For the last couple of weeks, it has been impossible to turn on the TV and not hear the name of another President, Monarch or Prime Minister related to the recently leaked offshore holdings documents dubbed the “Panama papers.” The Panama Papers are the 11.5 million documents from the Panamanian law firm Mossack Fonseca that were released by a massive global reporting partnership of over 100 publications led by the International Consortium of Investigative Journalists (ICIJ). These documents identify about 215,000 offshore shell companies and 14,153 clients tied to Mossack Fonseca and linked to the use of tax havens to shield vast wealth.
While names of the like of Putin, Cameron, Almodóvar, and even Messi keep being named as shareholders, directors and beneficiaries of offshore companies, it is interesting to note that so far only a very small number of American names have surfaced. However, that in no way means that American citizens are refraining from such practices. Wealthy individuals and businesses that want to mask their ownership can conveniently do so in the United States. Delaware allows companies to shift royalties and similar revenues where they actually do business to holding companies in Delaware, where they are not taxed.
Panama’s president claims the massive data leak, “wrongly called the ‘Panama papers’ is not a problem of our country, but of many countries of the world.” He is right, to be clear, Panama is one of many jurisdictions where shell companies can be created for the purpose of tax evasion. A tax haven has been described a place that: (1) has no income tax or a very low-rate income tax; (2) it has bank secrecy laws; and (3) it has a history of non-cooperation with other countries on exchanging information about tax matters. Many states in the US have those characteristics.
Those seeking to veil their assets and shield some of their income from taxation can establish a shell corporation in Wyoming, Nevada or Delaware with very little effort. Constituting a company is a simple process (most states allow for online filing) and can be done cheaply. The fee payable to the Secretary of State for the filing is somewhere between $300 and $500, depending on the state where the company is created. There are online services that charge an additional couple of hundred dollars, in addition to the fee, for constituting a company. Constituting a company in most states requires no identification whatsoever from the organizer, the board of directors, or its shareholders.
In 2010, the United States passed the Foreign Account Tax Compliance Act, which requires financial firms in other countries to disclose details about American clients with offshore accounts. However, the United States is one of the few countries that has refused to sign new international standards for exchanging similar financial information with other countries. Thus, it is not surprising that other nations often fail to cooperate with the US in regards to financial disclosure.
In sum, the Panama Papers reveal many problems, including the evident lack of cooperation between countries in regards to financial information. That translates into tax havens where the rich can hold their money and avoid paying their share of taxes. In 2012, Tax Justice Network estimated that somewhere between $21 trillion to $32 trillion is hidden away by the super-rich in offshore entities. However, we would be mistaken to think that the problem is limited to Panama. In fact, the fundamental problem is the failure of nations to require more transparency in financial transactions that could reveal financial fraud, tax evasion or other crimes. While the Panama Papers reveal serious problems with the international tax system, the key to a more equitable future for all is more effective global governance.