Panama Papers: Why it matters.

Alex Mitchell
Latest posts by Alex Mitchell (see all)

Many of you may have heard over recent days about some documents that have been leaked by the world’s fourth biggest offshore law firm, Mossack Fonesca, based in Panama.

Why all the fuss you may ask? Well over 11 million documents, spanning 40 years, are the focus. The papers include details of individuals and companies using Mossack Fonesca to circumvent taxes and, in some cases, facilitate money laundering.

This story should not be downplayed. These documents leaked to German newspaper Süddeutsche Zeitung and shared with the International Consortium of Investigative Journalists (ICIJ) give us an insight into the workings of the secretive world of offshoring.

Among those named by the leaked documents are 143 politicians from around the world – including 12 current or former heads of state, naming Nawaz Sharif, Pakistan’s Prime Minister; Ayad Allawi, ex-interim Prime Minister and former Vice-President of Iraq; Petro Poroshenko, President of Ukraine; Alaa Mubarak, son of Egypt’s former President; and the Prime Minister of Iceland, Sigmundur Davíð Gunnlaugsson.

What is ‘offshoring?’

This is where an individual or company transfers assets and/or cash to the ownership of a company based in a country which is known to be a tax haven (either with very low or no income taxes). This company is registered there and doesn’t disclose who the main beneficial owner is. In fact, they declare very little.

If a company is registered in Britain, annual financial reports must be produced and these can be accessed by anyone through Companies House. Likewise, if you’re self-employed, you must submit your own tax forms. These offshore companies don’t do that. They also don’t co-operate with other tax authorities.

The offshore company director then loans out money with 0% interest to the beneficiary based in their home country and thus avoids paying taxes on this income as to the accountants and tax inspectors this is a loan and not an income.

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An example: Mr A wants to sell one of his homes in Britain but wants to get the most money possible. He transfers the ownership of the property to Company B which is based in Panama. The home becomes an asset for Company B and they continue to sell the home. The house is sold and the money is paid to Company B and not Mr A. This money avoids UK taxes associated with selling a property as the money is sent to (in this case) Panama as Company B turnover.

Once the sale has gone through Mr A calls up Company B and speaks to the director (a man paid to be the rubber stamp). Mr A asks for a loan and the director approves the loan, using the money from the sale of the property, at a generous rate of 0%. Thus Mr A benefits by avoiding the taxes he would have had to pay if selling the house himself.

This is tax avoidance, not to be mistaken with tax evasion. What’s the difference? Tax avoidance is the legal use of tax law to reduce an individual or company’s tax burden. Tax evasion, on the other hand, is the misrepresentation of financial affairs to reduce the tax burden. Essentially, telling the taxman you earnt £100 for work when in fact you were paid £1,000 – that is tax evasion. Telling the taxman that £1,000 for work was paid to Company B and not to yourself and that £1,000 you have is a loan from Company B and not an income is all perfectly legal – for now.

“Two things are certain in life. Death and taxes” Benjamin Franklin

Unless of course you’re super rich, then there is just one certainty.

There is nothing wrong or illegal with countries setting their own rates of tax – it is a fundamental part of government economic policy. Business rates may be low to attract inward investment from multinationals. However they are for the citizens of that country and, in an ideal world, companies who operate from that country.

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If you live here in Britain or you live in America, Russia or even Iceland, then you pay the taxes of that nation. It is the cost of living in that country. No one enjoys it but it is the collective money from those taxes that pay for schools, hospitals, police, waste collection, roads, community projects, the arts, business grants and money towards international aid for those who have little or none of the above.

I don’t know about you, but I am proud of our NHS. I am proud of our welfare system. I’m proud that we pay international aid. We all pay in for that time when we may need it, but in the meantime it goes towards helping others.

I will not go into a full debate about those that abuse the welfare system. That’s for another time. Instead I want to focus on the systemic abuse by the rich and powerful whilst they hand down more cuts on those who need it.

Take the recently proposed cuts to the Personal Independence Payment (PIP). The Government proposed a £4.4bn cut to these disability benefits by 2020 as part of the plan to cut the welfare budget by £20bn.

£1.1bn was cut from the NHS repairs budget. University maintenance grants were scrapped to save £1.6bn a year.

But how much does tax avoidance cost the UK? In the financial year 2012/13, HMRC estimated that £7.2bn was lost through tax avoidance. The figures I quoted previously come to £6.7bn. This would allow us to pay disability benefits for five years, repair hospitals and offer maintenance grants for the poorest university students with £0.5bn left over. Tax evasion and nonpayment cost the UK economy an estimated £35bn.

It’s not just those of us in Britain who are getting a raw deal, however. The people of Iceland suffered immensely during the global financial crisis. They had to rebuild a broken economy at the hands of being a tax haven. They are still paying the price today, yet Prime Minister Gunnlaugsson (who entered parliament a year after the collapse), along with other MPs, has profited through offshore companies.

Gunnlaugsson and his wife owned a company which had vested interests in the now collapsed banks. Though Gunnlaugsson makes clear it is his wife who owns the shares and not he, he stood to benefit from the government policies surrounding the bank creditors. Policies created by people elected and paid to have the best interests of the public at heart.

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It’s no wonder, then, that around 22,000 protesters filed into Reykjavik (nearly 10% of the country) demanding the resignation of the prime minister and his government. Gunnlaugsson’s arrogance was both shocking and offensive. He thought he could save himself through first dealing with his coalition government and then seeking a dissolution and election from the president.

In a rare occurrence, President Olafur Ragnar Grimsson declined the request, stating he needed to speak with all the parties of government first. This was Gunnlaugsson’s last play, and eventually he resigned.

The fact that Cameron’s father was a client of this firm does not surprise me, and though Cameron claims he does not currently benefit from the firm, his father did benefit from it. How he and his government can face the country, claiming we are all in the economic recovery together, is beyond me. Remember the moment when he publicly demonised comedian Jimmy Carr for using such an avoidance scheme? The irony is too much.

Imagine what the rate of tax could be if everyone paid in – if that £7.2bn avoidance gap was plugged. Imagine if that £35bn evasion gap was plugged, if companies like Google paid Corporation tax on their profits instead of finding new ways to avoid it (just long enough so they can pay a small £130m settlement, equating to an estimated rate of 3%).

Yet avoidance is imperfectly legal. In this imperfect world, if you’re rich enough and/or powerful enough, you can afford to play the taxation game. 

I’m not blaming Panama or countries like it. I blame those who seek to exploit the loopholes at the expense of their duty to their fellow citizens. Who have created a market for such an immoral legal/accounting service. We are not in this together and we should be angry.

About Alex Mitchell

Political observer and current affairs addict. I observe - I analyse - I debate