At sixes and sevens… in Panama

It is the theme of the moment. The ‘Panama Papers’ files represent the largest leak of information ever recorded on tax havens. The data now released have its origin in Mossack Fonseca, one of the largest law firms specialised in tax havens, which manages offshore companies and manages fortunes.

The relevance of the information now known, results from the fact that there are several important personalities whose name is involved in tax optimization schemes across Panama. At the time of this article writing, the involvement of prominent figures such as Sigmundur Davíd Gunnlaugsson, Iceland’s Prime Minister, Mauricio Macri, newly elected President of Argentina, Vladimir Putin, Russian President, Xi Jinping, President of China, King Mohammed VI (Morocco) and Salman (Saudi Arabia), Infanta Pilar de Borbón, the aunt of the King of Spain Filipe VI, Michel Platini, Lionel Messi and his father, the actor Jackie Chan, and the Spanish filmmaker Pedro Almodovar. And it seems that, more information about others involved will be released in the next few days…

Regarding Portugal, 244 companies, 255 shareholders, 23 clients and 34 beneficiaries with a portuguese mailing address are listed in the documents. So far, the name of the Portuguese businessman Idalécio de Castro Rodrigues de Oliveira, who allegedly controls 14 offshore companies, has also been announced.

At this stage of tremendous “noise”, it is important for me to separate two types of involvement, with different degrees of severity. On one hand, we will certainly have those who use these offshore companies for money laundering from unclear activity, often illegal and criminal. On the other hand, we have a broad set of stakeholders that uses these tax havens to “simply” pay less taxes. The esteemed reader of this article will tell me that both behaviours are serious, which I share. But you will certainly agree with me that the use of “offshores” for cover-up and/or financing of criminal activities will have a greater degree of seriousness.

I am particularly interested in analysing the situation of those who are looking for tax havens to objectively pay less tax on their (usually high) incomes. Are we dealing with a legal issue, or a moral problem?

So, what is a “tax haven”? This concept is usually attributed to territories and/or countries that have a very favourable tax environment in terms of taxation, which makes them naturally attractive to those who earn high incomes. The Portuguese tax legislation provides for a list (commonly referred to as “blacklist”) of tax havens, including Andorra, Bahamas, Costa Rica, the United Arab Emirates, Fiji Islands, Hong Kong, Jamaica, Maldives, Panama, Puerto Rico, Gibraltar, and the British Virgin Islands.

According to the international law, tax havens are legal. In addition, it is well known how they work, and it is also relatively easy to “set up” a business structure based in one of these territories. Obviously, these structures only become rewarding for those who have a high level

of income, for the costs normally involved in “assembling” and managing these business structures, essentially related to the associated consulting services.

In legal terms, we are generically conversant. As long as the law permits, it is effectively possible to use tax havens to pay less taxes. In moral terms, at least from my point of view, there is a specific problem. I believe that it is not morally acceptable for the “ordinary citizen” (including citizens and small and medium-sized enterprises) to be obliged to pay all their taxes, often bearing an almost suffocating tax burden (just look at the Portuguese case…), and at the same time, to have some companies and individuals enjoying the privilege of a much lower, sometimes outrageously low level of taxation, which is allowed to them in these territories which, quite often, have their main source of income in these schemes.

The ‘Panama Papers’ scandal makes it easy to see why the status quo does not change. Just see the importance of the names involved. Especially at the level of the western policymakers involved, what consequences will this involvement have for their respective democracies? Take the case of Iceland, in which the prime minister was forced to resign. What will happen in other countries?

Let’s keep an eye on the next developments, because surely many people will be at sixes and sevens to justify their involvement.

Till next post!

Marco Libório

UWU Solutions CEO / Consultant / Lecturer

blog@marciliborio.me

Right-Minded Person

Since I was little, I got used to hearing the expression “Right-Minded Person”. A “Right-Minded Person”, according to common sense and popular wisdom, is a just and proper person with those around him/her, being well regarded by the community precisely because he/she maintains an appropriate conduct to the common good of the society in which he/she is placed.

