The Panama papers: Time to reconsider taxpayer confidentiality

Panama City
Donald-Drysdale By Donald Drysdale for ICAS

15 April 2016

Donald Drysdale considers whether the Panama papers will change attitudes towards taxpayer confidentiality.

The recent leak of 2.6 terabytes of data, comprising 11.5 million confidential documents, from the Panamanian law firm and corporate service provider Mossack Fonseca & Co, will have lasting repercussions worldwide for governments, companies, trusts and individuals – not to mention their accountancy and legal advisers.

While it is still too early to say, there’s a possibility (some would say probability) that it will lead to new requirements in the UK for publication of personal tax returns by senior politicians and perhaps others in public life.

It might even lead to a fundamental review of the longstanding principle of taxpayer confidentiality as it affects all taxpayers.

What should be disclosed?

In the UK, the Prime Minister and a number of other high profile politicians of different political persuasions have reacted to the Panama papers by publishing either their tax returns or data drawn from them.

The publicising of such tax data in different formats, in some cases for single years and in others for multiple years, is counterproductive. The differing approaches raise immediate questions about why a particular method has been chosen, and what is perhaps being hidden.

If data is published for only one year, what sins would the previous year’s return have revealed? If data drawn from returns is published, what additional secrets would the returns themselves have revealed?

Tax returns show income and gains declared. Requiring these to be published might provide a measure of useful information, whilst possibly also generating a degree of envy or sympathy depending on the circumstances. However, it would be far more interesting to know what a tax return doesn’t reveal – such as tax avoided by legitimate planning or, at the opposite extreme, by aggressive avoidance or evasion. After all, as one commentator has observed, eating salad in public doesn’t prove you’re a vegetarian at home.

Should publication be mandatory?

While certain individuals are naturally drawn into politics, some of our most talented citizens are already discouraged from doing so by the relatively low pay compared with alternative career opportunities. Forcing MPs and other public servants to disclose more about their personal tax affairs might discourage even more people from seeking public office. In any event, requiring certain individuals to publish their tax returns might prove little, especially when the tax regime facilitates legitimate transfers of wealth between spouses and civil partners.

Extending the requirement to other high profile individuals, such as directors or partners in large organisations, might damage the economy by making the UK a less attractive place for them to live and work. A more radical solution of putting the tax returns of all taxpayers into the public domain would achieve greater transparency, but might bring its own set of risks.

Should all tax returns be published?

In Norway, details of individual taxpayers’ incomes, wealth and annual tax returns have been publicly available since 1863, and are now accessible online but with some limitations on their reproduction by the media. Sweden has a broadly similar system but the information is only accessible by those with a legitimate need for it.

This Scandinavian openness has been credited with encouraging equal pay and deterring outrageous salaries. However, while such transparency may be cathartic in an open society, it also propagates information flows that can be misused – for example by criminals, unwanted suitors and even school bullies.

The UK is an increasingly oppressive surveillance society, with more CCTV cameras than most other countries and fewer constraints on how such ‘big data’ may be used the government or anyone else. As the ‘internet of things’ introduces vast numbers of unwanted sensors and cameras into every household, official scrutiny will become ever more intrusive. Against this background, abandoning the longstanding principle of taxpayer confidentiality by putting all personal tax return details in the public domain might prove to be a step too far, drastically altering the nature of our society.

Human rights

Article 8 of the European Convention on Human Rights gives everyone the right to respect for their private and family life, their home and their correspondence. It further provides that there shall be no interference by a public authority with the exercise of this right except such as is in accordance with the law and is necessary in a democratic society in the interests of national security, public safety or the economic well-being of the country, for the prevention of disorder or crime, for the protection of health or morals, or for the protection of the rights and freedoms of others.

While UK law might arguably be amended to require publication of confidential information about every taxpayer’s tax returns, there is a need to balance any such transparency with the competing demands of privacy and confidentiality. It is likely that a move to publish every UK citizen’s tax return would be challenged in the European Court of Human Rights.

The role of the press

We should welcome the fact that we have a free, active and investigative press. Without it we might still be unaware of alleged improprieties which the Panama papers have revealed. However, many journalists have axes to grind – often of a political nature – and they do the public a disservice when they misrepresent (deliberately or otherwise) innocent tax and financial planning as something reprehensible.

To take one example, recent reports have characterised gifts from a parent to their offspring as indicators of sinister tax avoidance. This is absolute nonsense. The inheritance tax rules provide specific rules for gifts, and practitioners failing to advise their clients to take advantage of reliefs available could find themselves facing claims on grounds of professional misconduct.

On a similar theme, holding funds or other assets offshore is not illegal per se – and in some cases may be prudent or essential for personal, family or business reasons. There are complex rules to determine how offshore income is taxed, and those correctly declaring and paying their UK tax liabilities should not be castigated.

Article supplied by Taxing Words Ltd

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