This has come to light through paperwork (the so-called “Panama Papers”) obtained from the offices of Panamanian law firm Mossack Fonseca the fourth biggest provider of offshore company and structure formation in the world, with branches and affiliate organisations in 42 countries. The papers have been made available as a result of a leak (as was originally reported) or a hack (which Mossack Fonseca are reported to have subsequently claimed).
While a great deal of controversy has been discussed as a result of this leak, this commentary will focus primarily on people who may be holding wealth overseas to mitigate their exposure to tax.
Mossack Fonseca create and administer companies in offshore jurisdictions and offer wealth management services. They have stated – perhaps rightly – that they cannot be held accountable for any inappropriate use of the structures that they create by clients or intermediaries. After all, there is a significant difference between a legitimate structure being created and the way that structure is then used, particularly if the architects of the structure cease to be involved following it being created.
Controversy tends to arise from such matters because many offshore structures are opaque. It is difficult to see who ultimately owns or benefits from wealth held within such structures or to what use the wealth is put. This then lends itself to queries about whether due tax is paid, for example.
There are perfectly appropriate and legitimate uses of offshore companies, trusts and other structures. It may be that business is being conducted overseas by several parties and they want to do it through a jurisdiction that is mutually advantageous – or at the very least it may be that none of them want to be put at a disadvantage. It may be that legitimate estate or tax planning is being carried out, particularly for individuals who have a truly international footprint. It has to be pointed out that holding wealth overseas is not necessarily in itself improper, particularly if the individual or company is still complying fully with the law and reporting obligations of the jurisdiction or jurisdictions in which they are typically based.
Of course, there are always reasons for using such structures – regardless of who created them or where they located – that are seen as less legitimate. For example, individuals who are UK residents for tax purposes are liable to declare all of their income and capital gains for tax (subject to any treaty provisions that obviate such requirements). It is much easier not to declare something if it is sitting in an opaque structure with limited reporting requirements and fronted by a nominee on the other side of the world.
The Panama Papers ‘reveal’ something that has been known to legal and tax professionals, the media and the public for some time, which is that offshore planning can be abused by people who choose to avoid – or even evade – their legal responsibilities. It is rare, however, to see evidence of such behaviour brought to light, not least because of the secrecy sold as a huge benefit of employing services in certain offshore jurisdictions.
Panama has been in the sights of the authorities for a while and professionals have known – or ought to have known – that there have been reasons to be careful about the jurisdiction. The commitment of Panama to confidentiality and privacy is not something for which it should be condemned (because everyone has the right to keep their personal affairs private, as every country has the right to make their own law on this point), but concerns were raised dramatically when Panama chose not to commit to the Common Reporting Standard [1]. When a jurisdiction takes such a stance, it is perhaps not unsurprising that other states take a cautious approach to them.
If someone chooses to plan their affairs using an offshore jurisdiction they need to select the jurisdiction with care, giving consideration to the options, benefits and disadvantages of the different jurisdictions. A low-tax environment is of interest to most people undertaking such planning, but perhaps of more importance should be choosing a jurisdiction that is stable and has a robust legal and corporate system. It might also be worth ensuring that the chosen jurisdiction is not attracting unnecessary international suspicion and ire – for whatever reason.
Offshore planning can be of great benefit to individuals, particularly if they are seeing to protect family assets. For example, people seeking to protect family wealth against children divorcing in future may consider that the costs of setting up and running an offshore structure are outweighed by the protections afforded by offshore structures. As long as all reporting, legal and tax compliance requirements in the client’s native jurisdiction are fulfilled then the taxpayer in question will consider that they have acted properly.
What lessons can be learned from these revelations? There are clearly some. It is in the hands of the Government to follow up on pledges to tighten up the use of offshore planning. If they are serious about it then let them take steps – although we would always hope that such steps are proportionate, considered and taken after consultation with experts. The proposals to introduce a new criminal offence for companies that fail to stop their staff assisting in tax evasion has grabbed the headlines but it remains to be seen whether it will have any teeth.
The obvious lesson to be learned, however, is that any form of planning should be well thought out. It is perfectly appropriate for someone to order their affairs, in accordance with the law, so as to mitigate their tax exposure. If steps taken – be they using onshore or offshore planning ideas – are more esoteric and more opaque then questions can be raised about motives and legitimacy. The typical taxpayer in such a situation may only have to consider queries raised by HMRC. Someone who is of higher profile may have to consider public and media reaction as well, regardless of the rights or wrongs of what they have done.
We make a point at Anthony Collins Solicitors not to recommend planning for a client that could cause them embarrassment or negative attention. We tend to find that no matter how complex the needs of a client, they can achieve their legitimate goals through sensible, careful and well-thought-out planning of their affairs.
If a taxpayer seeks to plan their estate or tax matters and an offshore solution is offered this does not necessarily mean that they are being exposed to something risky, illegitimate or to their ultimate detriment. Clients should always feel confident in questioning their professional advisers about whether what is being proposed is in their best interests, if there are any potential negative consequences. If it seems wrong, however, then perhaps the taxpayer should treat it as such – and ultimately, if something seems too good to be true, it probably is.
If you would like to discuss this matter further, please do not hesitate to contact a member of our PPM team:
[1] The Common Reporting Standard was developed in response to a G20 request and approved by the OECD Council on 15 July 2014, and it calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. It sets out the financial account information to be exchanged, the financial institutions required to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.
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