Panama Papers: Where are the disclosure of documents of the U.S. wealthiest individuals and their use of offshore trusts and companies to conceal their wealth?

As you may or may not know, on Sunday April 3, 2016, a disclosure of a Panamanian law firm’s records, dubbed the Panama Papers, exposed world leaders and wealthy businessmen/women and their associates that utilized offshore trusts and companies to hide assets from taxation in their respective foreign countries.  (See International Consortium of Investigative Journalists (“ICIJ”) article about the Panama Papers; USA Today article; the Guardian article explaining the Panama Papers; and the German newspaper, Süddeutsche Zeitung (SZ) (which allegedly initially exposed the Panama Papers), article explaining the Panama Papers.  See also an infographic about the world leaders allegedly exposed for their use of offshore entities created/maintained by the Panamanian law firm.  Note: a person “exposed” or “implicated” in the Panama Papers does not automatically mean they are or have done any wrongdoing.  See the Huffpost article with a simple reddit user’s explanation of the Panama Papers through the use of a piggy bank, showing that the use of offshore trusts and companies does not necessarily implicate wrong doing.

As part of the “fallout” from these disclosures, at least one world leader (Iceland’s Prime Minister) has already resigned from his position due to his connection with entities exposed as part of the “Panama Papers". See the Huffpost article about Prime Minister Sigmundur Davíð Gunnlaugsson’s resignation.

The Panama Papers and the exposure it is receiving, raises a serious question, namely: Where is the information about the U.S.’ wealthiest individuals and corporations that might have undertaken similar or same offshore trust and company creation schemes to hide/shield their wealth?  See Craig Murray’s blog post raising the same inquiry. Mr. Murray states that one reason the exposure focuses on Russia and other UN sanctioned countries, is because the ICIJ is funded by the U.S. Center for Public Integrity which is further funded by various U.S. private foundations.  Mr. Murray posits that these entities would never expose the western world’s use of such entities. 

The IRS has estimated that U.S. corporations and wealthiest individuals have been avoiding the payment of taxes in the amount of $385 billion for 2016. Therefore, it begs the question, Are U.S. corporations and individuals utilizing structures implemented by the Panamanian law firm or similar entities in tax haven jurisdictions to generate the Tax Gap as estimated by the IRS?  This inquiry, as stated by Mr. Murray, suggests that the people behind the release of the Panama Papers may be hiding the exposure of “western” corporations and individuals, which may have undertaken the use of the same offshore strategies.

Perhaps the Senate Permanent Subcommittee on Investigations which has begun the process of exposing the U.S. corporations through its investigations of the largest U.S. corporations with offshore profit shifting, including: Microsoft and Hewlett Packard; Apple; and Caterpillar.  PSI also held a hearing on the offshore banks that have assisted individuals in hiding their assets in offshore jurisdictions and evading taxes. 

With the release of the Panama Papers, it would be interesting to see if the other documents by the Panamanian law firm would implicate the entities and individuals investigated by PSI or other prominent U.S. corporations or individuals who have utilized offshore structures to undertake the same tax avoidance schemes identified by PSI and IRS.  Since we do not have access to the source material and can’t search the documents which were recovered, we may never find out if there are other U.S. corporations or individuals.

Another reason for determining whether the Panama Papers expose U.S. entities or individuals is apparently the U.S. is now considered the number 3 tax haven because of its banking secrecy practices.  See the AP article regarding the U.S. as a tax haven for other countries’ tax dodgers.  Therefore, the exposure of U.S. entities or individuals would help IRS and other countries’ tax governing bodies limit/prevent tax avoidance/evasion. 

If you have specific and credible information of individuals and/or corporations utilizing structures described in the “Panama Papers” and would like to file a claim for an award with the IRS tax whistleblower program, please contact us.

Pfizer and the Inversion Debate.

As everyone is aware, America will lose another company in 2016 to Ireland with the closing of the Pfizer – Allergan inversion.  See Bloomberg article.  With the inversion (See this Fortune article for more information about inversions), Pfizer will relocate its corporate headquarters to Ireland and continue its long standing policy of transferring profits from the U.S. to a lower tax jurisdiction.  Pfizer’s move will continue a trend of U.S. companies playing the shell game with its U.S. sourced profits through transfer pricing.  See these Bloomberg articles regarding profit shifting to avoid taxes and  the U.S. corporate tax-dodge

The obvious question about such a move is: What happened to President Obama’s and Treasury Secretary’s, Jacob J. Lew, position that the US would try and prevent future inversions (See Forbes article for more information of the Treasury Regulations) in response to Pfizer’s first failed attempt to invert by purchasing Astra Zeneca?  (Note: see Bloomberg article about Pfizer’s attempt to acquire Astra Zeneca).  As stated by the Wall Street Journal, the Treasury’s efforts failed to prevent US inversions or foreign corporations from acquiring US corporations. 

So how does the U.S. solve the problem given the ineffectiveness of the changes to the Treasury Regulations?  Possible solutions could be: 1. To lower the corporate tax rate in the United States; or 2. A Tax Holiday.  See Congressional Research Service’s article: Corporate Expatriation, Inversion and Mergers: Tax Issues for a discussion of the solutions proposed to solve the inversion problem.

The first solution would be to de-incentivize corporations from changing their home jurisdiction by matching the corporate rates in other countries.  However, that might not stop the mass exodus of corporations or generate job in the U.S.  See Sam Becker’s article about Kansas’ attempt to lower tax rates for businesses and the negative impact on jobs in Kansas.

The second solution might be to declare a tax holiday and allow the companies to bring back money to the United States at a reduced rate or without paying tax.  As stated in Jaimie Woo’s Huffington Post article this might not be the best idea, because it is rewarding the companies that shifted its profits offshore through transfer pricing by allowing them to bring the profits home at a much lower rate.  Also, the tax holiday would not address the problem of inversions, because the reason the companies are inverting is to avoid all U.S. taxation, not just at a reduced rate.

Another possibility, but rarely discussed is an expatriation tax.  This solution wouldn’t solve the corporate inversion problem, but would provide a huge incentive to not invert. What is an expatriation tax?  If you are a U.S. Citizen and want to renounce your citizenship (or are ordered to renounce your U.S. citizenship), the IRS treats that situation as an expatriation and imposes a tax on all your assets.  See Internal Revenue Code Section 877A.  As stated by the IRS, the Expatriation Tax would treat the individual as having sold all of his/her assets the day before expatriating their citizenship, and would impose a tax on the sale of those assets (with a sizable exemption).

The Expatriation Tax Model could be implemented to include Corporations and not just U.S. individuals.  This would require the U.S. Corporations to pay the tax on the deferred earnings of their offshore subsidiaries, and all other assets prior to inverting to the foreign jurisdiction.  This would make sure the company pays its fair share of U.S. taxes before utilizing the foreign jurisdictions tax benefits.

Could this unique solution work?  It might not stop the inversions, but it would at least cause the corporations to pay their fair share of taxes for choosing to relocate (on paper) its corporate headquarters in another jurisdiction.  Unfortunately, as with the proposed legislation (changing the tax rate and a tax holiday) it is unlikely that Congress will implement this solution to prevent corporations from avoiding U.S. taxes.

If you feel strongly about inversions and have specific/credible information about corporations avoiding the payment of tax, something that you can do now to limit the tax avoidance is to utilize the IRS tax whistleblower program.  The IRS pays an award between 15% to 30% of the tax collected to a whistleblower with specific and credible information about a corporate taxpayer’s avoidance of tax (either through an inversion or other methods, such as transfer pricing, or sham transactions).   Contact us if you want to file a tax whistleblower claim.