Panama Papers and the offshore holdings delusion

Estimated reading time: 3 minutes, 22 seconds. Contains 676 words

The world is abuzz with the articles published by The International Consortium of Investigative Journalists (ICIJ) based on one of the biggest data leaks in history. The articles dubbed as ‘Panama Papers’ are based on leaked data of the Panamanian law firm Mosack Fonseka. The internal documents of the firm were leaked by an anonymous source to the German Newspaper Süddeutsche Zeitung which passed them to ICIJ. The scandalous leak contains about 11.5 million files covering 40 years of operations of offshore accounts and shell companies in tax havens like Panama, British Virgin Islands and the Seychelles. The offshore holdings have been linked with international figures including current and former presidents, prime ministers, monarchs and celebrities. Among the repercussions of this probe have been resignation of Iceland’s Prime Minister Sigmundur Gunnlaugsson to concession of UK’s Prime Minister David Cameroon that he benefited from an offshore trust fund in the Bahamas set up by his father.

The articles claim that high profile politicians and their close associates have used tax havens to hide their wealth. The other accusation that is tied with these offshore holdings is using them for tax evasion. But the fact that not all offshore holdings are linked with illegal activities evades most people. Similarly, most media have focused on the theme of ‘tax evasion’ while the revelations are mostly linked with hiding wrongdoing by corrupt officials not just tax evasion.

The New York Times reported,

“Holding money in an offshore company is generally not illegal, although such financial arrangements can be used in illegal ways — for example, to facilitate tax evasion or money laundering.”

Though the Panama Papers exposed cases where people have used offshore holdings for hiding assets and evading taxes, there is a myriad of legitimate reasons for setting up offshore accounts and shell companies. Generally, people use shell companies because of government restrictions on certain transactions and capital controls. Companies may also use offshore companies for tax efficiency through legal tax planning. Moreover, multinationals use shell companies to reap the benefits of flexible corporate regimes and investment diversification opportunities abroad. The New York Times describes some of the legitimate reasons behind shell companies in the article titled “The Panama Papers: Here’s What We Know,” as follows:

“There are many valid uses of offshore shell companies for multinational corporations, joint ventures and wealthy individuals. Many countries restrict the sale of real estate to their citizens or to companies registered there. American retirees looking to purchase homes in such countries form offshore companies that buy the properties to abide by the law.”

“Companies establishing joint ventures in countries with weak or corrupt legal systems also create offshore companies, based in a jurisdiction like the British Virgin Islands or the Cayman Islands, that own the enterprises.”

The Kathmandu Post reported that the statistics of Department of Industry (DoI) shows that 20 percent of FDI entered Nepal from tax havens till last fiscal year. The government officials suspect that FDI from tax havens may be linked with money laundering. However, the reason why FDI is entering Nepal from tax havens like the British Virgin Islands could be because of our corrupt system and capital restrictions like mentioned above.

One important aspect about ‘tax evasion’ is the case when tax rates cross the threshold that people are willing to abide by. When taxes are excessive, people naturally tend to try to find ways to evade them—whether through offshore holdings or other ways. The other aspect is whether the taxes you are paying to a government are reflected in the services it provides. People may be willing to pay even high taxes if they are satisfied with the way the government uses taxes. Else, even if taxes are low, people may want to evade them. For instance, if a government is not efficient and transparent while handling taxpayers’ funds, people will not be willing to pay taxes even when tax rates are low.

If you are interested in learning other legitimate reasons for setting up shell companies, here’ s the link to Huffington Post’s article titled “5 Legitimate Reasons to Have an Offshore Company

Dinesh Karki

Dinesh Karki is an independent researcher. He has Economics degree from Xi'an Jiaotong-Liverpool University, Suzhou, China.

3 thoughts on “Panama Papers and the offshore holdings delusion

  • April 13, 2016 at 11:42 am

    Why are we defending the multi-millionaires and billionaires. The thing about such tax havens is that it is secret. Yes the accountability of government using the taxes should be monitored, but that is a different investigation in itself. We cannot justify one morally dishonest act by another. Having such huge stagnant amount of money in banks definitely doesn’t help in any economy. And how does a start up or a retiree get enough information and influence to have savings in such tax havens? The whole purpose of such tax
    Though it is legal mostly, it is moral obligation of the rich to reinvest in their respective country.
    This gives some perspective on why actually such trade deals exist.

    • April 15, 2016 at 5:04 pm

      Thank you for your comment.
      As I have mentioned in the article itself, the leaks have been mostly associated with wrongdoings by political agents till now. However, the media is busy exaggerating cases in which such offshore holdings may have been used for tax evasion. So, through this article I’m just trying to let people know other legitimate reasons why people would like to go offshore. The purpose of the article is to elucidate the fact that all offshore activities in tax havens are not illegal. And, people may have been forced to adopt such measures (that you call morally dishonest) because of restrictions imposed by governments like mentioned in the article. And about ‘moral obligation’, I think it is a matter of personal choice and individual freedom to get to choose what you want to do with your money and where you want to take it. I hope I have managed to answer your questions.

      • April 15, 2016 at 6:07 pm

        A lot of things that I do not agree on.

        Firstly, the legality of such offshore tax havens were never in question, there is not need for reiteration. It is legal and that is what bothers me.

        Secondly, please do understand that no one is “Forced to adopt such measures”, I am pretty sure they do it at their own convenience and are quite happy about sending their cash offshore. It is by their will that they choose to deny to pay their taxes.

        Thirdly, why are governments allowing corporations to do business with such tax havens where the beneficiaries are only the rich and powerful. Why to legislators present a bill which paves a path for the rich and powerful to send the money offshore. Such tax planning tools are not accessible to the general public. You will need a refined set of highly efficient tax lawyers, proficient chartered accountants and people in correct places just to know about such loopholes and exploit it. Is it ludicrous to presume that the legislators have something to earn from this as well along with the corporations.

        And finally, I will agree to the point you made about how it is a personal choice regarding where an individual desires to spend or store their money. But the money that they are spending or stagnating needs to be earned fairly and have to go through the same looking glass as the rest of the people. You can’t accumulate a huge load of cash by exploiting a financial loophole and then claim that it is your freewill to do whatever you want with your cash.



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