by Michael Roberts
The leak of the so-called Panama Papers has certainly set the
cat of popular disgust among the pigeons of the super-wealthy global
elite. But, of course, pigeons can fly away.
The Panama papers contain 11.5 million confidential documents that provide detailed information about more than 214,000 offshore companies listed by the Panamanian corporate service provider Mossack Fonseca, including the identities of shareholders and directors of the companies.
An anonymous source using the pseudonym “John Doe” made the documents available in batches to German newspaper Süddeutsche Zeitung beginning in early 2015. The information documents transactions as far back as the 1970s and eventually totalled 2.6 terabytes of data. Given the scale of the leak, the newspaper enlisted the help of the International Consortium of Investigative Journalists,
which distributed the documents for investigation and analysis to some
400 journalists at 107 media organizations in 76 countries.
Law firms generally play a central role in offshore financial operations. Mossack Fonseca,
the Panamanian law firm whose work product was leaked in the Panama
papers affair, is one of the biggest in the business. Its services to
its clients include incorporating and operating shell companies in
friendly jurisdictions on their behalf.] They
can include creating complex ‘shell company’ structures that, while
legal, also allow the firm’s clients to operate behind an often
impenetrable wall of secrecy. The leaked papers detail some of their
intricate, multi-level and multi-national corporate structures. Mossack
Fonseca has acted on behalf of more than 300,000 companies, most of
them registered in financial centers which are British Overseas Territories. The firm works with the world’s biggest financial institutions, including Deutsche Bank, HSBC, Société Générale, Credit Suisse, UBS, Commerzbank and Nordea.
The documents show how wealthy individuals, including public
officials, hide their money from public scrutiny. The papers identified
five then-heads of state or government leaders from Argentina, Iceland, Saudi Arabia, Ukraine, and the United Arab Emirates;
as well as government officials, close relatives, and close associates
of various heads of government of more than forty other countries. The British Virgin Islands is home to half of the companies.
Reporters found that some of the shell companies may have been used
for illegal purposes, including fraud, drug trafficking, and tax
evasion. Igor Angelini, head of Europol‘s Financial Intelligence Group, also recently said that the shell companies used for this purpose also “play an important role in large-scale money laundering activities” and also corruption: they are often a means to “transfer bribe money”. The Tax Justice Network called Panama one of the oldest and best-known tax havens in the Americas, and “the recipient of drugs money from Latin America, plus ample other sources of dirty money from the US and elsewhere”
The most shocking thing about the Panama papers is not the likely
criminality and drug laundering, but that it is legal. It is legal in
most countries to set up an ‘offshore’ account for a company or trust as
long as the directors are not ‘resident’ in the country where taxes
should be paid. The company may be subject to local taxes but these are
minimal or non-existent. So if you run a fund and it is registered in
Panama or Luxembourg and all the revenues go into that company even if
they were earned in the country of origin, no tax is paid at home. Of
course, if you take the money out and put it in your home bank account,
you are supposedly then liable to tax. But it can stay ‘offshore’ until
you retire abroad etc, or you can use it to buy property or diamonds
According to The Guardian, “More
than £170bn of UK property is now held overseas. … Nearly one in 10 of
the 31,000 tax haven companies that own British property are linked to
Mossack Fonseca.” British property purchases worth more than £180
million were investigated in 2015 as the likely proceeds of corruption —
almost all bought through offshore companies – according to Land Registry data obtained by Private Eye .
The British Overseas Territories like the British Virgin Islands or
Jersey operate for these purposes and it’s the main source of revenue
for these islands. In the US, Americans can set up an ‘offshore
company’ in Delaware or other states like Nevada – they don’t even need
to go to Panama. Two-thirds of the purchases were made by companies
registered in four British Overseas Territories and Crown dependencies which operate as tax havens – Jersey,Guernsey, the Isle of Man and the British Virgin Islands (BVI).
The British Overseas territories play an important part in the role
that British imperialism has developed as the global financial centre
and conduit for international capital flows (see my post).
These old colonies in the Caribbean were “encouraged” to develop a
financial services industry, by allowing the former colonies to benefit
from tax treaties with the UK (and thereby access to the global
financial system), while making their own arrangements regarding the
local taxation of offshore shell companies.
