The Panama Papers are a collection of documents that were leaked (which essentially means stolen) from Mossack Fonseca, a Panamanian law firm, in 2015 and hit the mainstream media in early 2016. The documents contained information about the offshore assets of a number of wealthy (and sometimes famous) account holders, and the press has mostly spun the story around the idea of criminal’s “hiding” money overseas.
But I don’t think the real story here is about hiding money.
Now don’t get me wrong: if someone did something wrong, I’m all for getting up in arms about it. I’m just saying that it isn’t so clear that anyone actually broke the law.
I do think the story is about financial asset compliance in the modern world. And I think you can learn three things from the Panama Papers.
1. “Hiding” Money Offshore Doesn’t Work Anymore
The press sensationalized the Panama Papers in terms of illegal funds and so forth. But it is perfectly legal (according to all laws I am aware of, including US laws) to have a corporate structure in Panama.
Drilling down to the facts, we know that some well-heeled clients had funds in tax-advantaged accounts. That’s all.
Believe it or not, there are similar facts behind the other so-called “international tax scandals” in recent memory, including the stories about Google’s Double Irish structure and Lux Leaks. The former involved taking advantage of double taxation agreement wording, while the latter resulted from the Luxembourg tax authorities making sweetheart deals with multinationals like Amazon to funnel money through the country.
Politically sensitive? Certainly. Ethically questionable? Maybe. Anything illegal? Doesn’t appear so.
2. In a World of Financial Transparency, the Odds Are You Will Be Found Out
In the information age, when data is so easily available (legally or otherwise), it doesn’t make sense for Mossack Fonseca clients, Google, or Amazon to think about hiding money. If they had any legal skeletons in their closets when these stories broke, it would have already been “game over” for them.
The same goes for you. 20 years ago, being non-compliant and hoping nobody would notice might have worked, but not today. The risk-reward ratio is not in your favor.
For starters, you’re up against government-sanctioned measures like the Foreign Account Tax Compliance Act (FATCA). And on the other side you might face rogue bank employees who may leak/steal your data. And with the rapid pace of technological innovation, who knows what you’ll have to contend with in 5 years. You can’t afford not to be compliant.
3. Internationalization Means You Are More Likely to Have Asset Disclosure Requirements
The world is becoming a smaller place. People and companies cross borders all the time to live and do business.
Certainly, I understand you may not be interested in putting together elaborate offshore structures and may not consider yourself part of “that stuff,” but keep in mind that the underlying principle of US foreign asset disclosure rules is the same whether you have a simple checking account in Canada or an exotic Panamanian trust structure. You’ll need to follow the asset disclosure rules for it.
It may seem like the highly complex IRS rules were designed to keep “big fish” taxpayers in the US tax net, but you’re still responsible for complying with them even if you’re a relatively small fish.
For Peace of Mind, Move Forward with a Clean Slate
If you have (or believe you may have) a requirement to disclose your foreign assets to the IRS, treat the Panama Papers as a wakeup call to make sure you are compliant. If you’re not there yet, consider the Offshore Voluntary Disclosure Program (OVDP), Streamlined Domestic Offshore Procedures (SDOP), and Streamlined Foreign Offshore Procedures (SFOP). You can read more information about all your options in 2016 here. We’re here to help.
Latest posts by Venar Ayar (see all)
- Worst Things To Do In An IRS Audit - June 22, 2018
- Understanding the Difference Between Tax Evasion and Tax Avoidance - June 22, 2018
- 5 Repercussions of Failing to File Tax Returns - June 14, 2018