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The storm from Panama

April 13, 2016 14:40 IST

Image: A company list showing the Mossack Fonseca law firm is pictured on a sign at the Arango Orillac Building in Panama City.

As people struggle with effects of globalisation, political & business leaders need to realise what is legal may not be moral anymore, notes Claude Smadja

The list of casualties is already quite impressive: UK Prime Minister David Cameron fighting to restore his reputation for integrity at a time when he needs to devote all his time and influence to fight against a Brexit; newly elected President Mauricio Macri of Argentina having his political honeymoon cut short and his reputation badly tainted by the revelations of his tax evasion; Sigmundur David Gunnlaugsson, the prime minister of Iceland, forced to step aside; Vladimir Putin and President Xi affected by the dubious financial manipulations of family associates and friends; sport and entertainment stars having their tax evasion exposed in a glaring way, high-ranking officials having their tax dodging exposed. . .

The release of 11 million pages of documents from the Panama firm Mossack Fonseca by the International Consortium of Investigative Journalists comprising 107 media organisations from 76 countries is creating political havoc and wide public outrage.

There is trepidation in India as people are awaiting the results of the investigation of the committee set by Prime Minister Narendra Modi to assess who might be involved.

And, this is not the end of it: The International Consortium, which has been working on the documents, is planning the release of a second batch, including a full list of companies involved early May.

The Panama papers come at a very sensitive moment when populist rage was already rising in a number of countries against a political and business establishment seen as completely oblivious to the concerns and anxieties of the man on the street who was feeling threatened by the disrupting social and economic impact of globalisation.

The revelations are feeding the growing perception that the rules of the game are definitely skewed in favour of the rich and powerful who can use money and connections to skirt the law.

It is no coincidence that the issue of tax evasion is playing a significant role in the rhetoric of the candidates in the US presidential primaries.

This anger and frustration against skewed rules do not apply only to developed countries as the rising middle class in emerging market economies is increasingly fed up of the corruption and abuses of power of the elites, which puts them at a disadvantage in their quest for the better life that the opportunities created by globalisation and the ICT revolution open for them.

However, what is now under attack is not only the practices of individuals and companies using the most sophisticated financial networks and manipulations to evade tax or to launder money.

It is also the very existence of offshore financial centres -- tax havens -- requiring sometimes very little or even no information from non-residents or businesses for stashing or managing their money and sheltering their activities, and offering low or even no tax.

There will definitely be a new impetus to the efforts under way in many countries and at the international level against tax avoidance practices — many of them absolutely legal but increasingly difficult to justify in a context when normal citizens are supposed to pay their due to the tax authorities to the last cent without much leeway.

At the same time, competition among countries to attract investment and economic activities keeps increasing and there is no underestimating the difficulties and resistances that the attempt to create a fully coordinated set of rules and practices at the international level would generate.

Suffice to see the tensions inside the EU as high-tax countries keep leveling accusations and try to create pressures against lower-tax countries such as Ireland.

Another result of the growing intolerance against the many ways powerful individuals and corporations are finding ways to minimise taxes through the use of every single legal loophole is the powerful backlash against 'tax inversion' in the US, i.e. the practice of US corporations to go for mergers with or acquisitions of companies headquartered in low tax countries -- or benefiting from sweetheart deals with the government of these countries -- in order to minimise their own tax obligations in the US, whether by changing their legal base, or through price transfer and other practices.

Although perfectly legal in the present US tax system, these tax inversions are now under attack not only in Congress (forgetting that it is Congress which passed the tax legislation allowing for this practice) but from NGOs and the public at large.

There is no doubt that the public pressure everywhere for more accountability and transparency from government as well as from business will keep growing.

And this pressure is more than justified as the impact of globalisation is -- by itself -- prone to widen the wealth distribution gap and there should be no excuse for practices and policies which accentuate this widening of the gap instead of making a real effort to reduce it.

However, there should be some caution towards making sure that the present developments do not lead to some kind of 'witch hunt'.

Offshore financial centers are -- in themselves -- quite legitimate and even necessary for the functioning of the international economic and financial system; and every corporation or individual making use of them is not necessarily engaged in dubious practices.

The key challenge is to create the international frameworks that will ensure that the appropriate disclosures and checks are made, that monitoring systems are put in place and made to function adequately.

This would also require that people and corporations realise that the era of loose practices is coming to a close and that the price to pay for them will keep increasing.

What could have been -- and may still be -- perfectly legal is becoming less and less morally tolerable as the impact of social media expands by the day and as people in many countries are struggling to adjust to the impact of globalisation.

For political and business leaders the time has come to realise that this is part of the 'new normal' that they also need to adjust to.

Claude Smadja is the president of Smadja & Smadja, a strategic advisory firm

Image: A company list showing the Mossack Fonseca law firm is pictured on a sign at the Arango Orillac Building in Panama City. Photograph: Carlos Jasso/Reuters

Claude Smadja
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