Panama Papers: transactions not necessarily illegal

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The leaking of information relating to secret offshore accounts and companies from the files of a Panamanian law firm—now known as the Panama Papers—has already occupied many column inches in the media, mostly focusing on the famous names implicated.

Financial secrecy more elusive

“Having offshore accounts, funds or companies is not in and of itself illegal, provided the correct taxes are being paid and properly disclosed, all necessary permissions have been obtained from the Reserve Bank or similar regulations,” says Retief.

“The real implication of this leak, which comes on the heels of the HSBC Swiss leak last year, is that secrecy pertaining to your financial affairs is increasingly elusive. More than ever, individuals and companies need to assume that their financial affairs are going to come under scrutiny. Leaks will continue to occur and, more important still, revenue authorities around the world are sharing information about taxpayers. In today’s digital, connected world, information access is the great leveller.”

Common Reporting Standard on its way

The Standard for Automatic Exchange of Financial Account Information in Tax Matters, also known as the Common Reporting Standard, was endorsed by the G20 in 2014. South Africa is one of a group of early adopters of this standard, which means that from 2017, SARS will be sharing information about accounts held in its jurisdiction by foreign nationals, and receiving similar information about accounts held by South Africans overseas.

Ninety-six countries have committed to implement this information-sharing framework. South Africa has already concluded information sharing agreements with many other jurisdictions.

Information sharing between governments in this manner, says Retief, will make it increasingly difficult to avoid scrutiny by tax authorities. And even if information about questionable transactions is successfully hidden, the greater prevalence of leaks makes such information increasingly vulnerable.

Shrouded in anonymity

Retief notes that while structuring one’s financial affairs to avoid paying excessive tax is perfectly legal (within the letter of the law), trying to evade paying tax is both illegal and unethical, and in some cases even fraud.

The trouble is that offshore accounts and companies shrouded in anonymity and complexity lend themselves to tax evasion, either by individuals seeking to hide money from the tax authorities, to harder ill-gotten gains, terrorist activities, or by companies seeking to reduce the corporate tax they are due to pay.

Corporate tax evasion

Corporate tax evasion via base erosion and profit shifting has become a particular concern over the past several years, and has seen several high-profile corporates revealed to have been paying very low taxes through the use of tax havens and complex multinational structures.

Retief explains that this is done by routing transactions through shell companies located in various jurisdictions with favourable tax regimes, or jurisdictions that have strong secrecy, and in some cases little to no disclosure required in those jurisdictions.

In each jurisdiction, high charges are made for non-existent services, or greatly inflated values are levied in order to reduce the ultimate profit reflected in the country where the transaction actually took place, and where it should properly be taxed.

Great ingenuity is used to make these routes as meandering as possible in order to make obtaining proof hard, which is why confidential accounts and anonymous companies are so popular.

The real significance of the Panama Papers

“The tax authorities can deem this kind of financial manoeuvring to be tax evasion if nothing of value is added within each jurisdiction or where there is a lack of economic substance—but they first have to know that the activity is going on.

Getting the information is critical,” says Retief. “That’s why the real significance of the Panama Papers is that information is increasingly hard to conceal. One should structure one’s financial and tax affairs accordingly. There are many legitimate reasons why companies and individuals would like to have offshore accounts and companies, but their confidentiality is no longer guaranteed.”

The minister of finance introduced a voluntary disclosure programme that will be initiated later this year to allow individuals and companies to come clean with regards tax and exchange control contraventions.