Date posted: 01/12/2016 5 min read

Chartered Accountants and the Panama Papers

Should Chartered Accountants enter the debate about the offshoring activities highlighted in the Panama papers?

In brief

  • Mossack Fonseca maintained it is legal to establish commercial entities in different jurisdictions
  • Multinational corporations operate within a global marketplace — tax laws are set within nations
  • CAs have an ethical and social responsibility to be involved in this debate due to their expertise

By Robert M C Brown AM FCA

Taxes are the price we pay for civilisation.
Justice Oliver Wendell Holmes US Supreme Court, 1902-1932

As a case-hardened chartered accountant, it’s been difficult to reach a conclusion about how I should react publicly to the revelations in the Panama Papers.

Should I be surprised at the scale of them? Should I express “shock horror” and demand “immediate action”? 

Many commentators have, including these fighting words from Jeffrey Sachs, Director of Columbia University’s Earth Institute: “The UK and the US need to take the lead right now to end these tax secrecy havens. We see from the Panama Papers they are simply conduits for massive illegality, corruption, tax evasion and many other nefarious deeds. They just need to end … the abuses are not only shocking, but staring us directly in the face.”

Perhaps I should do what chartered accountants are trained to do and look at the issue objectively and dispassionately. Surely, there must be another point of view?

According to Mossack Fonseca, the law firm at the centre of the revelations: “It is legal and common for companies to establish commercial entities in different jurisdictions for a variety of legitimate reasons, including conducting cross-border mergers and acquisitions, bankruptcies, estate planning, personal safety and restructuring and pooling of investment capital from different jurisdictions in neutral legal tax regimes that does not benefit or disadvantage any one investor … we have always complied with international protocols to assure as is reasonably possible, that companies we incorporate are not being used for tax evasion, money laundering, terrorist finance or other illicit purposes. We are responsible members of the global financial and business community … if we detect suspicious activity or misconduct, we are quick to report it to the authorities … the vast majority of our clients use companies we incorporate for legitimate uses and our due diligence and compliance procedures are overwhelmingly successful in thwarting those who have other intentions.”

Taken at face value, these are compelling and comforting words. Should we believe them? According to Chris Berg from Australian free-market think tank, the Institute of Public Affairs (IPA): “The fact that law firms like Mossack Fonseca create corporate structures is no scandal. Even though what they do is completely legal, they are now being tagged with a vague sense of criminality ... most importantly, for all the impressive scale of the Panama Papers (11.5 million files) it tells us little about the extent to which offshoring erodes the tax base of non-haven countries. It is remarkably hard to identify any serious detriment to the revenue from offshoring, as even the OECD, the multinational body pushing the crackdown on tax avoidance, admits.”

Berg goes on to describe one benefit of tax havens as follows: “Tax havens perform an important function by putting downwards pressure on domestic tax rates. They are the global economy’s escape valve — preventing sclerotic Western welfare states from pushing taxes up and up.”

Some people may not be surprised that a neo-liberal organisation like the IPA might air this view, although I must admit that I have never before heard tax havens defended in such an inspired fashion. I guess that’s what happens in the creative “free market” of ideas.

On the other hand

As always, there’s another side to the story. According to economist Ian Verrender, writing on the Australian Broadcasting Corporation’s The Drum website: “Within the Interim Report of the Senate Inquiry into corporate tax avoidance and aggressive minimisation … is a litany of crimes against the nation. Sorry, correct that to read ‘mostly legal ways to evade paying tax’ ... the main problem is that multinational corporations operate within a global marketplace while tax laws are set within national boundaries by governments run by politicians that can be, well, let’s just say persuaded. Many global corporations are richer and more powerful than the countries in which they operate … they operate with a bare minimum number of often nominal directors who answer directly to head office, or to an entity located on a balmy tropical island that charges no tax. Even in highly developed countries, the pendulum has swung so far in favour of major corporations that few politicians have the gumption to take a stand on matters tax … bit by bit, our governments have ceded control to global corporations, over fear that they will no longer invest if they have to be accountable, and have kowtowed to demands for even lower taxes.”

And in a particularly telling paragraph that should offer hope to all struggling members of the accounting profession, Verrender writes: “The UK’s move (to slash corporate tax rates to the lowest in the world), even as it was fulminating about corporate tax malfeasance as a member of the G20, was symptomatic of a race to the bottom, that pits nations against one another and creates loopholes that even a suburban accountant could drive a truck through.”

So having listened to both sides of the story, what should we conclude? Should we even care?

We are a privileged well-educated group of people who have a duty to contribute to society to the best of our ability.

Pertinent questions

It’s tempting to walk away on the basis that the issues are too hard, too theoretical, too controversial and beyond our limited spheres of influence. Why not limit ourselves to issues on which we can have some impact and get on with our lives as best we can? That would be an entirely logical position to take. However, to do so would be walking away from some fundamentally important questions that chartered accountants should think about and on which we should be prepared to express an opinion.

Those questions include:

Should I support an international economic system which promotes lower corporate taxes, a smaller public sector, globalisation of free markets and limitations on the powers of sovereign governments?

  • Should I be involved in facilitating tax minimisation arrangements that are “legal” but are arguably against the public interest of our country?
  • As a professional, am I a “hired gun” acting on the instructions of my clients or am I supposed to be a “gatekeeper” for society?
  • As sunlight is said to be the best disinfectant, is it acceptable that so many international business transactions are veiled in secrecy for alleged commercial reasons or do I believe that some of the actions disclosed in the Panama Papers could be curtailed by greater transparency?

Instead of gaining comfort from nuanced expert tax opinions and claims of client confidentiality (we’ve all done it) it’s high time that, as individual professionals, we challenged ourselves with these questions.

At least then, we will start to understand where our country is going and our role, however small, in that process.

We are a privileged well-educated group of people who have a duty to contribute to society to the best of our ability. We have an ethical and social responsibility to be involved in this debate for which we are ideally suited because of our considerable expertise and experience.

It is simply unacceptable for chartered accountants to be passive bystanders.

Robert M C Brown AM FCA is a member of the Australian Government’s Financial Literacy Board, which provides advice to government and the Australian Securities and Investments Commission on financial literacy issues.

This article was first published in the July 2016 issue of Acuity magazine.

The Panama Papers

  • Concealing assets

    Leaked from the world’s fourth biggest offshore law firm, Mossack Fonseca, they reveal how wealthy public and private figures conceal the ownership of assets.

  • Named and shamed

    Twelve current and former world leaders, and 128 politicians and public officials, who keep money in offshore accounts and shell companies are named.

  • Financial service providers failed clients

    The papers demonstrate how legal and tax systems can be undermined when financial service providers fail to ensure their clients are not involved in criminality, tax avoidance or corruption.

  • Blacklist alert

    Included are records from 33 people or companies blacklisted by the US Treasury for criminal activities.