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Intentions behind the Panama Papers

Tetsuya Watanabe
Professor, Faculty of Law, Waseda University

The Panama Papers has become an international sensation. On May 10 before dawn (JST), the International Consortium of Investigative Journalists (ICIJ) revealed names on the internet of companies and associated individuals who had established tax havens with the Panamanian law firm, Mossack Fonseca. Names which sound Japanese are also listed on the ICIJ official website, and as of when this article was written, newspapers reported that approximately 20 Japanese companies and 230 Japanese individuals were disclosed.

The ICIJ Offshore Leaks Database website comments that "[they] do not intend to suggest or imply that any persons, companies or other entities included in the ICIJ Offshore Leaks Database have broken the law or otherwise acted improperly." If entities mentioned in the Panama Papers have actually engaged in illegal conduct such as tax evasion or money laundering, needless to say, they must be subject to legal actions. Furthermore, avoiding taxes may not be the primary objective for businesses setting up companies in tax havens. The true nature of this whole issue is how (an assumingly) legal conduct has drawn so much attention from society.

Legal but Immoral

Tax avoidance has generally been considered different from tax evasion as well as a legally permitted way to reduce taxes known as tax saving. "Legal but immoral" is one of the major features of tax avoidance. The Panama Papers scandal questions legal systems and national governments about their ways of responding to substantially organized tax avoidance schemes skillfully carried out across boundaries.

Two days after news regarding the Panama Papers was released on May 10, I discussed this topic at the beginning of my tax law class. It turned out, contrary to my expectations, many students thought that businesses and individuals mentioned in the Panama Papers had not done anything wrong. Approximately 80% of them said they would do the same, meaning they would want to avoid paying taxes legally, too. They did not want to be in the position of either being taken advantage of due to tax avoidance or observing in silence. I had mixed feelings; as a teacher of tax law, I wonder whether I should be content about this percentage. Nevertheless, not everyone can avoid paying taxes under tax havens because of socio-economic inequality. Unfortunately, in present-day Japan, hard work no longer means becoming fairly prosperous. Japan is starting to become a country where money circulates only among the rich and does not flow down to the lower classes (the United States is a typical example). In this sense, the Panama Papers have inadvertently exposed how the tax-based wealth redistribution system was not functioning effectively.

Keys to the Solution: How to Disclose Information

This is not a simple problem to resolve because understanding circumstances in tax havens is virtually impossible. Therefore, finding a way to draw information from tax havens will be the key to the solution. Meanwhile, tax havens exist because of their secrecy. I imagine tax havens would decide to disclose some information now because of the heavy scrutiny they are under due to the Panama Papers, but they may choose to do so only for countries like the United States in which they do not want to antagonize. Collecting information requires international cooperation (i.e. exchanging information). The Japanese government must seriously consider ways to obtain information (note: I learned from the newspapers on May 19 that the Japanese government and the Panamanian tax authorities have announced their plan to enter into an agreement for exchanging financial information automatically).

Visualized Tax Avoidance

The Panama Papers brought into light what the general public could not picture before. Although tax avoidance by large companies and the wealthy has been discussed over the years, the leak has clearly indicated the impact of facts and data instead of theories. Perhaps, there may still be a hidden truth. Rather, we should always doubt that something invisible exists even now. We must use our imaginations to attempt seeing beyond what has surfaced and been fussed about. This is a difficult task but is another lesson the Panama Papers teaches us.

Has the Panama Papers Opened a Pandora's Box?

Although neither the whole picture of the Panama Papers nor the ulterior motive of the informer is clear, I sense that the information was collected illegally. In other words, taking illegal steps (i.e. taking risks) was the only way to access information on tax avoidance by large companies and the affluent. This is a serious issue for tax authorities. While they welcome the information uncovered by the Panama Papers, they must consider how to obtain information on tax payers that have avoided inspection so far instead of simply investigating only what has become visible to them.

For tax payers, this signifies extra work involved in complying with the obligation to provide information. This is an unwanted development for businesses and related entities. It would be desirable if many tax payers accept such burden as part of their responsibility, but the concern is that some companies may leave Japan and move their head offices outside the country. This has in fact been the reality in the United States.

In many senses, the Panama Papers may have opened a Pandora's box.

Tetsuya Watanabe
Professor, Faculty of Law, Waseda University

Tetsuya Watanabe obtained his Ph.D. in Law from the Graduate School of Law, Kyoto University. He became Professor of the Faculty of Law at Waseda University in April 2014 after working as Associate Professor of the Faculty of Economics at Shiga University and later as Professor of the Faculty of Law at Kyushu University. He was also a Visiting Research Fellow at the UC Berkeley School of Law and at Harvard Law School, worked as Visiting Professor at the University of Munich Faculty of Law, the National University of Singapore Faculty of Law, and Duke University School of Law, and engaged in research and educational activities as a Fulbright Scholar at the NYU School of Law. His publications include: Kigyo Torihiki to Sozei Kaihi [Business Transactions and Tax Avoidance] (Chuokeizai-Sha), Kigyo Soshiki Saihensei to Kazei [Corporate Restructuring and Taxation] (Koubundou Publishers), and Be-shikku Zeiho [Basic Tax Laws] (co-authored; Yuhikaku Publishing). He is a member of the Japan Tax Jurisprudence Association (President), the Japanese Society for Tax Law (President), and the Japan Public Law Association.