Lance hylton dont throw out the baby with the panama papers jambar (final)

Don’t Throw out the Baby with the Panama Papers For presentation at the

Jamaican Bar Association Annual Week-end Conference - November 18-20 2016 Lance Hylton1

WHAT ARE THE PANAMA PAPERS? 1.

The Panama Papers are an unprecedented leak of 11.5 million files from the database of Mossack Fonseca, a Panamanian law firm. In 2014 an anonymous source contacted the German Newspaper Süddeutsche Zeitung (SZ) and submitted encrypted internal documents from the firm. The Newspaper shared approximately 2.6 terabytes of data with the International Consortium of Investigative Journalists (ICIJ). The ICIJ then shared the leaked data with a large network of international partners, including the Guardian and the BBC. (The Guardian, 2016).

2.

The leak has proven to be the largest that journalists have ever worked with. It has prompted what the ICIJ describes as the “biggest-ever international cooperation of its kind which has resulted in the collaboration of over 400 journalists from over 100 media organisations in over 80 countries”2.

3.

The data primarily comprises e-mails, pdf files, financial spreadsheets, and excerpts of an internal Mossack Fonseca database. It covers a period spanning from 1977 to early 2016 and provides data on some 214,000 companies formed in tax havens including Nevada, Singapore and British Virgin Islands.

1

Attorney at Law, Partner Hylton & Hylton, Kingston Jamaica October 2016 Obermaier, Oberymayer et al Panama Papers: The Secrets of Dirty Money. Retrieved on August 1, 2016 from http://panamapapers.sueddeutsche.de/articles/56febff0a1bb8d3c3495adf4/ 2

1

THE STRUCTURE OF THE LEAK The 11.5 million items contain the following file types

Obermaier, 2016

THE LAW FIRM - MOSSACK FONSECA 4.

The firm at the centre of the leak is Mossack Fonseca. Established in 1977, the firm’s website states that it provides “comprehensive legal and trust services” including the formation of companies and foundations and providing information relating to “the most suitable alternatives when it comes to choosing a company formation jurisdiction.”3

5.

The Mossack Fonseca group boasts over 500 staff members across every continent.

It offers its clients a web-based Client Information Portal application which allows clients to reserve companies online, verify the status of companies and pay invoices, in addition to other transactions.

6.

Mossack Fonseca has founded, sold and managed over 300,000 companies in its nearly 40 year’s existence. Among the advantages cited as a reason for choosing Mossack Fonseca as a registered agent is the fact that it offers – “Jurisdictions that are tax exempt regarding any commercial activity or operation carried out outside of its jurisdiction.”4

3 4

http://www.mossfon.com/about_service/mf-group/ retrieved on August 4, 2016 http://www.mossfon.com/service/company-formation-services/ retrieved on August 4, 2016

2

THE BIG REVEAL 7.

In an internal email dated April 1, 2016, Mossack Fonseca’s marketing director, Carlos Sousa-Lennox stated in part: "There was unauthorised access to our email server through which certain information was gleaned by outside parties… We do not yet know the identity or the motivation of the persons who have committed this act."5

8.

The source of the leaked documents is still not known and there are still questions as to whether the source is a “whistle-blower” from inside the organisation, or hackers. The German newspaper to which the documents were leaked reported that aside from stringent security measures, the source wanted “neither financial compensation nor anything else in return".

9.

On May 5, 2016, the source, who is now being referred to as John Doe, issued a statement explaining what motivated him to release the massive trove of files from inside Panamanian law firm Mossack Fonseca. In his statement, titled The Revolution Will Be Digitized, "John Doe" said the growing global income inequality and corruption allegedly enabled by Mossack Fonseca motivated his actions. Doe also said the papers demonstrated the injustices perpetrated by an industry that creates offshore companies. He blames governments for allowing offshore havens to flourish, stating that he leaked the documents: "Simply because I understood enough about their contents to realise the scale of the injustices they described."6

10.

John Doe also had this to say of lawyers: “…But most of all, the legal profession has failed. Democratic governance depends upon responsible individuals throughout the entire system who understand and uphold the law, not who understand and exploit it. On average, lawyers have become so deeply corrupt that it is imperative for major changes in the profession to take place…”

5

Murdock, J (2016, April 5) Panama Papers: Who is responsible for Mossack Fonseca email server leak?

International Business Times. Retrieved from http://www.ibtimes.co.uk/panama-papers-who-responsiblemossack-fonseca-email-server-data-leak-1553198 6 Doe, John (2016 May 6) The Source of the Panama Paper Speaks. Organised Crime and Corruption Reporting Project. Retrieved from https://www.occrp.org/en/panamapapers/the-source-of-the-panama-papers-speaks/

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11.

HIGHLIGHTS OF WHAT THE PANAMA PAPERS HAVE ALLEGEDLY REVEALED TO DATE7:  More than 214,000 offshore entities appear in the leak, connected to people in more than 200 countries and territories.  Twelve national leaders are among 140 politicians from more than 50 countries connected to offshore companies in 21 tax havens, (the list includes heads of states, elected officials, their families and close associates).  A Two Billion Dollar trail to Vladimir Putin. The Russian president’s close friend – Sergei Roldugin - is at the centre of a scheme in which money reputedly from Russian state banks is hidden offshore.  Among national leaders with offshore wealth are Nawaz Sharif, Pakistan’s prime minister; Ayad Allawi, ex-interim prime minister and former vicepresident of Iraq; Petro Poroshenko, president of Ukraine; Alaa Mubarak, son of Egypt’s former president; and the former prime minister of Iceland, Sigmundur Davíð Gunnlaugsson.  In the UK, six members of the House of Lords, three former Conservative MPs and dozens of donors to British political parties have had offshore assets.  Former Prime Minister David Cameron has also benefitted personally from tax avoidance schemes, including an offshore corporation created by his late father Ian, Blairmore Holdings Inc., which is a client of Mossack Fonseca and incorporated in Panama, is still in operation and owns Thirty-One Million Dollars in assets. Profits from that corporation have never been taxed in the UK, and were reported to have been a part of the inheritance the Prime Minister received when his father died.  The families of at least eight current and former members of China’s supreme ruling body, the politburo, have been found to have hidden wealth offshore.

