The ongoing release of leaked documents relating to Panamanian law firm, Mossack Fonseca, provides a small but useful window into the world of international business and offshore finance.
While the world’s media has rightly been focusing on the people of wealth, position and power that have been exposed, there are other angles that have received much less attention but also provide lessons. Most of the exposès are of people that have been caught doing things that they should not have been doing, but there are many reasons why international finance is useful.
Firstly, there were relatively few Americans caught in this net. There are many possible reasons for this, including the close proximity of Caribbean Islands, the existence of Delaware and the aggressive stance taken by the IRS against tax evasion. Even though the IRS and American courts are notoriously harsh with tax evaders, there clearly are ways to operate legally, as has been shown by the current presidential candidates.
Additionally, because America is so large, most people can move and change their lives, but stay in the USA. In other locations, such as Europe, moving from one country to another, is much more likely and frequent. Once a person begins to become international, it is much easier to structure finances legally to minimise taxes. Whilst it is very difficult to legally change domicile and many countries use a different country of domicile definition from each other, becoming tax resident in a new country can be surprisingly easy.
While the United States is, by definition, a country based on immigration, and there must be a great many Americans with dual nationality, this is also more likely in Europe. While dual citizenship does not guarantee that a person will pay less taxes, it can provide opportunities to be more selective about how personal finances are structured and therefore how much is paid to whom.
And yet it is the rich, famous and powerful of the world that have mostly been caught in the Panama Papers trap and for good reason. For many of these individuals, the nature of their work or income means that they personally need to be resident in a high tax country. This means that their opportunities to legally reduce their tax burden are limited and using the services of a company based in black-listed Panama is likely to be stepping outside of the bounds of legality. After all, if their structures really were one hundred percent legal, they would not have needed to use a jurisdiction that provides secrecy.
However, while there clearly are many lessons to be learned about personal taxation and international finance, perhaps the most pressing is to only work with law firms that take their data security incredibly seriously.