A day and a half has gone by with the #PanamaPapers. A virtual media storm has ensued, and we are still in the eye of the hurricane. Eventually, the dust will settle and our gazes will go to the future. The public, the media and politicians will be looking to settle accounts and take action.
We might expect significant change to come about. You might say previous leaks have led to real change in the international tax landscape, in particular as sources of new transparency rules.
Indeed, fast moving crises, such as this, cause calls for rapid political action, potentially sidestepping the often meticulous policy-making process. The #PanamaPapers, with so many wealthy and powerful people implicated, are guaranteed to drive public outrage.
In the stories that I have read, the prevalent tax planning mechanism in the stories is individual’s utilisation of Panama companies, funds, etc. to avoid/evade tax liability by conceding control of assets on paper whilst maintaining actual control through power of attorney, which are kept secret in Panama. (The legality may be difficult to ascertain based on the leaked data, but it is significant nonetheless). These and other techniques revealed are not new and should not surprise. The burning platform for change, in my view, comes from the fame and scale of revelations.
Based on the information that has come forward thus far, I imagine several potential non-exclusive policy avenues that are likely to be discussed in the coming days and weeks:
Further transparency rules
Given the secretive nature of the tax planning techniques revealed, cries for transparency will come (and have come already, in force). Building on existing streams in international tax law, public global and national beneficial ownership registries will be demanded to ensure public knowledge of who ultimately controls companies, as will (automatic) information exchange of tax information from Panama and other tax havens to provide tax authorities will the necessary information for risk assessments and audits. In short, people and politicians will want to be able to see the money and ownership trails across the globe. As Alex Cobham highlighted, public transparency (rather than, say, transparency for the authorities) will be particularly sought after given that the #PanamaPapers implicate so many world leaders.
One transparency initiative favoured by tax justice campaigners, which I do not think will get a bump from the #PanamaPapers, however, is public country-by-country reporting. I was surprised to see campaigners use the opportunity to reaffirm their stance on public CBCR, rather than focusing on other policy avenues. In my view, public coutry-by-country reporting would not go very far in addressing the issues revealed by the leaks.
Power pressure for tax haven reform
When international policy communities first started paying attention to tax havens, the most popular policy was to power pressure certain tax havens, coercing small (not large) countries to converge to international standards. And it was fairly successful. Even Panama, one of the remaining eyesores from a transparency perspective, has moved significantly towards OECD standards, although, as the #PanamaPapers show, issues remain. Already, I have seen cries for the global power players, in particular the EU and the US, to blacklist (a favourite pressure tool) tax havens that do not comply, with trade sanctions the seemingly favoured rhetoric (for now). Blacklisting has been sort of a forgotten tool over the past few years, given that smaller countries have largely complied with previously demands. However, the EU revamped its blacklisting work last year, although there is still no EU-wide agreement on the approach. Might there be a comeback for the bark?
More resources to tax authorities
A theme I have tweeted much about, which is sure to surface again, is the resources available to tax authorities. In particular, number of employees. It seems likely that politicians and advocates will argue that to combat tax evasion of the kind (probably) visible in the #PanamaPapers, tax authorities need entirely new more resources. To uncover complex webs and chains of financial and ownership flows requires significant time and effort. Many tax authorities across the world are, by their own admission, struggling for resources to keep up with control activities (the UK HMRC and Danish SKAT are good examples). Post-Panama Papers, I think it is likely we will see more demands for extra tax authority resources to reserve the global trend of cutdowns.
Stricter responsibility on middle men
Banks, tax advisers and others involved in the intermediation of tax planning might also see public and political anger directed at them. As the Panama Papers show, banks and law firms in particular (I’m sure there will be others implicated in due time) play a key role in facilitating tax planning activity in Panama. Questions are now being asked of the ethics and morality of local, onshore advisers when promoting offshore activity that may reduce onshore taxes. In response to previous scandals, the Danish government, for instance, in 2014 demanded a new code of conduct for tax advisers. In light of the Panama revelations, we might see similar calls for a greater responsibility on the part of intermediaries.
Finally, it is likely that we will see calls for lower taxes in general from certain economists. From an economics perspective, some would argue that tax evasion and avoidance can be dulled by lowering taxes, so as to reduce the incentive to and value of tax planning (legal or illegal). Whether and to what extent that is the case is up for the debate, but I think it will be a popular response given the complexity and scale of the Panama leaks, the likelihood of similar activity in other tax havens, and the simplicity of the proposed solution.
These are my initial impressions. There is no way to predict the future, of course, but I think these provide a good guideline for assessing likely policy debates in the coming time.
As always, comments, questions and input, including other potential policy responses, are welcome!