They include President Xi’s brother-in-law, who set up two British Virgin Islands companies in 2009.  Twenty-three individuals who have had sanctions imposed on them for supporting the regimes in North Korea, Zimbabwe, Russia, Iran and Syria have been clients of Mossack Fonseca. Their companies were harboured by the Seychelles, the British Virgin Islands, Panama and other jurisdictions.

7

The highlights are adopted from the Guardian which has partnered with the ICIJ. https://www.theguardian.com/news/2016/apr/03/what-you-need-to-know-about-the-panama-papers

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 Twenty-nine (29) Forbes-listed billionaires and many celebrities are also named in the leak including movie star Jackie Chan who reportedly has at least six (6) companies managed through Mossack Fonseca and world famous footballer Lionel Messi who is reported to own a Panama company with his father and whose offshore dealings are currently the subject of a tax evasion case in Spain.  The files revealed information on at least 33 people and companies blacklisted by the U.S. government because of evidence that they have been involved in wrongdoing, such as doing business with Mexican drug lords, terrorist organizations like Hezbollah or rogue nations like North Korea and Iran.

According to US authorities, one of those companies supplied fuel for the aircraft that the Syrian government used to bomb and kill thousands of its own citizens.  Records show that the family of Azerbaijan President Ilham Aliyev used foundations and companies in Panama to hold secret stakes in gold mines and London real estate.

MOSSACK FONSECA’S RESPONSE TO THE CRISIS 12.

Mossack Fonesca has vehemently denied any wrongdoing and while it has refused to comment on any specific matter citing its obligation to maintain client confidentiality, it has provided a general statement to the investigative media group in relation to the leak.

13.

In its defence, it highlighted the following:  That Mossack Fonseca provides company incorporation and related administrative services that are widely available and commonly used worldwide. It emphasised that incorporating companies is the normal activity of lawyers and agents around the world, and such services are frequently used and provided in many worldwide jurisdictions, including the United States and the United Kingdom. 

It stressed that in its capacity as the resident agent for the companies, Mossack Fonseca was not involved in managing the business, managing accounts or taking custody of money or assets. Its corporate secretarial services are limited to a narrow set of administrative services such as facilitating document filings, helping a company register for taxes and filing

5

for licences, managing patents and trademarks, filing tax returns and other documentation ďƒ˜

In respect of due diligence Mossack Fonseca was quick to point out that 90% of its clientele comprised of professional clients, such as international financial institutions as well as trust companies and prominent law and accounting firms, which act as intermediaries and are regulated in the jurisdiction of their business. It stressed that these clients are obliged to perform due diligence on their clients in accordance with the KYC and AML regulations to which they are subject. Mossack argued that in addition to its own internal due diligence procedures, its service provision agreement with these clients required them to notify Mossack Fonseca of any compromised (criminal clients).

ďƒ˜

Most importantly, Mossack maintains that it cannot be blamed for any abuse or misuse of its services and certainly should not be condemned for any failings of its clients who are mostly intermediary institutions.

PUBLIC REACTION AND CONSEQUENCES 14.

The worldwide reaction to the leak was swift and furious.

15.

UK Labour Party leader Jeremy Corbyn stated that the government should consider imposing "direct rule" on British Overseas Territories and dependencies8.

Mr Corbyn said the territories, including the Cayman Islands and the British Virgin Islands, were encouraging tax avoidance on "an industrial scale", to the detriment of public services in the UK. He has called for an independent investigation into the tax affairs of all Britons linked to the Panama papers, including Mr Cameron's family. He said Britain should go after those who have placed money in offshore centres to avoid tax and go after them to get the money back. He made a clear distinction between tax avoidance and tax evasion.

16.

Former Business Secretary Vince Cable, a Liberal Democrat, said: "We can't send gunboats these days but we can take the small territories under direct rule."9

8 9

http://www.bbc.co.uk/news/uk-35965855 Ibid.

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17.

HM Revenue and Customs promised to act “swiftly” against tax avoiders as it joined tax authorities the world over in poring over the apparent treasure trove of information contained in the Panama Papers10.

18.

The Australian Tax Office said it is investigating more than 800 wealthy clients of Mossack Fonseca for possible tax evasion.11

19.

In France, President Francois Hollande said: “As the information emerges, investigations will be carried out, cases will be opened and trials will be held. 12

20.

We are told that in Iceland “A crowd of around 10,000 people gathered outside Iceland's parliament building in Reykjavik on 4 April, demanding that Prime Minister Davíð Gunnlaugsson resign”13.

21.

The Panama Papers revealed that the Prime Minister had owned a shell company in the British Virgin Islands which held almost Four Million US Dollars in bonds in Iceland’s three biggest banks – a fact he had failed to declare upon instatement to public office, in contravention of Icelandic law. The public outcry forced the Prime Minister to resign in disgrace despite his protestations of innocence.14

22.

In Britain, Prime Minister David Cameron faced calls for a government inquiry and accusations of bald hypocrisy by championing financial transparency.

23.

In Panama the Mossack Fonseca headquarters and several subsidiaries were raided by Police along with officials from an organised crime unit. Officers set up a perimeter around the headquarters while prosecutors entered the offices to search for documents15

24.