As I have pointed out before in this blog, large global corporations
with many operations can switch their tax liability around the world to
find the lowest tax burden through special companies set up in these tax
havens. Barclays has 30-plus of such ‘shell companies’ to avoid tax.
In his devastating book, Treasure Islands, tax havens and the men who stole the world,
Nicholas Shaxson exposes the workings of all these global tax avoidance
schemes for the big corporations and how governments connive in it or
There are three ways that somebody (person or corporation) can get
their tax down or pay none at all. They can lie about their earnings
(tax evasion); they can employ batteries of accountants to come up with
schemes that are designed for no other purpose but to avoid paying tax
(tax avoidance); or they can simply refuse to pay (tax compliance).
One of the most notorious cases of refusing to pay tax that is due
under the law has been that of the global mobile telephone corporation,
Vodafone. It owed the UK government under the current tax laws £6bn in
taxes because it had salted away profits in a tax haven subsidiary
(registered in Luxembourg) purely to avoid paying UK taxes. The law was
clear. The UK government pursued the company for the money but at the
last minute, the leading UK tax official at the time did a secret deal
with Vodafone for the company to pay just £1.2bn over five years. The
reason given for the deal when it was exposed was that it was a ‘good
cash settlement’. But that’s only because Vodafone was fighting every
inch of the way through the courts to avoid a settlement (although it
was about to lose).
How many of us would get such a deal if we refused to pay tax due?
Yet there are 190 similar disputes going on with UK companies who have
put profits in tax havens to avoid paying. And these companies are now
using the Vodafone precedent as a reason for refusing full payment.
According to the Tax Justice Network, around £25bn is lost through
tax avoidance schemes in the UK, while up to another £70bn is lost
through tax evasion by large companies and rich individuals. Also,
because of the lack of tax staff, another £26bn goes uncollected. This
£120bn would be more than enough to avoid the huge cuts in government
spending and extra taxes on average households implemented by the UK
government with which it claims that we are ‘all in it together’.
The rotten irony is that the very people in accounting firms
organising these tax avoidance scams get jobs in the government tax
collection departments to chase tax avoiders! Edward Troup, the boss of
the UK’s Revenue & Customs (HMRC), the government department
overseeing a £10m inquiry into the Panama Papers,
was a partner at a top City law firm Simmons & Simmons that acted
for Blairmore Holdings and other offshore companies named in the leak,
when the firm had contacts with Mossack Fonseca.
Troup, who described taxation as “legalised extortion”
in a 1999 newspaper article, built a career advising corporations on
how to reduce their tax bills before leaving Simmons & Simmons to
join the civil service in 2004. While working in the City, Troup led
the opposition to reforms put forward by the then UK prime minister
Gordon Brown to curb corporate tax avoidance in 1999, putting out a
press release headed: “City lawyers call on government to withdraw proposals to tackle tax avoidance.” He criticised the proposed laws for giving “wide-reaching” powers to the Inland Revenue.
Of course, tax breaks for corporations and the rich along with tax
increases for the average household and the poor are not confined to the
UK. International Monetary Fund (IMF) researchers estimated in July
2015 that profit shifting by multinational companies costs developing
countries around $213 billion a year, almost 2% of their national
income. The Tax Justice Network estimates the global elite are sitting on $21–32tn of untaxed assets.
Thomas Piketty has pointed out
that, in 2014, the LuxLeaks investigation revealed that multinationals
paid almost no tax in Europe, thanks to their subsidiaries in
Luxembourg. Piketty pointed out that, in many areas of the world, the
biggest fortunes have continued to grow since 2008 much more quickly
than the size of the economy, partly because they pay less tax than the
others. In France in 2013, a junior minister for the budget calmly
explained that he did not have an account in Switzerland, with no fear
that his ministry might find out about it. It took journalists to reveal the truth.
Piketty’s economic colleague, Gabriel Zucman, recently published a book showing that $7.6 trillion in assets were being held in offshore tax havens,
equivalent to 8% of all financial assets in the world. In the past
five years, the amount of wealth in tax havens has increased over 25%.
There has never been as much money held offshore as there is today.
In the US, few big companies actually pay the official 35 percent corporate tax rate. Profits are up 21 percent since 2007, while corporate America’s total tax bill has dropped 5 percent.
The best known trick is so-called tax inversions:
US companies can move their headquarters abroad, avoiding the taxman
while keeping executives stateside, scoring government contracts, and
taking full advantage of public benefits for employees. Walgreens, which makes a quarter of its money from Medicaid and Medicare, proposed moving to Switzerland last year, only to change plans following a public outcry.
