It was the topic this spring that everyone talked about — except for some lawyers and bankers who generated the talk.
The Panama Papers, an April 2016 leak of 11.5 million documents from a Panama-based law firm, revealed the murky world of tax havens and offshore companies and identified by name some very wealthy people connected with those companies. A second release of information from the Panama Papers hit the web in May, naming more people connected with offshore accounts.
But who cares? Isn’t what people own their personal business? It’s not so simple.
“There’s a battle going on,” said Quartz, “over whether you should have to link your name to the things you own, unravelling the lucrative industry that has sprung up around creating ‘shell companies’ to hide the true owners of assets.”
Shell companies — legal?
People are downright angry about this topic.
- Some tell me that they feel the game is rigged in favor of the super rich.
- Others note that moving money offshore — even if done legally — removes tax dollars from the country, revenue that could provide more public services.
In response to the release of the Panama Papers, the President took executive action to close some tax avoidance loopholes used by foreigners with U.S. investments. He also called on Congress to pass legislation, The Guardian said, to increase “transparency regulations as a tool to flush further offshore tax abuses into the open.”
The use of offshore companies by individuals, however, can be legal.
An article in Forbes noted that shell companies can serve legitimate investment, estate planning and tax planning roles.*
- Forming offshore companies can be practical for individuals buying homes in foreign countries.
- Wealthy and famous people may need such anonymity for their own personal safety.
- Offshore companies can help secure a predictable legal framework for a legitimate investment into a country with a slow or fragile legal system.
This is of huge interest to authorities. “In recent years, a significant increase in offshore activity has been noted among U.S. taxpayers,” the IRS says. “More and more taxpayers have been observed attempting to ‘expatriate’ their income and assets.”
How does one expatriate wealth?
Let’s take a hypothetical example. Suppose the heir to the John Doe Family fortune sets up some offshore companies in the British Virgin Islands. Before the Panama Papers, no one knew that John Doe, Jr., the heir, had a tax haven. After the leak, tax authorities put two and two together. They could see from released documents that Doe had been moving millions of dollars worth of his inheritance out of the United States through shell companies. Now they could launch an investigation and determine whether Doe’s financial activity had been improperly shielded from the U.S. tax system.
If someone were to approach you about making foreign investments, be careful. The IRS has a number of websites that alert investors to tax scams and tax shelter abuses, including Tax Fraud Alerts and Abusive Tax Shelters.
Disclose ownership or not?
In one way or another, all of us interact with companies every day. Companies are artificial entities created to help us to do business.
When companies are anonymous, the owners can do business without others knowing a thing about it.
- Anonymous business transactions begin in a secrecy jurisdiction, where information about individuals and what they own is largely inaccessible to others.
- The companies can be registered in the name of a relative or an associate of the real owner. These individuals can act on behalf of the real owner to cover his tracks.
The Panama Papers named some account holders who are current or former leaders from Argentina, Georgia, Iceland, Iraq, Jordan, Qatar, Russia, Saudi Arabia, Sudan, United Arab Emirates and Ukraine. Some of the players and their alleged transactions seem to come straight out of a movie with international intrigue — money enters a maze of dummy corporations and offshore bank accounts and leaves all but untraceable. Maybe even some governments skirted sanctions imposed upon them.
Should you care?
The Panama Papers leak involves all of us. It raises these questions:
- Should one be allowed to cover their financial tracks?
- Or, should we have more disclosure, even full disclosure, of what we own?
What do you think?
* Securities America and its representatives do not provide tax or legal advice. Readers should consult their tax advisor, or legal counsel, for advice concerning their particular situation.