Pakistan Prime Minister Nawaz Sharif announced he would set up a high-level judicial commission to investigate links to his family members allegedly found in the leaked Panamanian documents. He denied any wrongdoing by him or his relatives.16

10

http://www.telegraph.co.uk/news/2016/04/04/hmrc-promises-swift-action-against-tax-avoiders-named-inpanama/ 11 Ibid 12 Ibid 13 http://www.ibtimes.co.uk/iceland-protesters-demand-pm-sigmundur-gunnlaugssons-resignation-after-panamapapers-leaked-1553201 14 http://www.nytimes.com/2016/04/06/world/europe/panama-papers-iceland.html?_r=0 15 http://www.bbc.com/news/world-latin-america-36032325 16 http://www.wsj.com/articles/icelands-prime-minister-sigmundur-david-gunnlaugsson-resigns-1459874528

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25.

In short there was, and to some extent still is, panic in the land. Transparency International now reports17 with glee that incorporations in the British Virgin Islands have taken a massive hit. Quoting a BVI Financial Services Commission September 2016 report that shows that the 16,000 new companies registered in the first half of 2016 represent a 30 per cent drop compared to the same period last year. The anecdotal information is that the BVI is also experiencing significant migration of existing companies.

26.

There has also been a massive increase in regulatory and due diligence activity and requirements as Governments everywhere rush to show that they are all trying to be more complaint.

BUT DESPITE THE UPROAR IT IS GENERALLY ADMITTED THAT THE ACTIVITIES REVEALED BY THE LEAK WERE LARGELY LEGAL 27.

In spite of the public uproar, mass panic, extensive media coverage and immense fallout, it has been grudgingly admitted by even the most skeptical investigators that for the most part the activities uncovered by the Panama Papers, and the work of Mossack Fonseca, are perfectly legal and benign.

28.

The Business and Economics Editor of Al Jazeera news writes that18: “There is no suggestion in the stash of files leaked to the International Consortium of Investigative Journalists that anything illegal has taken place.”

29.

The editors of the Atlantic summed it up thus19: “The majority of what we learn from the leak will merely be embarrassing for those exposed—showing them to be opportunistic and perhaps unethical, but not criminal. And that is why many of the people named in the documents are unlikely to see the inside of a courtroom concerning the services that Mossack Fonseca provided to them: not because they have the power now to quash prosecutions (with some notable exceptions!), but because some time ago they had the power to hire expert advisers who

17

www.transparency.org/news/feature/british_virgin_islands_have_they_cleaned_up_since_the_panama_papers

18

http://www.aljazeera.com/indepth/features/2016/04/panama-papers-perfectly-legal-160404113825480.html

19

http://www.theatlantic.com/business/archive/2016/04/panama-papers-crimes/477156/

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carefully designed their tax-avoidance (or law-avoidance) strategies...”(Emphasis Added) 30.

The New York Times conceded20 that: “None of the published leaks … necessarily show evidence of crimes. But anger and reproach about the revelations have started to swell nonetheless.”

31.

US President Obama concedes the legality but targets the offshore centers because they facilitate legal tax avoidance: “A lot of this stuff is legal, not illegal,” … “And unless the United States and other countries lead by example in closing some of these loopholes and provisions, then in many cases you can trace what’s taking place but you can’t stop it21.”

32.

Despite extensive reporting on the matter and the public outcry leading up to the resignation of the Icelandic Prime Minister, the UK’s Guardian Newspaper indicated that it had “seen no evidence to suggest tax avoidance, evasion or any dishonest financial gain on the part of Gunnlaugsson, Pálsdóttir or Wintris.”22

33.

Mr. Gunnlaugsson has denied any wrongdoing, saying holdings in the company, known as Wintris, were reported to Iceland’s tax authorities. The wall Street Journal reports23 that Mr. Gunnlaugsson was a postgraduate student, about a decade ago, when his partner received a hefty amount of cash from the sale of her share in a family business making off-road vehicles used in polar expeditions, according to a statement released by the prime minister’s office on behalf of Mr. Gunnlaugsson and his partner, Anna Sigurlaug Palsdottir, whom he married in 2010. The couple said they heeded their bank’s recommendation that the money be managed through a holding company registered in the British Virgin Islands.

34.

The prime minister argued that he wasn’t required to publicly report his connection to Wintris because it was really owned by his wife and because it was “merely a holding company, not a company engaged in commercial activities.”

Although reports show “no evidence to suggest tax avoidance, evasion, or any dishonest financial gain on the part of Gunnlaugsson,” his mere association with

20

http://www.nytimes.com/2016/04/06/world/europe/panama-papers-iceland.html?_r=0 Ibid 22 https://www.theguardian.com/world/2016/apr/04/icelandic-pm-gunnlaugsson-faces-no-confidence-votepanama-papers-wife-offshore 21

23

http://www.wsj.com/articles/icelands-prime-minister-sigmundur-david-gunnlaugsson-resigns-1459874528

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Mossack Fonseca and an offshore firm was enough to cost him his job, and possibly his career24.

35.

Here in Jamaica we have had the very public revelation that Prime Minister Andrew Holness (then opposition leader and election candidate) was and continues to be the owner of an offshore company formed to own his home and facilitate his tax planning scheme. He and his attorney have public declared that the manoeuvre was designed partly for the purpose of tax avoidance25

36.

Our leading newspaper, the Gleaner called on Mr Holness to “learn from the example of the Panama Papers” even as it conceded that: “Owning or holding one's assets in an offshore international business corporation (IBC) is neither of itself illegal nor evidence of corrupt intent. Indeed, they can be, and often are, legitimate and effective vehicles through which corporations and individuals can effectively organise their affairs and efficiently engage in global transactions.”26

SO IF ITS ALL LEGAL WHY THE UPROAR? It’s All About Taxes!

