Based on the evidence presented so far, there does appear to be widespread instances of aggressive avoidance of tax through Panama, but does that mean that all so-called tax havens and all offshore investments are wilful acts of flagrant tax fraud?
Surely there are perfectly legitimate and tax-compliant reasons why some individuals and businesses choose to invest in this way?
To begin to answer these questions, it is important to get behind some of the commonly used terminology used in this context:
‘Offshore’
The term conjures up visions of some faraway exotic island with palm trees and sandy beaches, where lower standards of regulation permit shady dealings for the rich and famous.
While the Panama Papers seem to suggest there is some truth in this view, the term ‘offshore’ can apply to any investment conducted outside the country that an individual or company is resident in. In this respect, a transaction involving a UK resident buying a Luxembourg-based mutual fund is no less ‘offshore’ than if they bought a fund from Panama. However, unlike Panama, Luxembourg is in the EU, and there are various EU directives to ensure that common standards of disclosure apply, within the EU at least.
So regulatory standards are a key issue in this debate, but if we are going to get serious about offshore investment in its strictest sense, then the pension funds that of most of us are invested in would need to change radically, let alone the ‘offshore’ investments of the rich and famous. The term ‘offshore’ is therefore unhelpful, as it is rooted in a basic misconception – perhaps ‘foreign investment’ is a better description. Short of bringing back exchange controls, it is difficult to see how or why foreign investment should be restricted.
‘Tax haven’
Again, the label is often applied in broad-brush terms, which is not helpful in understanding what is really going on.
The term ‘tax haven’ should really be reserved for those financial centres that promote secrecy both in terms of the ownership of assets and the identity of the beneficial owners. ‘Tax haven’ therefore is not an adequate description for many of the reputable financial centres that comply with international standards of disclosure such as the Foreign Account Tax Compliance Act and Common Reporting Standards, conclude multiple tax information exchange agreements with other countries, and provide details on the beneficial ownership of companies. Unfortunately, when incidents such as the Panama Papers arise, the good, the bad and the ugly centres tend to be branded the same.
