Moral Taxes (and the Panama Papers)
However, even when companies are structured and operating legally, tax authorities have sought to extract additional taxes from companies benefiting from their jurisdiction’s economy. On a national basis, many states have changed tax nexus laws providing for taxation based upon “economic benefit” rather than physical presence (but that is an issue for our State and Local Tax team). On the world stage, a number of high name-recognition companies have been called before legislatures to defend their tax position. In the case of Starbucks in the United Kingdom, the company agreed to pay a fee, what was first coined as a “moral tax”, of approximately £20 million unrelated to the company’s profit in the UK.
Why Moral Taxes
Many tax jurisdictions, the U.S. included, believe that the biggest leakage in the tax collection process is from companies operating internationally. Countries have individually enacted rules and regulations aimed at preventing tax evasion and tax avoidance. The OECD released 15 Action Items regarding Base Erosion and Profit Shifting (BEPS) in an attempt to minimize the global impact of artificial tax structuring for tax-avoidance purposes (learn more in a previous article on Understanding the Post-BEPS World). And while countries and international organizations have been diligently working on these issues, the release of the Panama Papers made clear that those companies and individuals with access to advanced tax planning techniques (and off-shore attorneys) can and will create off-shore companies enabling, if not tax evasion, then certainly tax avoidance.
Who was impacted by the Panama Papers
The Panama Papers consist of 11.5 million documents from the law firm Mossack Fonsecca which were leaked to a German newspaper. The newspaper then partnered with the International Consortium of Investigative Journalists which allowed 300 journalists to review the documents. After one year, the Consortium released their findings, which implicated 140 Politicians in 50 countries who were linked to offshore financial dealings in 20 tax havens. The findings also named famous athletes, celebrities, friends of world leaders and wealthy divorcees. The release of the Panama Papers revealed:
- The Prime minister of Iceland was personally connected to an offshore company, Wintris, who stood to benefit on Iceland’s bailout negotiations. The Prime Minister has resigned.
- The father of the former UK Prime Minister, David Cameron, owned an offshore company in Panama.
- Multimillion dollar network of offshore companies surrounding Vladimir Putin and his closest friends made secret and questionable loans to and investments in Russian monopolies.
- 57 people were linked (through 107 offshore companies) to the Petrobras scandal, a $5.3 billion bribery scheme implicating Brazil’s most elite politicians and executives. The scandal has led to President Dilma Rousseff’s suspension and upcoming impeachment trial (expected to last six months). Additionally, one offshore company has been tied to Eduardo Cunha, the lead opposition politician pushing for the president’s impeachment.
Next Steps
As you contemplate your next strategic international moves, heed the advice of our Managing Partner, Bill Hagaman, who judges actions and planning ideas by stating, “If you don’t want it on the front page of the Wall Street Journal, don’t do it.” A wise man, Bill. If it sounds too good to be true (or moral), it probably is (neither true nor moral).
Before taking your next step, reach out to a member of Withum’s International Tax Services Team at [email protected] for a practical, common sense approach. It’s easier to keep out of trouble than to get out of trouble!
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Kimberlee S. Phelan, CPA, MBA, Partner International Tax Services Practice Leader (609) 520 1188 [email protected]
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