37.

So… something is wrong with this picture… the activities revealed are mostly legal … yet:  One popular Prime Minister loses his job and another not so popular politician who boasts of his offshore dealings is elected prime minister,  Law Firm offices are raided by police,  A country’s economy is savaged!

38.

The answer in my submission lies in the perception that the Panama Papers provide a reality show like dramatization of the long and widely held view that so many of our fellow world citizens are not paying what we perceive to be their fair

24

Harrington, Brooke (April 6, 2016) The Atlantic. Retrieved from http://www.theatlantic.com/business/archive/2016/04/panama-papers-crimes/477156/ 25

http://nationwideradiojm.com/holness-wasnt-evading-taxes/

26

http://66.132.220.41/article/commentary/20160407/editorial-learn-panama-papers

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share of TAXES. It is a rallying cry we are all happy and willing to unify around.

Every state needs contributions from its citizens and residents to cover expenses and none of us enjoy having to “pony up” our hard earned dollars to throw into this pot. The idea that some are benefiting from our contributions without throwing in their lot is galling and we are happy to see them exposed and squirm in embarrassment. The combination of watching those perceived as better off than us suffer (including celebrities like Simon Cowell27 and Emma Watson28), coupled with the fetish for scandal all presented in vivid real life colour is just too much to turn away from.

39.

Governments have of course the most to gain by hammering away at tax avoidance options and the Panama Papers simply provides an opportunity to exploit our voyeuristic glee to push the unending case for more revenue for the bottomless tax coffers. The Tax Haven is the enemy of the Revenue State and the phenomenon called the Panama Papers created a window of public outrage for world tax authorities and enforcers to launch a full scale attack that might otherwise have been greeted with public outrage instead of public support.

40.

It was always known that offshore centers do exactly what was revealed at Mossack, and that similar things go on in the offices of other professionals onshore, so why not raid all offshore agents and law offices? Why Mossack alone? Simply a case of seizing the day while we are all too drunk with voyeuristic enchantment to realize or care that basic rights are being trampled.

What are “tax havens”?

41.

The Business Dictionary describes a tax haven as a country or independent area outside the jurisdiction of one's home country which imposes only a few restrictions on legitimate business activities within its jurisdiction, and little or no income tax29. These jurisdictions generally provide international banking and financial services, and privacy of deposits and earnings. Tax havens are also referred to as low tax jurisdictions, non-tax jurisdictions, or offshore havens. Of course the people who live in them just call them “home” and don’t see the

27

Watt, H et al (2016, April 6) From Kubrick to Cowell: Panama Papers expose offshore dealings of the stars.

Retrieved from https://www.theguardian.com/news/2016/apr/06/panama-papers-reveal-offshore-dealings-stars 28 http://www.dailymail.co.uk/news/article-3583350/Emma-Watson-s-included-Panama-Papers-Harry-Potter-starrevealed-British-Virgin-Islands-offshore-firm.html 29

http://www.businessdictionary.com/definition/tax-haven.html

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difference between themselves and onshore countries which offer tax incentives of one sort or another to encourage investment.

42.

43.

Countries are typically selected because of one or more of the following advantages:       

44.

low or zero taxation in the country of incorporation; income earned outside the jurisdiction is not taxable; instead of taxation of income only a relatively small fixed annual fee is charged; simple procedures for incorporation and ongoing maintenance of companies; readily available shelf companies; no requirement for filing annual financial statements; and attractive trust laws.

As we have highlighted before, owning an offshore company or Trust is not illegal.

In fact, as Mossack Fonesca explained in its response to the media: “It is legal and common for companies to establish commercial entities in different jurisdictions for a variety of legitimate reasons, including conducting cross-border mergers 12

and acquisitions, bankruptcies, estate planning, personal safety, restructuring and pooling of investment capital from different jurisdictions in neutral legal and tax regimes that do not benefit or disadvantage any one investor”.30

45.

In other words, establishing an offshore company or trust may be a logical step in a broad range of business transactions or prudent estate planning. Offshore companies and trusts can be used to LEGALLY structure your affairs to:      

Enjoy peace of mind knowing that your estate will be distributed EXACTLY as you desire; Maintain control of your estate in the interim; Enjoy security and protection of your assets for you and your loved ones; Shelter your estate against tax and cash flow burdens; Avoid the cost, delays, tensions, and publicity of probate after death; and Take advantage of treaties (e.g. CARICOM Treaty) to avoid double taxation.

46.

BUT the fact that these options are legal does not change the problem for the Revenue Authorities that they cause less cash to flow to government coffers. Nor does it remove our jealous outrage that most of us don’t have access to these options and just have to pay the tax levied.

47.

As the business editors of Al Jazeera news stated: “The so-called Panama Papers highlight how easy it is for the wealthy, political elite and their families to set up shell companies in tax havens to conceal their wealth…

It has been known for some individuals to avoid tax by setting up offshore shell companies, in which they deposit their earnings before making loans to themselves. That way they avoid future tax liabilities….

While such offshore structures are legal they are increasingly seen as odious in the realm of public opinion31.”

30

Mossack Fonseca. (2016, May 10) Statement Regarding Media Coverage. Retrieved from http://mossfonmedia.com/ 31 http://www.aljazeera.com/indepth/features/2016/04/panama-papers-perfectly-legal-160404113825480.html

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48.

