The Panama Papers are back in the news after the public portion of a trial involving more than two dozen associates accused of helping some of the world’s richest people hide their wealth came to an unexpectedly speedy conclusion on Friday.
The trial came eight years after 11 million leaked secret financial documents that became known as the “Panama Papers” prompted the resignation of the Prime Minister of Iceland and brought scrutiny to the then leaders of Argentina and Ukraine, Chinese politicians, and Russian President Vladimir Putin, among others, news agency AFP reported.
Panama Papers case in brief
* The Panama Papers leaked extensive financial data from Mossack Fonseca, a major offshore law firm.
* They disclosed 214,000 tax havens involving global elites and entities from 200 nations.
* Most of the documents showed no illegal actions, but some implicated firms engaged in fraud, tax evasion, or sanctions evasion.
What is a tax haven?
A tax haven refers to a nation or area that imposes very low tax rates or none at all on individuals and businesses from abroad. These places do not require the physical presence of a business or the residency of individuals to benefit from their tax policies.
Tax havens contribute to financial stability and offer secrecy for financial details from foreign tax authorities.
Initially introduced to help rebuild economies after World War II, the concept of tax havens has become integral to the global financial system, enabling corporations and affluent individuals to avoid paying taxes.
According to a 2016 study by the US-based Citizen for Tax Justice, over 370 Fortune 500 companies have subsidiaries in tax-haven countries.
Criteria for tax havens
In 1998, the Organisation for Economic Cooperation and Development (OECD) outlined several criteria to identify tax havens, including:
Nominal tax on relevant income
Tax havens typically impose minimal taxes on income earned within their jurisdiction. The specific rates can vary by country.
Secrecy of information
A key characteristic of tax havens is their ability to safeguard personal and financial information of their clients. They do not share this data with external tax authorities without the consent of the individual involved.
Lack of transparency
Offshore financial centres are known for their lack of transparency. They do not disclose financial information to national governments, which facilitates tax evasion and money laundering.
No substantial activities
Entities in tax havens are not required to conduct significant business operations within their borders. Companies can transfer earnings from jurisdictions where taxes are paid to these havens, using methods like establishing headquarters or moving large financial transactions to shell companies based there.
Top tax havens in the world
Bermuda: In 2016, Oxfam identified Bermuda as the top corporate tax haven due to its zero per cent corporate tax rate and absence of personal income tax.
The Netherlands: The Netherlands is favoured by many of the world’s Fortune 500 companies, offering tax incentives to encourage business investments.
Luxembourg: Luxembourg attracts foreign businesses and individuals with its tax breaks and zero per cent withholding taxes.
Cayman Islands: This territory offers several advantages, including no personal income, capital gains, payroll, or corporation taxes. It also does not impose withholding taxes on foreign operations.
Singapore: Singapore attracts businesses with low corporate taxes, significant tax incentives, and the absence of withholding taxes, allowing for substantial profit shifting.
Switzerland: Switzerland provides full or partial tax exemptions to individuals, depending on the banking institution used.
Advantages of tax havens
Here are the benefits associated with tax havens:
1. Businesses often utilise tax havens to reduce their tax burdens significantly.
2. Engaging in tax-saving strategies within tax havens is a lawful practice, providing a more secure investment environment due to the absence of tax constraints.
3. The influx of new investments can positively affect the local economy of the tax haven.
Disadvantages of tax havens
However, there are also disadvantages:
1. When affluent individuals and companies use tax havens to avoid paying taxes, it results in revenue losses for their home countries.
2. Such practices can foster illegal activities, including money laundering and deliberate tax evasion.
3. Operating through tax havens might damage a business’s reputation, as these practices are sometimes viewed as unethical.
What is the Panama Papers case?
The Panama Papers, unveiled in April 2016 by the German newspaper Suddeutsche Zeitung, comprised 11.5 million documents that had been leaked from the Panamanian law firm Mossack Fonseca. These documents detailed the creation of more than 214,488 offshore entities to evade taxes and hide wealth.
The records exposed the financial dealings of public figures, corporate leaders, celebrities, and politicians, revealing information that had previously been confidential. The documents spanned from 1977 to 2015 and brought to light various secretive financial activities.
Indians mentioned in Panama Papers
The disclosure included about 500 Indians, among them Bollywood figures such as Amitabh Bachchan, Aishwarya Rai, and Ajay Devgn, as well as businessman Vijay Mallya and former Solicitor General of India Harish Salve. Also listed was Iqbal Mirchi, a known associate of the fugitive Dawood Ibrahim.
The Panama Papers suggested these individuals had engaged in illegal activities involving assets estimated to be worth around Rs 20,078 crore.
Following the publication of the Panama Papers, investigations were launched into the tax evasion practices and the alleged illegal entities connected to these individuals.