TWN Info Service on Finance and Development (May17/04)
23 May 2017
Third World Network

United Nations: Panama urged to deepen reforms on tax evasion
Published in SUNS #8466 dated 19 May 2017

Geneva, 18 May (Kanaga Raja) -- A United Nations human rights expert has called on the government of Panama to deepen its reforms on tax evasion, focusing amongst others on strengthening governance and incorporating the banking sector in any national strategy towards curbing illicit funds.

This recommendation was made by Mr Juan Pablo Bohoslavsky, the UN Independent Expert on the effects of foreign debt and other related international financial obligations of States on the full enjoyment of all human rights, at the end of an official nine-day visit to the country from 2-10 May.

In an end-of-mission statement, the rights expert noted that illicit financial flows are a global challenge, affecting developed and developing countries.

They are not accidental or a by-product of the market, rather these flows often appear to be the result of state- sanctioned practices.

"There is no doubt that these flows can only be effectively addressed and curbed through mechanisms of international cooperation and shared accountability," said the rights expert.

By the same token, responses by one country alone, isolated from structural changes in other jurisdictions or from international efforts to fight opacity, will seldom produce meaningful results.

"This is why I commend Member States of the United Nations for committing themselves to reducing such flows substantially as part of target 16.4 of the 2030 Agenda for Sustainable Development."

Closely linked, the Addis Ababa Action Agenda states that the bulk of the funds needed to reach the Sustainable Development Goal will come from the developing countries themselves through significant gains in domestic resource mobilization.

The reduction of illicit financial flows and other tax abuses and the universally understood need to increase domestic resource mobilization are inherently connected to each other and, of course, to human rights.

While there is a large number of phenomena classified as illicit financial flows and other tax abuses, including illegal tax evasion, clandestine tax avoidance by transnational corporations, bribery, corruption and other criminal activities such as money laundering, trafficking of people, drugs, weapons or child pornography, it has been estimated that the majority of all illicit financial flows are related to cross-border tax-related transactions.

Indeed, said Mr Bohoslavsky, the rationale for international capital movements transferring financial assets or accounting profits to jurisdictions with low (or no) taxation and strong secrecy rules is essentially for reducing tax payments.

Curbing tax-related illicit financial flows ought to include minimizing tax evasion by high net-worth individuals, commercial tax evasion through trade mis-invoicing and tax avoidance through abusive transfer-pricing by transnational corporations.

Global estimates point to a significant amount of wealth held offshore, benefiting from secrecy and the use of financial instruments that have been set in a number of countries, not declared appropriately.

Using 2015 estimates available, there are between $24 trillion to $36 trillion unrecorded private wealth invested offshore.

It has been estimated that the relative amount of wealth from developing countries held abroad is much greater than for developed countries, ranging from 20-30 per cent in many African and Latin American countries.

It has been estimated that 85 to 90 per cent of wealth belongs to fewer than 10 million people - just 0.014 per cent of the world's population.

The rights expert pointed out that there are three main measures that can contribute to overcoming the shadow economy:

(a) abolition of shell companies and anonymous accounts, by imposing a legal requirement for public disclosure of ultimate beneficial ownership information of all business entities, including companies, trusts, charities and foundations;

(b) automatic exchange of tax-related information worldwide; and

(c) public country-by-country reporting, mandated by a legal obligation on multinational corporations to submit thorough reports about their assets, profits, revenue, taxes paid and number of employees, their profits and losses in every jurisdiction where they operate rather than presenting a consolidated balance.

"Empty and easily manipulated corporate vehicles, hidden funds with unknown owners, and impunity for designing global corporate strategies to pay zero or near-zero taxes do not deliver inclusive growth."

Mr Bohoslavsky noted that the recent so-called "Panama Papers" (along with information leaks about similar phenomena) drew international attention to the scale and volume of tax abuse and money laundering by business corporations, politically exposed persons and high-net worth individuals from around the world.

"Whilst the international perception is that this scandal was a turning point in the domestic sphere towards enhanced regulation and more transparency in Panama, I have learned during this visit that there were already a number of discussions and reforms set in place well before the "Papers", and that the revelations accelerated their implementation, and gave them a more robust focus."

Among these reforms are new obstacles on corporate shares issued to bearer, establishment of an obligation to companies to keep accounting books of offshore transactions, reinforcement of due-diligence requirements on resident agents who are asked to identify the real owners of the corporate vehicles for which they provide services, regulation and supervision of non-financial actors (such as casinos, Free Trade Zone of Colon, accounting and legal firms, and real estate, among others) who are now obliged to report suspicious transactions.

"Yet, I am convinced that Panama needs to broaden its understanding of the challenges in terms of financial and fiscal opacity."

The rights expert said firstly, he has learned that tax evasion is not considered a crime under Panama's criminal law. Those obliged to report suspicious transactions do not have to pay close attention to whether taxes involved have been paid or not.

The entire suspicious transaction reporting system does not seem to grasp the fundamental fiscal dimension of the broader illicit financial flows problem.

In other words, "know your client" currently excludes assessing compliance with tax obligations and status at home or abroad.

In the rights expert's view, this gap needs to be closed in the Panamanian regulation without delay.

Second, he believes that the financial and banking sector still needs to be integrated into the agenda of curbing illicit funds in Panama.