Markus Meinzer at the Tax Justice Network joined the call to bring down the offshore industry, not for illegality but because the rich can access them :“What came to light through the Panama Papers was that there is a systematic network of secrecy jurisdictions, of which Panama is only one and not the most important one, ….. These tax havens help individuals and economic and political elites to escape the rules and regulations of the societies in which they reside, and on which they and their wealth depend to a large extent.”32

49.

Another report cites:33 “Thirty years of runaway incomes for those at the top, and the full armoury of expensive financial sophistication, mean they no longer play by the same rules the rest of us have to follow. Tax havens are simply one reflection of that reality.

Discussion of offshore centres can get bogged down in technicalities, but the best definition I’ve found comes from expert Nicholas Shaxson who sums them up as: ‘You take your money elsewhere, to another country, in order to escape the rules and laws of the society in which you operate.’ “

IS THERE A MORAL DUTY TO PAY AS MUCH TAX AS POSSIBLE? 50.

So this is a presentation to lawyers at a law conference. What should be our approach as lawyers to this issue? How should we advise our clients? Is there an ethical duty on us to NOT HELP our clients to legally “escape the rules and laws of the society in which [they] operate” … if they so desire?

51.

If you live in a country which has a high tax rate, is it immoral or illegal for you to move to a country that has a lower rate, just to save money? When I was in New York this summer I learned that people drive over to New Jersey to shop, just because it has lower sales tax. Are they odious and immoral?

52.

Is there a moral duty on citizens to seek, and find, and pay the highest rate of taxes payable in all situations, and structure their affairs accordingly? If saying “highest” suggests hyperbole but “lowest” is immoral, what is appropriate? 90%?

Maybe 65% ?

32

http://www.worldfinance.com/wealth-management/behind-the-story-of-the-panama-papers

33

http://www.taxjustice.net/2016/04/11/the-panama-papers-are-not-about-tax/

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53.

We are all familiar with the well-known quote attributed to the American lawmaker Benjamin Franklin who wrote in a 1789 letter that “Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.”

Was he right?

What is a tax anyway?

54.

So we know that taxes are necessary and it is the role of the State to collect enough to run the country. A tax has been described as “a compulsory contribution to state revenue, levied by the government on workers' income and business profits, or added to the cost of some goods, services, and transactions”34. The government derives its authority to collect taxes from statute. The requirement to pay taxes is therefore a legal obligation and a taxpayer’s legal duty is to pay to the government that which is required of them by the statute.

55.

Sounds simple enough. But what happens when the statute has provisions which give the taxpayer the option of paying less taxes? Is he obliged to pay as much tax as he can? Every tax law has options that allows you to pay less. If you make more profit you pay more income tax. Some purchases attract more tax than others, can’t you chose to buy the exempt goods and thus pay no sales tax?

56.

In Jamaica the list of goods and services exempt from GCT is constantly changing.35 Let’s assume it includes the following:GOODS AND SERVICES EXEMPT FROM GCT General Consumption Tax Act Goods 1) Travel tickets for international travel. ….

8) Canned sardines, herrings and mackerel.

9) Infant formulae 10) (1) Bread, bulla and water crackers.

34

http://www.oxforddictionaries.com/definition/english/tax The link to what I believe to be the current list may be found here: https://www.jamaicatax.gov.jm/documents/10181/106844/goods_and_services_exempt_from_gct.pdf/06003f7d03b9-4e6a-89dc-698af3015aa5 35

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(2) In paragraph (1) “crackers” means small dry bakery products made only of bleached flour and water, with or without leavening or shortening and salted or unsalted, the total weight of which contains not more than ten per cent of sugar and without flavouring, coating or topping and verified to be such by the Bureau of Standards.

11) Rice.

12) Sugar (brown).

13) Salt.

14) Baking flour packaged in quantities of not less than 45.359 kilograms.

57.

Is it my duty to tell my client to try to decipher what the true intent of Parliament is in putting together this list, or should he try to just follow it based on what it says? Would it be odious and immoral of him to take the red herring that is normally sold dried and uncanned and place it in a can then sell it as canned herring and so avoid the GCT taxation?

58.

What if he normally sells his baking flour in packages of 45 Kilograms, and thus within the taxable band. Would he be considered an “odious” person trying to “escape the rules of society” by starting to sell them in 46 Kilo packages, just to avoid having to charge GCT ?

59.

Let’s imagine he is going on a trip from Kingston to Ocho Rios. We know have two two primary routes. There is the toll free two hour drive going across the treacherous flat bridge, around the steep Mount Rosser and through the narrow and slippery Fern Gully, and there is the express 45 minute drive along the new North-South Highway through the scenic hills of St. Catherine and St. Ann but with a toll charge of J$[1,220.00] (approximately US$10.00) one way travel. What if I just decide I don’t want to pay the toll and take the long painful route, which may well cost me more in lost business time, gas and wear and tear? Is doing it for no reason other than to avoid the toll, OK?

60.

OK, so maybe you are saying that these are easy ones. These are not the sophisticated types of

SCHEMES

the crooked offshore lawyers put together for

their rich clients. So does it matter how rich the client is or how sophisticated the “scheme” is? How many companies should be in a structure qualify to make it a “scheme”, one? two? three?

61.

As we have seen, offshore structures are used for a variety of reasons including:  Privacy, no I don’t want you to know that I am rich because you might kidnap my son for ransom!

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 Jurisdiction Change, If I own the boat it will have a Jamaican flag but if I incorporate a BVI Company to own it, it gets a British Flag and I have more rights when I sail into certain ports;  Avoidance of Forced Heirship; if I buy those US Treasury Bonds in my name then when I die my no good cheating and estranged (but not divorced) husband may be able to file a claim for some of it whereas if I use an Offshore Company and Trust to own it then the Trustee will give it to my children and cut him out.

62.

