Decoding Panama Papers Leak

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Akhil Verma, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur

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Tremors generated by the leak of confidential documents from Panama law firm Mossack Fonseca had rocked the world of the politically influential and rich persons across the globe. The details that have been emerging from the release of the documents are simply too glaring to be overlooked.

Firstly, talking in context of India, significant sections of the population feel that this is the case of black money stored in foreign countries which needs to be brought back to the country. On the other hand, a section of Indian capital feels that instruments like the black money law are not as much about preventing black money as they are tools of harassment. In fact, there is a very thin line between the legal and the illegal black money. The difference between tax evasion and tax avoidance is one such line. Tax evasion involves not paying taxes on your income and is illegal. Tax avoidance, on the other hand, is about managing your taxes across different tax jurisdictions to take advantage of differences in tax rates, such as corporate tax rates, in tax treatment of different kinds of income, such as capital gains, and in tax treaties among countries.

Now, talking in context of OECD countries which have simpler tax laws with lower tax rates and lower compliance costs, Panama Papers reveal that even here it is a challenge to prevent illegitimate cross-border flows.

The problem is not about individual cheating or corruption but structural corruption. It is not easy to book such people, who have taken legal shelters abroad after allegedly cheating the governments, banks and even the innocent public of their countries of origin. In the future, the focus should be on more stringent reporting requirements, better international sharing of data, and more closely coordinated cross-border verification and enforcement efforts. For a country like India, it is a lesson that when countries with simpler laws and better enforcement are not able to prevent violations of the law, we cannot hope to do so with our maze of tax laws and much weaker tax administration.

 

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