Tax haven opacity will inevitably shrink and could lower tax rates

Mirko Hayat, Affiliate Professor of Law - April 11th, 2016
Point of View: Mirko Hayat says tax haven opacity will inevitably shrink and could lower tax rates - ©Fotolia - Ingo Menhard

POINT of VIEW  #PanamaPapers

As Panama announces new measures to improved transparency in its offshore financial transactions, Mirko Hayat, affiliate professor in law and tax at HEC Paris, says the Panama Papers affair will fast track an existing trend toward tax transparency in countries known as ‘tax havens’. This could, in turn, lead to more tax entering national coffers, and ultimately lower tax rates, he says.  

Mirko Hayat ©HECParis

Mirko Hayat holds a Ph.D. in Law from the Paris XIII University. He also holds a degree in Economy from the Nice Sophia-Antipolis University, and a Habilitation to conduct (...)

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“More transparency in these countries is inevitable,” says Professor Hayat, who adds that this trend gained momentum in the last decade, especially after the financial crisis in 2008, well before the advent of recent leaks. “Panama Papers, Luxleaks and Swissleaks have simply served to speed up the process,” he adds. 

Next year Luxembourg is set to reach a level of full transparency, whereby if a non-national sets up an account on its soil, this information will automatically be communicated to the country concerned. Switzerland has pledged to follow suit in 2018. “Both countries once ruthlessly guarded their banking secrecy”, says Hayat, “yet today they are showing their commitment to transparency. Banking secrecy in both these countries is therefore coming to an end.” 

As it stands, it is not illegal to set up an offshore company, as the freedom of establishing a firm anywhere in the world is a pre-requisite for free trade. As a result, Hayat believes the setting-up of these firms is unlikely to be regulated. “The phenomenon of registering offshore companies will continue to exist for some time and there will always be loopholes,” says Hayat. However he explains that as opacity reduces around the world, setting up bogus companies that have no commercial activity and in some cases fictitious staff, will become increasingly challenging. 

If those companies are no longer able to hide their money abroad, this might mean more money for tax authorities’ coffers and this could ultimately lead to reduced tax rates across the board, says Hayat. “This can only be favourable for economic development.” 

The so-called Panama Papers comprise 11.5 million confidential documents made up of detailed financial records leaked from the law firm Mossack Fonseca, based in Panama, which helps clients place their funds in offshore jurisdictions.  After the leak (whose source is so far unknown), the International Consortium of Investigative Journalists uncovered detailed information about individuals and companies that have avoided (and in some cases evaded) tax and steered clear of sanctions.

According to the OECD, a tax haven is defined as a country where little or no tax is payable on income, where there is a lack of transparency with regard to its tax policies transactions, where there is a lack of exchange of tax information with other countries, and where non-active companies are set up. Tax havens fall into several categories.  Zero transparency is when countries refuse to communicate any information to other nations; many countries have a black list featuring these nations.

Panama falls into a second category of countries that have agreed to divulge certain information about account holders, but can only give information they have and ultimately divulge very little information. For instance in 2012 it agreed to divulge certain information to France, but this did not amount to much, explains the professor.The next level of transparency is when one country can access account information on request.

The final level of transparency is automatic exchange of information –  a status tax havens will increasingly be forced to adopt, according to Hayat.