The banking sector in the country represents approximately 7 per cent of the GDP, with 90 banks in operation, most of them licensed to carry out general activities domestically and internationally. This begs the question: what role have the banking and financial institutions played in the flows of funds that the corporate vehicles facilitate?

"While it is true that many financial transactions performed by companies formally created in Panama take place in foreign jurisdictions, given that more than 40 percent of the financial assets in the Panamanian financial sector are sent/lent abroad, I find it absolutely essential that any national strategy towards curbing illicit funds incorporate the banking sector," he said.

The rights expert also noted that the overall involvement of financial institutions in abusive tax planning strategies for transnational corporations worldwide is confirmed by the number of cases in which individual financial institutions received specific declared penalties and investigations for a host of infractions, the most widespread of which was helping wealthy clients and corporations engage in tax fraud.

Panama cannot consider itself an exception, particularly given its highly connected financial platform.

"I therefore encourage the Panamanian banking regulator to broaden the scope and nature of information that is publicly available to offer the complete file: including any investigations of, and sanctions imposed upon, the institutions it supervises as well as the reasons for such investigations and sanctions."

Panama needs to strengthen the fiscal dimension of due diligence in the banking sector: beyond the volume of the tax actually evaded from the Panamanian state (given the territoriality principle upon which its tax system is based), there is an extraterritorial obligation not to facilitate adverse fiscal impacts in other jurisdictions.

Third, said Mr Bohoslavsky, in order to effectively implement reforms towards enhanced financial and fiscal transparency in the country, governance must be strengthened. Clear and robust conflict-of-interest legislation must be put in place so that the autonomy and independence of sectorial supervisors and decision-makers are ensured.

It is also crucial to guarantee the independence of the judicial branch, including a more participatory and transparent system of appointing judges on the basis of merit and more stability in appointments and staffing to enhance professionalization.

Beyond all the issues already outlined, this means that all States of origin ought to apply clear regulations that make it illegal to intentionally, incorrectly or inaccurately state the price, quantity, quality or other aspect of trade in goods and services in order to move capital or profits to another jurisdiction or to manipulate, evade or avoid any form of taxation.

THE "FOUR PANAMAS"

Mr Bohoslavsky also pointed out that economic growth in a country with a world class financial sector should bring substantial reductions in economic, social and political inequalities of its population and massive improvements in the enjoyment of economic, social and cultural rights for the poor and marginalized.

Panama takes pride in the strength of its economic model geared towards services and in the impressive 7.2 percent average annual growth it has achieved during the last decade - more than double the regional average and among the world's highest. Around 5.5 percent growth per year is estimated for the years to come.

In absolute terms, growth has led to a clear reduction of poverty, especially since 2004. Between 2008 and 2014 figures indicate a reduction from 26.2 to 18.7 per cent of poverty, and from 14.5 to 10.2 per cent of extreme poverty.

"While this has meant that more people are now considered "middle-income" in the country, I have repeatedly heard of the "four Panamas": wealth and income continue to be sharply stratified and indicate pervasive inequality and exclusion."

There is a small wealthy urban group, an urban-poor group, a poorer rural Panama, and a worst-off indigenous peoples in the comarcas, indigenous territories where the eight indigenous peoples live.

Urban extreme poverty represents about 4 per cent, while rural extreme poverty represents 27 per cent, six times higher.

In the comarcas, poverty is above 70 percent and extreme poverty as high as 40 per cent, 4 times the national average.

The rights expert pointed out that Panama has one of the lowest tax/GDP ratio in the Latin American region (16.2 percent vs regional average 22.5 percent in 2015). While all the countries in the region have increased this ratio from 1990 to 2015, in Panama it remains practically the same.

The Government's Strategic Plan 2015-2019 acknowledges that development in recent years has been based on a social, economic and institutional structure with multiple imbalances and gaps. It also explicitly aims at enhancing social inclusion.

"I concur with this diagnosis and aim. In my view, lack of balances and loopholes in taxation impede keeping wealth widely distributed and systemic changes are needed to create a more inclusive, fair and productive society."

Tax policy is a powerful tool that Governments can use to address exclusion and inequality, and to ensure that no group hoards the benefits of economic growth for itself.

More importantly, said the rights expert, taxation must also be understood as an essential element in the implementation of international human rights obligations, notably in balancing disparities.

To exemplify, in the flourishing area of high-end real estate and horizontal properties in Panama, especially in Panama City, a current legislative debate is related to lowering the tax on properties.

While some developers have argued that the current tax is too high and the valuation too "subjective", the Government rightly considers that a discontinuation of this tax would be detrimental to the overall tax base.

"In addition, I would highlight that property and land taxes in a rapidly urbanizing country like Panama, with "financialization" of housing as a phenomenon, could be an essential element in the fight against poverty and inequality and would also address possible illicit flows via real estate transactions."

Mr Bohoslavsky called on the National Budget to be rationalized, with better planned and regulated public investment in the social areas, which are sorely needed especially in the poor and marginalized areas.

Another critical dimension of the disproportionate attention given to economic growth in detriment of human development and inclusion can be perceived in the implementation of vast investments in infrastructure, agro-industry and hydroelectric power plants.

Panama's economic capacity, easy access to credit, and its priority geared towards providing services to international markets have captured an uneven emphasis in a series of projects, without a robust consideration for human rights and environmental impact assessment prior to carrying them out, said the rights expert. +