Paradise Papers have leaked! But what are they? What are the tax implications? These are details of some 13.4 million files that have leaked from tax havens. The leaks have exposed wealth secrets and probably tax secrets of several very wealthy individuals from across the globe.
a. Affiliate Disclosure: These are affiliate links from which we receive a commission at no cost. Read full Affiliate marketing disclosure HERE.
b. Tax Contents Disclaimer: The tax industry in Kenya is very dynamic. The tax contents in the posts are not professional advice. Read full disclosure HERE.
But what is the Big Deal?
It is alleged that wealthy individuals have hidden their wealth far away from the reach of the tax authorities. Hence, the individual is guilty of engaging in tax avoidance.
A few months ago it was the Panama Papers. Again it was the same issues that are as old as the Christian Gospel (remember the Bible story of short taxman Zacchaeus). People fear taxes and the taxman or woman for obvious reasons.
But the tax people understand one thing that taxpayers do not seem to understand; information is power. Therefore, the tax people like the cat at the entrance of the rat hole, bid for their time.
Even though Benjamin Franklin proclaimed the widely known fact that “there are only two things certain in life: death and taxes”, there is something else in the block; information of non-compliant taxpayers will one day be available in broad daylight.
The tax people do not even need to bother looking for it … it crawls to their offices uninvited.
Hence, even before the dust of the Panama Papers has settled, we now have the Paradise Papers leak. At this moment we are forced to ask one question: is it cheaper to comply with taxes or be exposed through leaks of supposedly very private information?
The Costs
From our long experience in the tax industry, our conviction is that any day, it is cheaper to comply with the tax law than to face the backlash that comes with the leaks.
Imagine the personal costs in terms of embarrassments, numerous questions, the judgments from family and friends etc.
On the business front, multi-billion businesses may go down from the leaks. The tax fines, penalties and interest that may be levied on any taxes established may be unimaginable.
The information leaks may result in tax-related stress of unimaginable proportions that may result even in the death of some person or the businesses they are associated with.
It is a very costly affair.
As far as tax is concerned, the adage is true: there is no secret between two people. This includes tax secrets. Betrayals are the order of the day these days for whatever reasons and there are many out there. Hiding wealth from the taxman does not help. The secret will leak one day, especially in this age of the internet.
Who is to Blame?
There are two groups of people involved in tax haven schemes. Some of the people who have been caught red-handed bear the blame one hundred per cent. They knew what they were doing and fully understood the consequences. They were in it line hook and sinker for the long haul.
However, there is another group; the innocent ones. In my country Kenya, one is innocent until proven guilty. Hence, we advance the understanding that not everyone who has money in the tax havens is guilty of tax avoidance and tax evasion. Some people may be innocent of the true meaning of the word. How?
Investment Adviser
Some of the people may have been sold the tax haven schemes and they did not and still do not understand or even know the consequences of keeping their wealth in the tax havens and not paying taxes. Other people may already have paid tax on the money.
But is keeping money in the tax havens illegal? No. What is illegal is keeping money and not accounting for the applicable taxes especially income tax.
We are aware that ignorance is no defence. However, some people do not understand the implications of holding their wealth in tax havens. This is an acceptable fact no matter how bitter may sound.
In this case, their tax planners, tax lawyers, accountants etc. are to blame for the mess they have put their clients in and they should be held accountable. Of course, we are aware of the kind of hefty fees the taxpayers are charged in exchange for the schemes that have proven to be as fluid as jellyfish.
Tax Regimes
Some of the tax regimes in the West encourage tax avoidance. How? The very requirement of taxation of only repatriated incomes into the residents’ tax base encourages tax avoidance. When income is generated across the world, the owners can pack the income in the tax havens and only repatriate what they require in their tax bases on a need-be basis.
A Few Solutions
There are several solutions to this problem. We propose three solutions to start with. These would help the affected people and governments.
Massive Tax Education
One of the solutions to this problem of tax avoidance is massive tax education of the taxpayers so that they understand that at the end of the day, it is cheaper to comply with tax laws in their country and elsewhere.
A well-informed taxpayer is better than an illiterate (tax-wise) taxpayer. Governments have a responsibility to help their residents understand matters of tax.
Tax Regimes
Governments should also help their citizens by putting in place tax regimes that encourage payment of taxes even though the income earned elsewhere across the globe is not repatriated to the resident’s tax base.
Extend Responsibility
Also, governments should extend the responsibility of the tax avoidance consequences to the tax advisers, tax lawyers, accountants and everyone else involved in enabling the taxpayers to avoid tax. They need to shoulder responsibility for their actions.
Conclusion
As country borders are broken down and the world transitions into a small village, there will be more leaks of information that has tax consequences.
Taxpayer must also remember that most of the exchange of tax information agreements will become fully effective from January 2018. Taxpayer’s information will be easily available across the globe.
A lot of information will be available on the wealth that has been stashed away in tax havens and elsewhere. Tax authorities across the world and especially those in the Third World countries Kenya included will have a field from January 2018.
But the question remains: will any taxes be levied and paid to the affected governments? Getting information is one thing, taxes are a different story.
Thank you for reading the article.
Dr. Wakaguyu Wa Kiburi
