The Panama Papers are a leaked set of 11.5 million confidential documents that provide detailed information about more than 214,000 offshore companies listed by the Panamanian corporate service provider Mossack Fonseca, including the identities of shareholders and directors of the companies. The documents show how wealthy public officials hide their money and identify current government leaders from five countries – Argentina, Iceland, Saudi Arabia, Ukraine, and the United Arab Emirates – as well as government officials, close relatives, and close associates of various heads of government of more than 40 other countries, including Brazil, China, Peru, France, India, Malaysia, Mexico, Pakistan, Romania, Russia, South Africa, Spain, Syria, and the United Kingdom. On April 5, 2016, the Prime Minister of Iceland, Sigmundur Davíð Gunnlaugsson, resigned following the scandal.

Amounting to 2.6 terabytes of data, the papers, which go back to the 1970s, were supplied to the Süddeutsche Zeitung in August 2015 by an anonymous source, and subsequently to the U.S.-based International Consortium of Investigative Journalists (ICIJ). The papers were distributed to and analyzed by about 400 journalists at 107 media organizations in more than 80 countries. The first news reports based on the set, along with 149 of the documents themselves, were published on April 3, 2016, and a full list of companies is due to be released in early May 2016.

Background

Mossack Fonseca is a Panamanian law firm and corporate service provider founded in 1977 by Jürgen Mossack and Ramón Fonseca. The company’s services include incorporating companies in offshore jurisdictions, administering offshore firms and providing wealth management services. A 2012 Economist article said it is believed to be an industry leader in its country.The company has more than 500 employees in over 40 offices around the world. The firm has acted on behalf of more than 300,000 companies, most of which are registered in the UK or in British-administered tax havens.

Mossack Fonseca is the fourth-largest offshore law firm in the world as of April 2016. The firm works with the world’s biggest financial institutions, such as Deutsche Bank, HSBC, Société Générale, Credit Suisse, UBS, Commerzbank and Nordea. Before the Panama Papers leak, Mossack Fonseca was described by the Economist as a “tight-lipped” industry leader in offshore finance.

An article on the Australian Broadcasting Corporation website states:

Using complex shell company structures and trust accounts Mossack Fonseca services allow its clients to operate behind an often impenetrable wall of secrecy. Mossack Fonseca’s success relies on a global network of accountants and prestigious banks that hire the law firm to manage the finances of their wealthy clients. Banks are the big drivers behind the creation of hard-to-trace companies in tax havens.

Much of the firm’s work is perfectly legal and benign. But for the first time the leak takes us inside its inner workings, providing rare insight into an operation which offers shady operators plenty of room to manoeuvre….

Leak

More than a year before the first publication of the Panama leaks in April 2016, the German newspaper Süddeutsche Zeitung was offered large caches of documents from an anonymous source. The paper accepted and began to receive more and more material; in the space of a year they acquired a total of 2.6 terabytes of data consisting of documents related to Mossack Fonseca, providing information on 214,488 offshore entities related to public officials. The leak consists of 11.5 million documents created between the 1970s and late 2015 by Mossack Fonseca.

The reporters communicated with the source only via encrypted channels, as he demanded anonymity: “There are a couple of conditions. My life is in danger, we will only chat over encrypted [lines]. No meeting ever.” Süddeutsche Zeitung journalist Bastian Obermayer said the source decided to do it because he thought Mossack Fonseca was behaving unethically. “The source thinks that this law firm in Panama is doing real harm to the world, and the source wants to end that. That’s one of the motivations,” he said.

The International Consortium of Investigative Journalists organized the research and review of documents. They utlized reporters and resources at The Guardian, BBC England, Le Monde, SonntagsZeitung, Falter, and La Nación and German public broadcasters Norddeutscher Rundfunk and Suddeutscher Rundfunk and Austrian ORF (broadcaster). The team initially met in Munich, Lillehammer, London, and Washington, DC to structure their research. The data was distributed to and analyzed by about 400 journalists at 107 media organizations in more than 80 countries. After more than a year, the first news reports based on the set, along with 149 of the documents themselves,were published on April 3, 2016. Among other planned disclosures, the full list of companies is to be released in early May 2016.

The total size of the leaked documents dwarfs that of the Wikileaks Cablegate 2010(1.7 GB), Offshore Leaks 2013 (260 GB), Lux Leaks 2014 (4 GB), and Swiss Leaks 2015 (3.3 GB). The data primarily comprises e-mails, PDF files, photos, and excerpts of an internal Mossack Fonseca database. It covers a period spanning from the 1970s to 2016. The Panama Papers leak provides data on some 214,000 companies. There is a folder for each shell firm that contains e-mails, contracts, transcripts, and scanned documents. The leak comprises 4,804,618 emails, 3,047,306 database format files, 2,154,264 PDFs, 1,117,026 images, 320,166 text files, and 2,242 files in other formats.

The data had to be systematically indexed. This was done with proprietary software developed by an Australian company named Nuix, which is also used by international investigators. The documents were fed to high-performance computers for optical character recognition (OCR) processing, making the data machine-readable and searchable. Compiled lists of important people were then cross matched against the processed documents. The next step in the analysis is to connect people, roles, monetary flow, and structure legality.

Indian Government Reaction

Indian Prime Minister Narendra Modi had ordered an inquiry following which, the Indian government announced that it was constituting a special multi-agency group comprising officers from the investigative unit of the Central Board of Direct Taxes and its Foreign Tax and Tax Research division, the Financial Intelligence Unit and the Reserve Bank of India.


