Countries begin to look beyond narrow national interests to tackle tax avoidance

Analysis: co-operation behind Panama Papers may be replicated by tax authorities

Law firm Mossack Fonseca  in Panama City, which specialises in setting up offshore companies, is at the center of the Panama Papers controversy. Photograph: Joe Raedle/Getty Images

Law firm Mossack Fonseca in Panama City, which specialises in setting up offshore companies, is at the center of the Panama Papers controversy. Photograph: Joe Raedle/Getty Images

 

Tax authorities are, by their nature, particularly focused on, and limited by, sovereignty.

It is not just that, for obvious reasons, national tax authorities are restricted to raising revenue from activities in their jurisdictions, or persons or companies located in them. It has also long been the case that the tax laws of one state can often be the enemy of tax collection in another state.

The ne plus ultra of this is the type of jurisdictions that feature in the Panama Papers leak, mostly British Overseas Territories such as the British Virgin Islands, the Cayman Islands and Bermuda. These are tiny jurisdictions that, were it not for their tax-haven and secrecy industries, would have even smaller populations. On a larger scale come places such as Luxembourg, exposed in 2014 as an industrial-level provider of highly aggressive tax-avoidance schemes to international business.

Ireland, of course, is the bane of tax authorities in larger European Union jurisdictions such as the UK, France and Germany, with its 12.5 per cent corporation tax rate and open-for-business philosophy.

The limitations of this nation-focused attitude in a world where business has long since flown the national boundary coop, are well recognised at this stage, and explain much of the thought behind the Base Erosion and Profit Shifting (Beps) initiative on business taxation, being run by the Organisation for Economic Co-operation and Development.

This reporter was at a Beps meeting some years ago during which, during a coffee-break chat, a revenue official from Germany remarked that one of the difficulties with the Beps enterprise was that each jurisdiction had an element or two of domestic tax law that was “offshore” in philosophy, and designed to confound neighbours’ tax authorities.

Multinational taxation is the focus of Beps and was the focus of the LuxLeaks project that exposed Luxembourg’s role.

The Panama Papers revelations are, in the main, about the curious mix of elites, kleptocrats, tax evaders and gangsters that try to hide their affairs in the offshore world.

And while there are lots of legal reasons for using offshore services, in the main they are reasons that apply only if you are at a certain income level, or wealth bracket. The overall claim that offshore is about elites is justifiable, and plays into the view that at a time of austerity and growing inequality, multinationals and the elites are treating the rest of the world like schmucks.

Hence the political response, and the response of the world’s tax authorities. Faith in tax systems has to be preserved, for all our sakes, as does a rational, international response to the pressures being created. Today’s meeting of the Joint International Tax Shelter Information and Collaboration network in Paris is designed so that tax authorities can share information in an effort to help each other catch each other’s tax cheats.

That’s an interesting development, striking in the way that it mirrors the international co-operation between media groups, including The Irish Times, that lies behind the success of the Panama Papers and LuxLeaks projects, both of which were co-ordinated by the International Consortium of Investigative Journalists, in Washington.

Business and wealth were out of the traps way before everyone else when it came to globalisation. Now, maybe, others are catching up.

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