Panama Papers Revisited

Panama  Papers  Revisited

Once again, how time flies!

It’s a year ago this week since the International Consortium of Investigative Journalists (ICIJ) launched the biggest investigation in journalism history: “The Panama Papers”

The ICIJ and more than 100 media partners published hundreds of stories revealing the offshore financial secrets of many of the world’s richest and most powerful people.  The investigation sparked protests, resignations, arrests and fierce debate around the world  ……………  and that was just the beginning.

I thought I’d re-cap what the “Panama Papers” situation was all about.

In simple terms, at the end of the day, it’s all about money.

As my friend Shane Trout says, if you ever want to get to the bottom of any contentious issue or thing (pretty much anywhere in the world) follow the money trail!

Now, back to the “Panama Papers” situation, one thing that never goes out of fashion is how to minimise or avoid tax.

The famous biblical text ‘Render unto Caesar all things that are Caesar’s  ………’ gives some insight into how long citizens of the world have been wrestling with paying the dreaded taxman.

It’s human nature to want to keep more of what you earn, inherit or win  ……………  or, in the case of many politicians, steal.

The news a year ago this week that the rich and powerful are actively continuing this ancient ‘cat and mouse’ game with the tax collector dominated the headlines of the world’s media for weeks.

The leaking of millions of confidential documents, some dating back to 1977, had exposed the handwork of Panamanian law firm, ‘Mossack Fonseca’.

An international team of journalists pored over the documents and the juiciest bits captured the headlines for much of April, 2016  –  and then for many months thereafter.

This week a year ago the ABC reported:

The leak reveals the offshore holdings of 12 current and former world leaders including Iceland’s Prime Minister Sigmundur David Gunnlaugsson, as well as relatives of Syria’s President Bashar al-Assad, friends of Russian President Bashar al-Assad and members of China’s Communist Party elite.’

More than 1,000 Australian links to companies have been found in the data leak including the passports of hundreds of Australian citizens connected to companies as directors, shareholders and beneficial owners.’

Twenty-nine Forbes-listed billionaires are also named in the leak.

The reaction from various countries was a sideshow in itself.  Amongst other things:

  • Iceland’s PM fell on his sword (although, admittedly, he had a lot of help in falling);
  • China banned news outlets and social media from covering the story;
  • Russia claimed it was a Western conspiracy to discredit Putin; and
  • the late father of the then UK Prime Minister, David Cameron, was also named in the documents ……………  ironically (and amusingly) at a time when David Cameron was running a ‘table slapping’ platform of clamping down on tax evasion!  lol!

All of the above said, everything that I read starting a year ago indicated that the actions of Mossack Fonseca were 100% legal!

To quote from the ABC again:

Is it legal?’

Yes.  The use of shell companies in tax haven jurisdictions is legal.  However, the opaque environment in which they operate is often open to abuse by criminals and individuals who want to avoid liability by keeping their identities and activities anonymous.

If you had a few hundred million, or a few billion, dollars and you could afford to put in place the structures to legally minimise your tax, would you do it?

Now, in this ridiculously ‘PC’ world of publicly doing and saying the right thing, you can answer that question truthfully in private.  My personal and very public answer is:  ‘Hell Yeah I would!’

Have you ever paid a ‘tradie’ in cash?  Have you ever been paid cash and not declared it?  Have you ever organised your affairs so that you can pay less tax?  Have you ever been faced with a big tax bill and asked your accountant what you can do to reduce it?  Of course you have!  None of us want to pay more.

I know of a prominent accountant in Sydney who:

  • has his (or her) nose well and comfortably nestled in the rear-ends of a number of high ranking Australian Taxation Office officials; and
  • very publicly condemns any form of tax avoidance,

but, I’m sure, has no issue with claiming 100% of his (or her) E-Tag expenses as a tax deduction notwithstanding that a significant proportion is incurred in the course of driving his (or her) children around Sydney!

Tax evasion is all just a question of degree  ……………  and in particular is about in how much, and to what extent, each person is prepared to participate.

I’ll never forget the late Kerry Packer’s infamous response to the 1991 Senate Inquiry?

I don’t know anybody that doesn’t minimise their tax.  I’m not evading tax in any way shape or form.  Of course I’m minimising my tax.  If anybody in this country doesn’t minimise their tax they want their head read!  As a government I can tell you that you’re not spending it that well that we should be paying extra.

The hypocrisy of national leaders using offshore tax havens, while imploring their citizens to pay their fair share, was a year ago  –  and continues to be  –  galling  ……………  but hypocrisy is also not a recent phenomenon.  Hypocrites have been around since long before the Roman’s popularised the term.  You’ll never outlaw people speaking out both sides of their mouth  ……………  and, if we did, prisons would be full to the brim with politicians, bureaucrats, union officials and CEOs.

Here’s a controversial way to look at the use of these tax havens  ……………  they act as a restraint on political pork-barrelling.

How so you might ask?

Imagine we live in a dream land where everybody pays the correct amount of tax.  In this utopian world the government’s coffers are suddenly enriched to the tune of $40 billion.  Enough revenue to balance its budget.

Who wants to take a bet on how long that budget would stay balanced?

Based on the Kevin Rudd / Wayne Swan experience, I’d give it less than 2 years before we were well and truly back in the red.

With a bigger pot to dip into, the incumbent government’s promises, demands, pay-offs, ‘jobs-for-the-boys’ and corruption would escalate to another (and unprecedented) level.

In the bigger picture, legitimately denying politicians and bureaucrats access to greater revenue streams is a good thing.  Why?  Well, because they might (one day) learn to live somewhat within the nation’s means.

The political class ‘tut-tut’ over the use of these tax havens, yet they have no problem in racking up obscene amounts on travel expenses, for example $70,000.00 for a 10 day ‘study trip’ (read “junket”) to Europe, and all paid for with the taxpayers’ money.

The ‘pig in the trough’ example our politicians and ex-politicians set does precious little for the ‘we need to raise taxes’ agenda.

For Australians who don’t have the means to warrant making a phone call to Mossack Fonseca, you may want to take a closer look at the legitimate tax-free haven that exists here in Australia.

For less than $2,000.00 you can set up a self-managed super fund (SMSF).

An SMSF in the wealth creation phase pays a maximum tax rate of 15% on earnings.  This rate can be significantly reduced with the use of fully franked dividends.

An SMSF in pension phase pays  ZERO  tax on earnings (be it either income or capital gain) and you get to receive a full refund of all franking credits.

Who needs to go the British Virgin Islands or to the island of Jersey when you can have an SMSF?

‘But aren’t they going to change the tax rates on super?’ you may ask.

Most probably  ……………  or, possibly.  However, my guess is superannuation will still (and always) be a tax effective investment vehicle.

Legislative risk is something we all live with.

Even those in tax havens could find cash-starved governments  –  led by the US and Europe in particular  –  applying economic pressure to generate a greater level of compliance.

As just one example, look at the extreme pressure the United States successfully applied to Swiss banks to lift their once impenetrable veil of secrecy.

What we continue to witness from the RBA’s continued accommodative policy  –  and the leaking of documents  –  is a system that is very much under strain.

Central banks desperately need to keep debt coursing through the veins of the economy  ……………  and governments need to look under every rock for revenue to pay for their many, many unfunded commitments  –  and unfunded public service superannuation in particular.

Peter Kerin