Are any of these in the Crooked Scheme realm as yet? Once we are not going based on the specific wording of the law then we must have some other basis, or do we just “know” when its wrong, just have a “gut” feeling? Can we just smell when it’s immoral?

63.

OK, let’s look at one of the more complicated ones to try to hit your threshold smell test.

64.

Let’s say the client has a business and is currently paying massive income tax on his profits, taxes on dividends and taxes when his shareholders transfer shares. He reads that if he gets the company listed on the Junior Stock Exchange he will be relieved of all these taxes. So he goes and lists for absolutely no other reason than to save taxes, no other corporate motive. It that OK? Would it matter if he went and got listed on the Stock Exchange for Barbados, or some other foreign country for the tax advantages they offer?

65.

What if for the same motive of saving and paying less taxes he decided to take advantage of the CARICOM Double Taxation Treaty. The Treaty provides relief from double taxation on dividends paid by a company which is a resident of a member State to a resident of another Member State by providing that taxes are to be paid only in the first-mentioned member state36. The Treaty goes further however and provides that the rate of tax shall be zero percent37. What this means is that where typical dividends from profits to ordinary shareholders are declared from a company in one-member state to a resident of another member state, said payment ought to be taxed at a rate of zero and hence be free from withholding taxes. One assumes that the policy theory behind this was that the CARICOM governments wanted to encourage trade and investment across member states and

36 37

Article 11 paragraph 1 of the CARICOM Tax Treaty.

Article 11 paragraph 2 of the CARICOM Tax Treaty.

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since, say, Barbados is going to charge its citizen income tax on the dividends he receives from his shareholdings in a Jamaican company it would not be fair to have Jamaica also tax the same dividend.

66.

But what if we advise the Bajan client to: transfer the shares in the Jamaican Company to a St. Lucian company which qualifies as a St. Lucian tax resident for purposes of the treaty. Hereafter dividends will flow to this company tax free and dividends paid by the St. Lucian company to its shareholders are not subject to withholding tax in St. Lucia.  put the shares of this St. Lucian company in a BVI Trust rather than in his own name so that it and the underlying assets wont form a part of his estate and be subject to taxation on his death.  incorporate separate companies in different offshore countries, one to purchase and own a townhouse he wants to leave for his son, and the other to own various investments and securities. He will now avoid various transfer, asset and other taxes before and after death!  And just to make it a bit more “schemey” looking let’s have them all run their money through a bank in the Cayman Islands

67.

Our Client’s Offshore tax efficient structure would look like this: BVI TRUST Cayman bank Account

St. Lucia CARICOM Co.

Nevis IBC

Jamaican Company

Anguilla IBC

Multi-Million Dollar Townhouse

Millions in Investments and Securities

$$$$

$$$$$$

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68.

Millions of dollars will no longer go to the starving tax coffers of the Caribbean while other citizens continue to pay taxes they can hardly afford. Now is that a “scheme” that though legal is one we should be ashamed of setting up? To be clear we can add as many extra companies in as many jurisdictions as you like to make it even more complicated and “crooked looking”.

69.

Is it possibly that we are more inclined to consider to be immoral, unethical or maybe illegal arrangements that we don’t understand because it’s out of our comfort zone???

WHAT DO THE COURTS SAY? 70.

Now detractors will say that the Courts now take a “purposive”, pro tax and “antiavoidance” approach to the interpretation of tax statutes. Gone they say with glee are the days when you tax lawyers could point to your beloved Westminster38 and recite the words of Lord Tomlin which hang framed on your wall. They refer of course to the following seminal words of the wise, noble and learned Judge: Thomas James Chesshyre Tomlin, “Baron Tomlin” Lord in Ordinary, who in 1935 (just a few months before his death in office) said:“Every

man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.”39 71.

Now they say, we are ruled by Ramsay40 which they argue gave the Courts judicial power to ignore legal tax avoidance structures particularly where there was a circular pre-ordained transaction into which steps had been inserted for no commercial purpose other than to save tax. The effect of the Ramsay principle was

38

IRC v Duke of Westminster (1936) AC 1 Ibid at page 19 40 WT Ramsay Limited v IRC [1981] UKHL 1 39

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that the court could examine the transaction as a whole in order to determine whether there are any pre-arranged or artificial steps which serve no purpose other than to save taxes. This approach entitles the court to disregard or ignore these intermediary steps and look to the end result of the transaction.

72.

The foregoing principle was applied in Jamaican cases such as Carreras Group Limited v Stamp Commissioner41, a case which involved questions as to liability for transfer tax on shares. In that case, the Privy Council adopted a wide view of the transaction, assessing it as a whole and applying the Ramsay approach to interpreting tax statutes. It is noteworthy however, that the Privy Council also cautioned that there may be cases in which the facts would not justify a similar conclusion and therefore the precedent should be used advisedly.

73.

In Cigarette Company of Jamaica Limited v Commissioner of Taxpayer Audit and Assessment42 , Morrison JA also commented on the limitation of the Ramsay principle and opined that “Barclay’s expressly recognised that in the commercial world schemes of tax avoidance can give rise to transactions or elements of transactions which appear to have no commercial purpose………. ..But that does not necessarily mean that “in the application of any taxing statute, transactions or elements of transaction which [have] no commercial purpose [are] to be disregarded.” What is required in every case is for the court to decide, on a close analysis exactly what transaction the statute was intended to capture and then to see whether the transaction in question falls within the statutory net.”

74.

While a full review of the evolution of the Ramsay principle is beyond the scope of this paper, it seems to be generally agreed that what initially threatened to be a carte blanche policy driven rule to protect revenue, has evolved into a statutory tool of interpretation. Its application in a taxation context seems more relevant to complex “onshore” commercial contractual arrangements than to offshore structures of the kind we have been discussing or the kind that offshore centers are usually used, or criticized for.

