-needed infrastructure repairs or upkeep. When a country’s wealth is diverted elsewhere, the neediest individuals, such as seniors, the poor, or the disabled end up being the ones who lose out on expanded or new programs. Additionally, roads, bridges, and other improvements can’t get structural projects or refurbishments completed as easily.
Because of the prevalence of offshore bank accounts and shell corporations that hide a wealthy individual’s revenue abroad, it’s estimated that over $100 billion has been lost in tax revenue since 1998 in the United States. Even though corporations are supposed to be taxed at a rate of 35 percent, most large companies pay closer to 16 percent of their profits in taxes. It is said that nearly 40 percent of all foreign investments are through offshore accounts based in various tax havens around the world.
Banks Taking the Lead
In order to combat these sad facts about tax avoidance that were further put on the international stage with the Panama Papers leak, financial institutions and treasury departments around the world are developing new strategies to make wealthy individuals and corporations more accountable for their income. Institutions, such as ABLV Bank Luxembourg, are working now to begin closing accounts that are strictly offshore.
Other banks around the world are working to adopt more stringent requirements for offshore investing, such as minimum deposit amounts or a higher schedule of fees. Accounts that have been created in exotic traditional tax havens such as Bermuda, Belize, the Cayman Islands, or the British Virgin Islands may face additional scrutiny.
In order to solve the problem of tax avoidance, many major countries are having discussions about possible tax reform. One possible solution involves reducing the corporate tax rate in order to make companies be more likely to follow the standards set by their home country. Another possible solution to the problem involves creating legislation to require more financial transparency in offshore shell corporations. Making it so that investors must be registered and recorded may help curb individuals and organizations from taking advantage of the situation.
Now that the information from the Panama Papers has been released, in time, the international finance community may see some reform. As more individuals are named and governments fully realize the extent of the possible tax fraud, additional opportunities to help fix this abusive system can be drawn up. With Europe leading the way, new laws are being passed in the European Union to allow for easier exchanges of information regarding the wealthiest individuals on the continent and their responsibility when it comes to their tax bills.