And guess where ‘inversions’ were first started? Panama! Tax
inversion was pioneered in 1983, when the construction company McDermott
International changed its address to Panama to avoid paying more than
$200 million in taxes. The tax lawyer who masterminded the “Panama Scoot” was later immortalized in an operetta performed for his colleagues. The 13-minute operetta, Charlie’s Lament,
told how the party’s host, John Carroll Jr., invented a whole category
of corporate tax avoidance and successfully defended it in a fight with
the Internal Revenue Service. The lawyers sang:
The Feds may be screaming,
But we all are beaming
’Cause we’ll never pay taxes,
We’ll never pay taxes,
Never pay taxes again!
Inversions aren’t the only way to dodge the taxman. Foreign profits
of US corporations aren’t taxed until they are “repatriated,” so
companies can hoard earnings in subsidiaries or divisions abroad.
(Ireland just shut down the “double Irish” offshoring trick used by Apple, Google, Twitter, and Facebook.) Between 2008 and 2013, American firms held more than $2.1 trillion in profits overseas—that’s as much as $500 billion in unpaid taxes.
American corporations are making billions in record profits, but 60
of the nation’s largest companies are parking 40% of their profits
offshore in an effort to escape US taxes, a survey by the Wall Street Journal reveals.
In US president Obama’s last budget for 2016, he proposes to stick a
one-time “transition toll charge” of 14 percent on the more than $2
trillion in corporate earnings parked overseas, regardless of
whether they’re brought back stateside. The estimated $280 billion in
tax revenue would be earmarked for upgrading highways and
infrastructure. The proposed one-time tax is aimed at just one of the
various loopholes and maneuvers that domestic businesses use to offshore
their profits, beyond the reach of Internal Revenue Service. Congress
may block this.
Apart from greed, there is a very good economic reason for a tax
system that benefits corporations and the rich and hits the average
family and the poor. Lowering the corporate tax burden has been a big
part of counteracting falling profitability of capital in the major
economies. Look at the trend in the effective tax rate on US
corporations compared to the effective tax rate on their employees. The
effective tax rate is a measure of what is actually paid compared to
income rather than the headline tax rate. Whereas in the 1950s, US
corporations paid an effective tax rate of around 40-45% of profits by
the 1990s, that rate had fallen to 30-35%. In the last decade, it
dropped further to under 25% and reached an all-time low in 2009 at the
depth of the Great Recession. In his latest budget, the UK Chancellor
George Osborne announced a further cut in corporation tax to a record
low for G7 countries of 17% by the end of this current parliament.
The trend is clear: corporations are being taxed less and less to
preserve their profitability. In contrast, the effective personal
income tax on employees has remained pretty steady at about 35%. Less
tax for capitalists and more tax for workers.
While corporations and wealthy individuals pay less tax at home and
salt much of their gains in tax havens abroad, the rest of us have had
to pay for the loss of these tax revenues. As the effective rate of US
corporation tax plunged, income taxes on households were static until
the Great Recession led to unemployment and falling incomes. Median
income in the United States is down 8.5% since 2000.
And the wealth of US families has fallen sharply since 2007 and is roughly back to where it was 24 years ago.
The bottom 90% of Americans have seen their overall income drop,
while low interest rates and quantitative easing have dramatically
helped the top 10%. If the super-rich actually paid what they owe in
taxes, the US would have loads more money available for public services.
What needs to be done? In the UK, the government should end the
tax-haven statuses of the overseas territories. Companies there must
pay the same taxes as in the UK. If the poorest in these tiny enclaves
suffer loss of income, then the UK government can compensate them.
Governments should agree to an international agreement to end tax havens
like Panama and impose economic sanctions against them if they won’t.
Above all, the tax avoidance operators must be taken over. We need to
take into public ownership and control the major banks and financial
institutions that dominate the globe and encourage and provide services
for the rich and corrupt elite (as revealed in scandal after scandal).
This would provide not only extra tax revenue to meet the real needs of
people in public services and investment, it would also enable banking
and finance to be put to use as a public service in providing credit for
Of course, such measures will be vigorously opposed by most current
governments and their rich backers and ignored by most left opposition
movements. But without such measures, the Panama story will continue.
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