75.

As recently as 2014 the Jamaican Court of Appeal in Digicel Jamaica Ltd v Commissioner of Taxpayer Appeals 201443 in discussing Ramsay stressed that:

41

(2004) 64 WIR 228 Revenue Court of Appeal No.1 of 2005, para. 55 43 [2014] JMCA Civ 36 42

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“in interpreting the provisions of a revenue statute, …., the paramount question for the court is the construction of the particular provision and its application to the facts of the particular case” [emphasis added] 76.

Morrison JA referred to the following extract of the judgment of Lord Wilberforce in Ramsay: “A subject is only to be taxed on clear words, not on ‘intendment’ or on the ‘equity’ of an Act. Any taxing Act of Parliament is to be construed in accordance with this principle. What are ‘clear words’ is to be ascertained on normal principles; these do not confine the courts to literal interpretation. There may, indeed should, be considered the context and scheme of the relevant Act as a whole, and its purpose may, indeed should, be regarded…” [emphasis added]

77.

He concluded therefore that: “It accordingly seems to me that, in seeking to discover whether section 18(4) applies to the proceeds of the insurance settlement received by Digicel in accordance with the terms of the policy in this case, it is necessary to have regard to the clear words of the Act, looked at against the context, scheme and purpose of the Act as a whole and section 18(4) in particular”.

78.

There is therefore no specific principle of law arising from Ramsay or elsewhere that affects Lord Tomlin’s basic tenet or makes an offshore arrangement that has the effect of tax avoidance ineffective. The statute will be looked at in a non-literal way to determine its true meaning.

79.

The type of matter to which Ramsay in its current form applies is illustrated by the 2016 UK Supreme Court case of UBS AG v Revenue and Customs Commissioners44.  The relevant tax laws provided that the award of shares to employees was exempt from tax if the shares were subject to a condition making them liable to forfeiture if some contingency occurred. For example, a senior executive of a company might be awarded shares subject to a condition that the shares would be forfeited if performance targets were not met. In that event, no tax was payable on the award of the shares.  The employer desired to award discretionary bonuses to some employees, but rather than paying the bonuses to them directly (which would have been taxable), the employer instead used the amount of the bonuses to pay for redeemable shares in offshore companies set up for the purposes of the

44

[2016] 1 WLR 1005; [2016] 3 All ER 1;

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

  









schemes. The shares were then awarded to the employees in place of the bonuses. Conditions were attached to the shares making them subject to forfeiture so as to qualify for the tax exemption.

In the UBS case the contingency was a specified rise in the FTSE 100 index within the following three weeks. The contingency was unlikely to occur and it was also hedged against so that even if it did occur the employees would not lose out significantly.

In the DB Group case, the contingency was the employees being dismissed for misconduct or voluntarily resigning within the next six weeks.

Once the exemption from income tax conferred by sections 425(2) and 429 had accrued the shares were redeemable by the employees for cash, tax free.

The central question in the appeals was whether the conditions attached to the shares fell within the scope of the statutory provision conferring the exemption. On a literal interpretation of the statute, they did. But the question was whether a literal interpretation reflected what Parliament had intended.

The Court was of the view that tax statutes were generally concerned with real-world transactions with real-world economic effects. Where a transaction, or an element of a transaction, had no real world purpose but was designed purely to avoid tax it could usually be said that to allow the tax treatment to be governed by an element that had no real world purpose of any kind was inconsistent with that fundamental characteristic.

The Court took the view that it was difficult to accept that Parliament could have intended to encourage by exemption from tax the award of shares to employees where the award of shares had no purpose whatsoever other than the obtaining of the exemption itself. The fact was that the shares were in a company which had been brought into existence merely for the purposes of the scheme, undertook no activities beyond its participation in the scheme and was liquidated upon the termination of the scheme.

The encouragement of such schemes, unlike the encouragement of employee share ownership or share incentive schemes, would have had no rational purpose. Furthermore, it was clear that one of the purposes of the legislation was to forestall tax avoidance, so it was hardly likely that Parliament had intended it to apply to tax avoidance schemes.

The provision conferring the exemption (section 423(1) and (2)) was therefore to be construed as being limited to conditions having a business or commercial purpose and did not apply to commercially irrelevant conditions whose only purpose was the obtaining of the exemption. It

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followed that income tax was payable on the bonuses, based on the value of the shares awarded to the employees.

80.

For my part even this approach may be going too far and crossing the line between judicial interpretation and judicial law making.

IF THE SCHEME IS LEGAL AND SAVES MONEY, DOESN’T A COMPANY DIRECTOR HAVE A DUTY TO EXPLOIT IT? 81.

Directors of Companies worldwide generally have a duty to their company similar to that found in Section 174(1)(b) of the Companies Act of Jamaica: “Every director and officer of a company in exercising his powers and discharging his duties shall - … (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances, including, but not limited to the general knowledge, skill and experience of the director or officer.”

82.

It would seem that if the purpose of the Company is to make a profit and provide dividends to its shareholders while observing the law, then the directors should have a duty to utilize all legal methods to maximize such profits, even if that means paying less tax.

WHAT IS THE DUTY OF THE LAWYER? 83.

Every Attorney is bound by the Canons of Professional Ethics. These rules generally provide that an Attorney should not be a party to any illegality or counsel their client in how to break the law.

The Canons include the following: CANON III (f): “An Attorney shall not act contrary to the laws of the land, or aid, counsel or assist any man to break those laws.”

