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

Entrepreneurship

Europe’s “Silicon Valley”

“I found an extremely vibrant Portugal. (…) In most of the last 400 years, Portugal has trade with the rest of the world. So it’s a very focused nation, it’s in its DNA to do things and sell them anywhere in the world. (…) Past is past, and seven years ago there was a generation that focused on making a better future. Because these people do not care about politics, IMF or EU decisions. Whatever the circumstances, these people are determined to build great things. It is an unexpected level of positivism. And that can be felt by walking in Portugal.”

The author of these words is Paddy Cosgrave, co-founder of Web Summit, in an interview with Diário Económico, on 5 February. The Web Summit is considered one of the most important meetings of entrepreneurship and technology of the world, and has been held since 2010 in Dublin, Ireland. This year of 2016, and in the next three years, the Web Summit will be held elsewhere. Do you know where? Is it Silicon Valley? London? Berlin? Shanghai? No, it’s really in Lisbon. Speaking of this move to Lisbon, Paddy Cosgrave said that “it is a magical city with so much history. I am very happy that we can call Lisbon our home in 2016. “

These words should make us reflect while Portuguese people. From my point of view, I will share some thoughts with you, based on those statements and on what I observe around me.

About 3 years ago I was in Silicon Valley, California. It was a remarkable experience for me. I will share the details of this trip with you in one of my next articles. In this context, I recalled this trip concerning Paddy Cosgrave’s statements. Silicon Valley is in fact a different place, still far from the Portuguese reality. After returning, several people asked me “but what difference is there that is so great?”. I used a metaphor to explain to them: in a certain place of the world there is a river, which runs from the mountain where it rises, to the sea; In this place all the people are taken to swim towards the mountain; When someone plunges into the river and begins to swim in that direction, obviously he/she feels enormous difficulties, because the current is against him/her; He/she will need to make a great effort to get around, and he/she will have to stop at the bank several times to rest; He/She will even have to be careful not to be pushed back. In another place of the world, distant of that, exists a similar river; But there is a fundamental difference: people swim towards the sea, that is, they have the current in their favour; This allows them, with a controlled dose of effort, to make much more trips in the river, as water helps them to move, rather than hamper them.

We in Portugal are no worse “swimmers” than those in Silicon Valley. We are no less competent, less intelligent, less efficient or less capable. Simply the Silicon Valley system works in a way that enhances entrepreneurship. There it is almost impossible not to undertake. Even the logic of trial-failure is valued, as it demonstrates resilience, persistence and will to win. Here, our “river” runs almost always against the entrepreneur, because most of the time creating a business is an incredible amount of obstacles. We have been improving, it is true, but there is still a long way to go. Portugal has already been an example of entrepreneurship in the

past, when it gave new worlds to the World. Why do we recede? Why are we today, people limited by fear?

Portugal is far from being a paradise for entrepreneurs. But has this prevented many Portuguese startups from being an international success today? No. Did that prevent the Web Summit from choosing Portugal? No. Imagine what would happen if our country was able to build a truly empowering eco-system for entrepreneurs. The Web Summit can help change the overview, but it certainly will not be enough.

Is it possible to turn Portugal into a Silicon Valley of Europe? Is there something stopping us? Only ourselves.

Till next post!

Marco Libório

UWU Solutions CEO / Consultant / Lecturer

blog@marciliborio.me

Entrepreneurship

Entrepreneurship and Socioeconomic Development

What is the true role of Entrepreneurship in promoting the social and economic development of a country or region? Is the phenomenon of Entrepreneurship capable, on its own, of leverage the development of a society? Under what conditions can it do this?

According to the United Nations, “The Entrepreneurship hypothesis being linked to economic growth, finds its most immediate foundation in simple intuition, common sense and pure economic observation: activities that turn ideas into economic opportunities are at the heart of Entrepreneurship. Entrepreneurship is a source of innovation and change, and as such, it prompts productivity improvement and increased economic competitiveness.” (United Nations, 2005). “As regard both qualitative issues and quantitative dimensions of economic development, Entrepreneurship can make a positive contribution. This phenomenon is, generally described, as important for economic development, since it boosts job creation, alleviates the tax burden, and provides competitiveness to the economies” (Naudé, 2008).

Currently, two main models that seek to explain the correlation between “Entrepreneurship” and “Economic Development” can be identified. These are: the Wennekers and Thurik model (1999) and the GEM (Global Entrepreneurship Monitor) research model. Both put emphasis on the individual, the entrepreneur. Entrepreneurship is, above all, an innovative and proactive attitude. According to these studies, macroeconomic policies to encourage entrepreneurship are a very important factor, but not enough to stimulate economic development through entrepreneurship. It is necessary to develop entrepreneurial qualities in individuals, arousing in them the passion for undertaking. This view is shared by other authors. Murphy (1991) emphasizes that “entrepreneurial talent” is extremely important, influencing in a decisive way the size of companies and the growth of the economy. It is suggested that, in the perspective of the economic growth of a society, “it is very important that the most talented and capable become entrepreneurs” (Murphy, Shleifer, & Vishny, 1991).

Taking all this into account, and considering what has already been said about the concept of “Entrepreneurship”, it seems consensual that entrepreneurs can be a key element in the development of societies. But is it always like this? Effectively there can be what can be called of “bad” Entrepreneurship. Many authors, such as Murphy (1991), Baumol (1990), Acemoglu (1995), Mehluma, Moene, & Torvik (2003) claim that more talented and capable entrepreneurs tend to look for activities that are “more prone to profit, and not necessarily socially more useful” (Murphy, Shleifer, & Vishny, 1991).

The “entrepreneurial capacity” of the individual is then the key factor for a “positive entrepreneurship” in the sense of being a facilitator of the economic and social development of a country or region. Focusing the discussion on this point, how can the entrepreneurial capacities of individuals be improved? “Entrepreneurial skills can be improved through the acquisition of experiences, of schooling (…)” (Holmes & Schmitz, 1990). There seems to be

evidence that the way knowledge is shared is extremely important. “Learning by doing” seems to be the right way to boost entrepreneurial skills. “Entrepreneurship is best apprehended through the variety of educational experiences and real-life experience” (Consortium for Entrepreneurship Education, 2011).

In conclusion, it is fundamental that society in general, and official institutions in particular, actively promote “Positive Entrepreneurship”, which is based on the empowerment of the entrepreneurial capacities of each (and everyone), directing entrepreneurs to sustainable activities and businesses, both socially and economically, but also (and not least) environmental. “Experiences in some countries empirically evidence that entrepreneurship can be improved through, for example, education, culture, entrepreneurship awareness as an occupational choice, and through learning by doing” (Naudé, 2008).

Till next post!

Marco Libório

UWU Solutions CEO / Consultant / Lecturer

blog@marciliborio.me

Taxation

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