The Panama Papers: what now?
After a long period in which terror dominated the Belgian news, it felt almost nostalgic to be informed mainly about tax fraud for a week. Although everyone has actually known for years about the existence of foreign structures in Panama and other tax havens, the media apparently could not resist the lure to boost their sales and viewing figures following the so-called Panama Papers. Almost everywhere, the populist bell rang, tarring everyone with the same brush for convenience, with the cry of ‘fraud!’ echoing loudly.
Apart from the fact that not everything happening in Panama is fraudulent (just think of the many ships sailing under the Panamanian flag without any fraudulent intent), fraud is a generic term anyway, covering a multitude of sins.
In its worst form, this concerns ‘criminal money’ originating from common law offences such as corruption, drug trafficking, … . This money is and always remains contaminated and cannot be regularised. In its worst form, this money cannot be the subject of a so-called extended criminal settlement.
In addition, there is so-called ‘black money’, being money originating from inherently legal activities but completely hidden from the tax authorities by housing it in – in this case – a Panamanian company. This is tax evasion, which can be tackled both on a tax level (administrative) and a criminal level (tax offences and money laundering). However, this form of fraud can also be the subject of regularisation and an extended criminal settlement.
Often, however, the money comes from legal activities on which taxes have indeed been paid, but where the decision was subsequently taken to hide the ‘savings’ from the tax authorities with the intention of avoiding tax on the capital income. This is what is understood by ‘grey’ money: the origin of the capital is white, but the returns are black, as a result of which the total assets ‘turn grey’. This is also tax evasion, albeit of a less serious nature.
Finally, there is the question – specifically for tax structures abroad – of whether the structure itself does not constitute a tax sham. This is inherently a purely tax problem, where the so-called ‘real seat theory’ comes into play. The approach here is that it is not forbidden per se to work with a foreign company, provided that you consistently follow through on this choice in your actions. Read: that the structure is more than an attempt to hide the fact that the actual management takes place in a location with a less favourable tax regime. Although this question must be answered from a tax law perspective, it can also have a criminal tail if this happens with fraudulent intent.
So one ‘fraud’ is not the same as another. And in some cases, it may even have to be established that there is no fraud at all.
This alone leaves a somewhat bitter aftertaste to the name-and-shame tactics used by the media over the past week.
Moreover, the question arises whether some whose names appear in the Panama Papers have not already regularised their affairs in the past. Both the Contactpunt voor Regularisaties and the BBI have been accepting files in which structures are regularised for years. The extended criminal settlement has also been applied several times to such files. It is therefore not the case that such structures have by definition remained completely ‘under the radar’ of the tax authorities until today; on the contrary, the tax authorities have been targeting such files for quite some time.
Is the attention the Panama Papers are receiving today therefore primarily ‘much ado about nothing’?
Not quite. It shows that the fight against tax fraud has not yet been won despite the large wave of tax regularisation in 2013. It is simply a fact that the majority of the files regularised so far were rather simple fraud cases. Say, of private individuals with grey assets held in a foreign bank account or – after the introduction of the Savings Directive – invested in TAK 21 or 23 products. In recent years, these predominantly private investors realised en masse that the latest national and international legislation meant that the question was no longer if, but when, the Belgian tax authorities would be informed about their hidden savings. Due to the concessions made by Luxembourg and Switzerland, among others, they were additionally confronted with bankers who forced them either to regularise or to leave. And those who chose to leave could not take their cheque to any Belgian banking institution without … having regularised beforehand.
Until recently, the fear of tax transparency was much less prominent among those who housed their assets in foreign structures. Because the accounts holding their assets are not in their personal name, but in the name of a foreign company, the Belgian tax authorities do not yet receive information from foreign banking institutions. A first step towards change – and nervousness – occurred when the Belgian legislator decided that taxpayers would be obliged from 2015 to declare certain foreign structures with a view to applying the Cayman Tax.
If the Panama Papers have achieved one thing already, it is that this nervousness has strongly increased. Although Panama has not yet endorsed the OECD’s Common Reporting Standards and to date no Tax Information Exchange (TIEA) or double taxation treaty has been concluded with Belgium, few doubt that the discovery of the Panama Papers will probably cause a rapid acceleration here too. And not only for Panama, but also for other tax exotics.
This rapid acceleration can – and will – lead to those who have housed their wealth in distant structures exclusively with the intention of evading Belgian taxes studying the draft bill for the new tax regularisation with special attention. And if they do this well, they will realise that it is probably better to take action now (some files are already being prepared) and not wait until their wealth is discovered. The fact that the regularisation, which is widely expected to enter into force on 1 June next, will gradually become more expensive in the future will also encourage them to do so: unexpired income will be subject to a tax increase of 20 percentage points in 2016, which will subsequently rise to 25 percentage points until 2020. Statute-barred tax capital will be regularised at 36% in 2016, to subsequently be increased annually by 1% to 40% in 2020.
And what about the approximately 700 Belgians mentioned in the Panama Papers who might be of the opinion that they must regularise? The cards are somewhat more difficult for them. Although the tax authorities are obliged to tax unexpired income of which they are notified, it is common knowledge that the local inspector has been pointing to the BBI for some time, and the BBI has not been handling new files since the suspension and subsequent annulment of the directive establishing the rates at which one could still ‘fiscally correct’. Moreover, the new law, which as mentioned will probably enter into force on 1 June 2016, only provides solace to those who have not yet been informed that they are the subject of a tax investigation. However, a small ray of light shines at the end of the tunnel for them: the consortium of journalists that brought the Panama Papers to light has informed Minister Van Overtveldt that it only wishes to make information available to the tax authorities at the end of May 2016. It could get very busy at the door of the Contactpunt on 1 June…
And for those who are too late, there is perhaps a last legal straw to clutch at: the judgment of 17 December 2015 of the European Court of Justice (EHJ 17/12/2015, WebMindLicenses Kft. Vs. Menzeti Ado- és Vamhivatal Kiemelt Ado- és Vam Foigazgatosag, C-419/14) which requires the tax judge to verify whether the use of evidence obtained in criminal proceedings was authorised by law and necessary, failing which it must be disregarded. One can imagine that the European Court will be even stricter when it comes to evidence obtained outside any legal process…
Stijn DE MEULENAER
Partner lawyer Everest Advocaten
Executive Professor AMS, lecturer Vives Hogeschool