This is due to the eternal discussion about whether the State is (or isn’t) a “Right-Minded Person”. Does the State, as a fundamental “actor” in our society, act as a “Right-Minded Person” in the performance of its various functions? That is, does the State establish a fair, proper and balanced relationship with the citizens it seeks to serve?

Well, in the attempt to answer these questions, let’s focus on the main one. Effectively the state exists to serve the citizens. At least, this is what lies in the foundations of a “Constitutional State”, way in which our society is organized. In order to serve the citizens properly, it is necessary for the State to obtain revenue, which is intended to cover the expenses incurred in carrying out its activities (wages, pensions, rents, materials, fuels, installations, etc.).

In recent years, we have seen a clear improvement in the State’s ability to raise revenue. Indeed, for reasons mainly linked to the need to balance the public accounts, and resulting from the incapability to reduce public expenditure (too strict and mainly based on wages and pensions, where it is socially more sensitive to “tinkering”), it has been on the revenue side that some positive results have been achieved with regard to public accounts.

All of us have felt in recent years the various measures of “fiscal tightening”, either by raising tax rates or by a greater capacity of the Tax Authority to monitor the activity of companies, fomenting the so-called “fight against tax fraud and evasion”.

I obviously consider very important that this fight should be made, because we will have a fairer and more balanced society if we all pay the taxes we have to pay. However, I have watched some disturbing signs.

Just a few days ago I read a report about the State’s repeated non-compliance in paying (or giving back improperly paid) amounts that derive from court decisions to its detriment. In other words, in this newspaper there were several cases of companies that had won disputes against the State in court, but that this was delayed to pay, that it did not meet the deadlines provided by law, and that it often “forgot” to liquidate the interest to which it was legally obliged.

I confess, dear reader, that these stories do not astonish me. I have witnessed several of this kind over the years in which I am a business financial and tax advisor. The latter is related to the SPA (Special Payment on Account). Not wanting to bother my dear reader with tax technicalities, I will tell you quickly that the SPA consists of a CIT (Corporate Income Tax) advance that all companies in general are obliged to do annually (in two installments – March and October), from

the third calendar year of the activity, and whose amount is calculated based on the previous year’s turnover, with a minimum of 1.000 euros.

In recent months, several companies have received notifications about errors in the calculation of the 2011 and 2012 SPAs, which have resulted in less paid tax. Not being in question that these errors actually existed (in the situations I have followed, so it was), the penalty applied is completely disproportionate. I am going to share with you only one of the cases that I have been exposed to: a company made a mistake in calculating the SPA, which resulted in a value of 27.57 euros of less paid tax to the State; This error cost the company 68.25 euros of fine. By my accounts, we are talking about a penalty that represents about 248% (!!!) of the amount originally missing.

This is a representative example of what has been happening with several companies. As far as I’m concerned, I’ve seen a dozen of cases similar to this one. I would point out that the SPA is a CIT advance that companies make during the year in question, and that the amount goes into the final accounts of the CIT to be paid, made by the end of May of the following year.

Whether in the case of delays in returning or paying a certain amount as a result of a decision by a court in favour of the taxpayer, or in the situation of the SPA in which a completely disproportionate penalty is imposed, the State does not act as a “Right-Minded Person”. At least in my interpretation of this concept, which I shared with you previously.

I am not against a demanding and rigorous state. On the contrary, I consider that it will have to be, in all aspects, if we want to evolve as a society. However, it seems that we currently have a State that is too demanding with the citizen, but little or no demanding with itself.

Just as I learned early in life the concept of “Right-Minded Person”, I was also taught at a young age that “The example comes from above.” If we want to demand from others, we will first have to demand from ourselves, setting the example for others. The motto for reflection is given for the decision makers, but also for the citizens who do not conform to the current state of the State.

Till next post!

Marco Libório

UWU Solutions CEO / Consultant / Lecturer

blog@marcoliborio.me