The Panama Papers leak, which detailed the dealings of numerous politicians, businessmen, and other high-ranking officials in offshore banking regimes has caused a worldwide media firestorm.
Calls by institutions such as the Organisation for Economic Co-operation and Development (OECD) for closing tax loopholes and classifying Panama as a “tax haven” for its supposed malfeasances have been the popular response to these developments.
Over the past few years, tax havens have been the whipping boy for many politicians in developed countries who want to rein in these jurisdictions for supposedly fostering tax evasion and other illegal activities.
In reality, the Panama Papers did not reveal anything earth shattering or potentially incriminating about the majority of individuals who turned to Mossack Fonseca for corporate services, nor did they reveal any criminal behavior on the part of Mossack Fonseca.
What Mossack Fonseca did throughout these cases is standard fare for corporate service providers and is perfectly legal.
Tax Havens: In Short
In sum, tax havens refer to certain countries, states, or territories that confer certain advantages in financial and taxation matters – increased financial privacy, friendly levels of taxation, and the ability to incorporate companies under more favorable circumstances.
These places have existed since time immemorial and have served as a viable form of competition among tax jurisdictions, allowing countless international entrepreneurs to set-up their businesses in a cost-effective manner.
However, this useful feature in today’s world economy is often overlooked in contemporary policy debates. The majority of the focus is placed on the need to close these loopholes, enforce more stringent data sharing programs, and curtail the practice of corporate inversion.
The calls for reform are well-intentioned, but one harsh reality is generally ignored: the OECD, which spearheads the campaign against tax havens, is made up of cash-strapped Western governments that are desperate to collect tax revenues in order to finance their unsustainable welfare states.
For these countries, tax havens represent the latest medium for potential tax plunder.
Six years prior to the Panama Papers incident, the U.S. passed the controversial Foreign Account Tax Compliance Act (FATCA) – a law that allows for foreign banks and financial institutions to effectively act as an enforcement arm of the IRS.
Although FATCA is a US law, foreign countries must comply with its provisions. These provisions require all foreign financial institutions to register their organizations with the IRS, and then, agree to hand over all the private financial data of their American clients.
A fiscal imperialism of sorts, the OECD’s endgame is to impose their member country’s tax policies upon countries
If said financial institutions do not comply with FATCA, the US government has the ability to seize 30 percent of the foreign bank’s US earnings through a withholding tax.
Not only does FATCA represent a major violation of the privacy rights of US citizens living abroad, it will also make it more difficult for these same individuals to make a living abroad, as foreign banks will start to drop American customers in order to avoid the costs of FATCA regulations.
In the same token, FATCA has already laid the groundwork for a global data sharing program among governments that will subject the foreign bank accounts of US citizens living abroad to further taxation and possible intrusion.
The OECD’s Gambit
The Panama Papers uproar may just be the necessary catalyst for a robust international data sharing program that will make measures such as FATCA a global standard.
This does not bode well for entrepreneurs and other individuals with international business aspirations. Many individuals could see delicate, private information be shared among governments that are not known for their protection of privacy rights.
Instead of maintaining the traditional model of territorial taxation and repudiating FATCA for its intrusiveness, the OECD sees the latest Panama Papers controversy as a carte blanche to continue the implementation a global tax system on countries that are deemed non-compliant.
A fiscal imperialism of sorts, the OECD’s endgame is to impose their member country’s tax policies upon countries such as Panama, thus subjecting countless foreign individuals and corporations to unjust levels of double taxation.
The campaign to combat tax evasion is merely a front for the true endgame – global taxation on an unprecedented scale.
The Virtues of Competitive Jurisdictions
The ability to bank, set up a savings account, or start up a company wherever an individual decides to should be treated as a fundamental economic right. As long as these individuals operate within the confines the law, governments have no authority to interfere with otherwise peaceful activities.
Luckily, there now exists more competition between governments, as skilled citizens are more mobile than ever. This mobility creates an environment in which governments are incentivized to keep taxes on labor and capital low.
In essence, governments are compelled to compete with each other in order to attract the best capital and labor from across the globe under this type of dynamic.
Competitive tax jurisdictions are veritable lifesavers for the citizens of countries such as Venezuela that must endure crushing inflation and a burdensome regulatory climate. The existence of tax competition provides a viable exit strategy for individuals that are otherwise stuck in unstable economic environments.
Instead of condemning tax havens, OECD countries and the rest of the world, for that matter, should strive to emulate tax havens by implementing tax competition and simple regulatory policies that generate economic growth and attract investment.
Instead of turning to the heavy hand of the state, these governments and their citizens would be best served by tax policies that are easy to follow and do not scare away entrepreneurs.