Statement from OECD Secretary-General Angel Gurría on the “Panama Papers”

04/04/2016 – The “Panama Papers” revelations have shone the light on Panama’s culture and practice of secrecy. Panama is the last major holdout that continues to allow funds to be hidden offshore from tax and law enforcement authorities. The OECD has been leading a global crackdown on these practices since 2009, working hand-in-hand with the G20. Through the Global Forum on Transparency and Exchange of Information, we have constantly and consistently warned of the risks of countries like Panama failing to comply with the international tax transparency standards. Just a few weeks ago, we told G20 Finance Ministers that Panama was back-tracking on its commitment to automatic exchange of financial account information.  The consequences of Panama’s failure to meet the international tax transparency standards are now out there in full public view. Panama must put its house in order, by immediately implementing these standards.

While the “Panama Papers” data expose nefarious activities, they also show a decline in the use of offshore companies and bearer share companies, which is a testament to the incredible transformation effected in the last 7 years to establish robust international standards on tax transparency, including on beneficial ownership: 132 jurisdictions have committed to the standard on exchange of information ‘on request.’ Of those, 96 jurisdictions will introduce automatic exchange of financial account information within the next 2 years. Almost 100 jurisdictions have joined the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.  As a result of our in-depth peer review process, the use of bearer share companies is close to being eliminated across the world, and the beneficial ownership rules have been strengthened to ensure that information is now available to tax authorities when they need it.

Establishing global standards and making commitments are just the start though. Effective implementation is the key to lifting the veil of secrecy once and for all and eradicating tax evasion. The time has come to make sure that no jurisdiction can benefit from failing to meet their commitments. In the run-up to September’s G20 Leaders Summit in Hangzhou, we must use every opportunity to deliver. The next G20 Finance Ministers meetings and the Global Anti-Corruption summit taking place in London in May will be critical.


 

Q&A on Panama Papers

What does the release of the “Panama Papers” actually tell us?

The Panama Papers describe in detail how a veil of secrecy is still allowing funds to be transferred between jurisdictions and held offshore, where it can be hidden from tax authorities. Panama’s consistent failure to fully adhere to and comply with international standards monitored by the Global Forum on Transparency and Exchange of Information for Tax Purposes is facilitating the use of offshore financial centres for hiding funds, depriving governments of tax revenue and often aiding and abetting criminal behaviour.

The Panamanian government says that the OECD has recognised its efforts to improve access to information about beneficial ownership of entities and its willingness to share such information with authorities in other jurisdictions. Is this actually true?

The OECD has been working for more than seven years to establish robust international standards on tax transparency and ensure their implementation. In 2009, when the initial objective of the Global Forum was to reach international agreement on the Exchange of Information on request, most countries and jurisdictions were quick to get on board, while a few, including Panama, were reluctant to make commitments or move forward along with the rest of the international community.  After many years of resistance, Panama updated its domestic legislation in 2015, which provided the basis upon which to engage in the phase of the review process that assesses whether effective information exchange is actually taking place. Panama remains well behind most other comparable international financial centres.

To push the transparency agenda forward, the G20 identified Automatic Exchange of Information as a new international standard in 2014, and almost 100 jurisdictions and countries have already agreed to implement it within the next two years. Whilst almost all international financial centres including Bermuda, the Cayman Islands, Hong Kong, Jersey, Singapore, and Switzerland have agreed to do so, Panama has so far refused to make the same commitment. As part of its ongoing fight against opacity in the financial sector, the OECD will continue monitoring Panama’s commitment to and application of international standards, and continue reporting to the international community on the issue.

Is Panama the only outlier, or is it the tip of the iceberg? Are there other jurisdictions posing similar problems

Having conducted well over 200 Phase 1 and 2 peer reviews in the past 7 years, the Global Forum has identified a number of member countries and jurisdictions whose legal and regulatory framework for the exchange of information are as yet not up to international standards. They include Guatemala, Kazakhstan, Lebanon, Liberia, Micronesia, Nauru, Trinidad and Tobago and Vanuatu. It is clear that there are other jurisdictions where a lack of information on beneficial ownership of corporate and other entities is facilitating illicit flows.

What are the Tax Benefit on offshore income in Panama?

Non-resident offshore Panamanian Corporations (Panama IBC’s) and Private Interest Foundations do not pay tax on offshore income.

  • No income tax of foreign earned income.
  • No capital gains tax (except on sales of real estate located in Panama).
  • No interest income tax.
  • No offshore sales tax.
  • No tax on issuance of corporate shares.
  • No tax to shareholders.
  • No stock sale or transfer tax (except where sale of shares is for transfer of Panama real estate).
  • No capital stock tax.
  • No offshore property tax (except on real estate located in Panama).
  • No estate tax.
  • No gift tax.
  • No stamp tax.
  • No succession tax.
  • No inventory tax.
  • No municipal tax.
  • No state tax.
  • No federal tax.

What are the rules related to  incorporation in Panama?

  • Panama does not impose any reporting requirements for non-resident offshore Panamanian corporations.
  • Panama does not allow “piercing the corporate veil”.
  • Panama corporations share certificates can be issued in Nominative or Bearer form (anonymous form of ownership), with or without par value.
  • Panama corporations do not require Paid-In Capital, nor is there a time limit in which authorized capital must be fully paid.
  • Panama corporation’s directors, officers and shareholders may be of any nationality and resident of any country.
  • Neither the directors nor the officers of Panama corporations need to be shareholders.
  • Meetings of directors, officers, and shareholders may be held in any country and accounting books may be kept in any country.
  • It is not necessary for the interested parties to be present in Panama for the purpose of establishing a corporation.
  • Panama offshore corporations conducting business outside of Panama do not require a commercial license for offshore business activities.

Source- OECD, Wikipedia, Many Other Legal Service Websites in Panama.

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