The Panama Papers And The Offshoring Industry

The so-called Panama Papers, more than 11 million leaked documents from a Panamanian law firm, are shining a spotlight on the scope and financial impact of the offshoring financial industry and global efforts to move assets to tax havens or less-regulated jurisdictions.

Regulators, of course, were keenly aware of the issue. National governments and global think tanks have in recent years ramped up policy efforts and political pressure on national authorities and regulators to impose restrictions that would combat illegal tax planning and offshore structuring. Several global banks, like Credit Suisse, were fined for their role in helping clients hide assets.

The Organization for Economic Co-operation and Development has played a significant role in these efforts by developing the Common Reporting Standard (CRS) on its Automatic Exchange of Information portal, through its Global Forum on Transparency and the Exchange of Information for Tax Purposes. According to the Forum’s recent report, 98 jurisdictions have already committed to these standards, set to come into effect in 20172018. Panama and Bahrain, leading financial centers, have not committed yet, but that may change in light of the recent megaleak.

The G20 Leaders’ Summit in 2017 will examine the implementation of the already existing standard on Exchange of Information on Request, which forces the offshore financial management industry to adapt to new transparency and disclosure standards.

Governmental efforts globally to go after offshore bank accounts are part of a broader policy campaign to close tax loopholes and build more-just tax systems in times of election campaigns, growing inequality and fiscal crises in the developed world. New Treasury rules in the US to block corporate inversions in order to tax global US companies are a case in point. Taken together, the measures may erode the economic value-added of the offshore management industry.

But the Panama Papers may impact asset structuring and tax planning even more than government rule making.

“The legal rules have not changed the likelihood of being caught,” notes Reuven Avi-Yonah, Professor at University of Michigan Law School and international tax expert, “unlike Fatca [Foreign Account Tax Compliance Act of 2010], which I think made a significant difference.”