CANON IV (q): “An Attorney shall withdraw forthwith from employment or from a matter pending before a Tribunal- … (ii) where the client seeks to pursue a course of conduct which is illegal or which will result in deliberately deceiving the Court; 23

… (iv) where his continued employment will involve him in the violation of a Rule of Law or a disciplinary rule; …”

CANON V (n) “An Attorney shall not counsel or assist his client or a witness, in conduct that the Attorney knows to be illegal or fraudulent, and where he is satisfied that his client has in the course of the particular representation perpetrated a fraud upon a person or tribunal, he shall promptly call upon him to rectify the same.”

Similar provisions can be found in other jurisdictions as well.

Every Attorney is bound by these ethical rules and must conduct themselves accordingly. No Attorney should therefore assist their client to break the law, whether or not this will involve the use of ‘offshore companies’.

Furthermore, let’s not forget that where an Attorney knowingly assists a client to commit a crime – like tax evasion – he is not exempt from the law, and is subject to criminal prosecution like any other person, in addition to disciplinary proceedings.

Nothing here about “immoral” tax avoidance or circumventing the “true intent” of Parliament.

84.

I have known some “non-commercial” lawyers to smirk at any arrangement that involves an offshore content, and look with disdain and any tax avoidance strategy, but what if the “Ramsian” purposive approach was applied to the areas in which many non-commercial lawyers seek to assist their clients to achieve their goals within the strict interpretations of the law?  How many civil and criminal litigation cases are decided on “technicalities” rather than substance? How many cases are lost because inexperienced prosecuting counsel didn’t plead the correct statutory provision even though all present knew full well what was meant? How often does counsel rely on the slightest nuance of the words used in a statute to serve their clients desired outcome? Is this what Parliament really intended?  How many criminal attorneys have appealed on purely procedural grounds or technicalities to challenge a verdict or sentencing even when there is accepted evidence that the client committed the crime?

24

 When Parliament set out to control rent and protect the poor and vulnerable from rapacious land barons, they provided that even if a tenant agreed to a rent any amount in excess of the legally controlled sum was recoverable.

Did they intend to allow commercial or well to do clients who agreed of their own volition to benefit from the provision. Do those lawyers who so advise feel morally guilty and advise their clients not to take advantage of the section?  Is the adverse possession (squatter) law always used in the way it was intended? How often is the true policy intent of Parliament openly and knowingly avoided by lawyers who advise their clients in this area?

85.

Is this any different from advising a client that if they arrange a transaction in a certain way they will have the benefit of provisions of a taxing statute?

86.

Is the tax planning attorney unethical or immoral for taking advantage of a “loophole” but the other not so?

CONCLUSION – DONT THROW OUT THE BABY WITH THE PANAMA PAPERS 87.

The point is Lets Not Throw Out The “Baby” With The Panama Papers.

88.

Let’s agree that there are people who use offshore centers, and offshore companies, and Trusts for illegal activities. But there are also people who use cars as weapons to run over someone or to escape from a crime scene, there are people who use religion as a weapon to seduce and confuse and steal from others and there are even people who use airplanes as weapons to commit mass murder.

89.

Bad people will use any otherwise good thing for bad purposes. It is not the thing, the product or facility itself that is bad, it is the people and their intentions. As Mossack Fonseca pointed out in its response to media reports on the Panama Papers 45:

45

Mossack Fonseca. (2016, May 10) Statement Regarding Media Coverage. Retrieved from https://www.theguardian.com/news/2016/apr/03/mossack-fonsecas-response-to-the-panama-papers

25

“… the instances you cite in your reporting represent a fraction – less than 1% – of the approximately 300,000 companies that Mossack Fonseca has incorporated in its over 40 years in operation. This fact shows that the vast majority of our clients use companies we incorporate for legitimate uses and that our due diligence and compliance procedures are overwhelmingly successful in thwarting those who have other intentions.”

90.

The solution to the problem is the same as it is for all crime. Better and more efficient regulation, better laws to close the loopholes you don’t want. The many ongoing initiatives include: The Financial Action Task Force (FATF) has issued numerous know your customer (KYC) guidelines, anti-money laundering (AML) and combatting the financing of terrorism (CFT) policies which are complied with internationally, including by offshore jurisdictions.  More recently, the U.S. Foreign Account Tax Compliance Act (FATCA), has forced almost every country (including offshore jurisdictions) to implement reporting measures in order to reveal Americans with accounts over $50,000.00.  As a result of increasing calls for transparency and pressure from FATF, many offshore jurisdictions have also implemented local legislation, regulations and policies to strengthen the due diligence requirements surrounding the provision of their services e.g. BVI Business Compliance Companies (Amendment) Act, 2015 and the BVI AML (Amendment) Regulations, 2015, Panama AML/CFT policies.  Additionally, most jurisdictions have formal tax information exchange agreements with several countries that are approved by the Organization for Economic Cooperation and Development (OECD) including double taxation agreements (which include provisions for information sharing between authorities).

91.

So let’s consider the concept of the “Panama Papers” to be our euphemism for the bad eggs of the industry. Let’s agree to throw them out, but let’s not throw out the good parts, let’s not allow those with their own self interests to destroy the industry, lets not:  Deprive famous persons of the right to privacy of their assets and thus avoid paparazzi who stalk them;

26

 Remove this potential source of jobs and income from the many small economies who can no longer look to their banana, sugar or tourism industries for survival;  Deny parents the option of having their bequest go to the child of their choice rather than the “eldest son” just because that’s what the law of their home State demands; or  Force persons to have to have their estate wind through the public and archaic probate process of many countries when options exist for them to have the estates administered in a more private, less costly and more efficient manner

Let’s not:Throw Out The Baby With The Panama Papers’ Bathwater!

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