The Panama Papers — what exactly is the problem?

FT Alphaville – August, 2016 | By Howard Bilton

It’s almost five months since 11m private documents leaked out of a Panamanian law firm, Mossack Fonseca. This guest post from Howard Bilton, chairman of off-shore advisory specialist The Sovereign Group, looks at the broader state of play for those looking to minimise their tax bills.

It’s a widely held assumption: nobody would set up a company in Panama unless they were doing something illegal. But what is it that is illegal? There is nothing under UK law which prevents our citizens or tax residents from setting up a foreign company. We abolished exchange control long ago and we are free to invest wherever we want, however we want. That includes investing in Panama or setting up a Panama company to hold assets or investments anywhere else in the world. So what exactly is the problem?

One of the problems is the very idea that somebody might seek to gain tax advantage is objectionable even if it is totally legal. But the famous dictum espoused in the 1936 Duke of Westminster case still applies in this country i.e. that a taxpayer is entitled to arrange his affairs in any legal way which minimises the amount of tax payable.

There is no general duty to maximise the amount of tax. There is now a raft of legislation aimed at minimising the opportunities to reduce tax. We have the relatively new General Anti-Avoidance Rule (GAAR). This can be used to negate the effect of any arrangement which “artificially” reduces tax. The Disclosure Of Tax Avoidance Schemes (DOTAS) regulation requires any “scheme” to be notified to HMRC. Once notified HMRC will look at it most critically and use any and all available powers to charge tax where it has been avoided.

Read the full article here.