PANAMA SCANDAL

The leak of documents of Panamanian law firm Mossac Fonseca has set the cat
amongst the pidgeons around the world from Kremlin to London and Beijing. The
high and mghty and the well connected have got their tounges tied for explenations
as to why they have these companies registered beyond the borders of where they
call home.
The big question is, is it legal?
The short is, it is legal and common for companies to establish commercial entities
in different jurisdictions for a variety of legitimate reasons, including conducting
cross-border mergers and acquisitions, bankruptcies, estate planning, personal
safety, and restructurings and pooling of investment capital from investors residing
in different jurisdictions who want a neutral legal and tax regime that does not
benefit or disadvantage any one investor.
Under South African law there are different types of residents, for example a
resident defined by the Income Tax Act, 1962 in terms of the so called physical
presence test and an ordinary resident defined in terms of South African
common law. Any natural person who is not ordinarily resident (common law
concept) in South Africa during the year of assessment but meets with all three
requirements of the physical presence test, will be treated as being a resident.
A person will be considered to be ordinarily resident in South Africa, if South
Africa is the country to which that person will naturally and as a matter of course
return to after his or her wanderings. One of the key tests of physical presence is
having a local office and some staff to answer phone call, etc. This has resulted
in the mushrooming of virtual offices globally.

If a foreign company renders professional services to a South African company, it is

important that the foreign entity considers whether, as a result of rendering such
services, the foreign company will create a permanent establishment in South
Africa. The reason why this becomes important is that where a foreign company
creates a permanent establishment in South Africa, South Africa will under the
provisions of a Double Taxation Agreement ("DTA") concluded with another country,

be entitled to subject that foreign entity to tax on the profit attributable to that
permanent establishment created in South Africa
Currently, the corporate tax rate for any company whether external or otherwise is
28% of taxable income derived from the South African Branch. The distribution of
profits by local branches of foreign companies is not subject to the normal 15%
dividend withholding tax. There is no further tax payable on the remittance of South
African branch profits offshore. These profits will have been taxed in South Africa.
Non-residents are subject to Capital gains tax (CGT) at an effective rate of 18,6%.
In Panama, the standard corporate tax rate is at 25% of net income and Standard
branch tax rate is 25% escorted by additional 10% imposed on after branch-tax
income.
Businesses in Panama are regulated by several different oversight and
enforcement agencies, including Banking Superintendence of Panama and the
Intendancy of Non-Financial Services Providers. Furthermore, businesses are
expected to comply with international protocols such as the Financial Action Task
Force (FATF) and, more recently, U.S. Foreign Account Tax Compliance Act
(FATCA) to assure as is reasonably possible, that the companies being
incorporated in foreign countries are not being used for tax evasion, moneylaundering, terrorist finance or other illicit purposes.
Additionally, under Law no. 42 of February 2011, lawyers have strict requirements
of knowing the client and maintaining enough information to identify him/her. Client
due-diligence involves Know your customer, which means obtaining and verifying
identification of the client and the beneficial owner during the due diligence process
before starting to work with the client. Thus when one of the directors of Mossac
Fonseca said that he could not possibly know all 300 000 of their clients and he just
set up the companies, not know what they do as individual businesses. It paints the
values of his practice in a bad light. The practive of law is not a processing plant.
You cannot just be processing documents for people you are not in a relationship
with.
Moreover, lawyers must also comply with the following client due-diligence: Record
retention requirements for no less than 5 years; Reporting suspicious transactions;
Reporting

any

cash

transactions

in

excess

of

the

R10,000

threshold,

Monitoring transactions on a weekly basis; Monitoring of account holders'

transactions on a bi-annual basis.
Finally, in any event, the new obligation imposed by the amended Commercial
Code on all legal entities in Panama to keep updated share registers for nominal
shares, subject to penalties for non-compliance, is sufficient to ensure the
availability of ownership information with respect to shareholders where nominal
shares are concerned.
One may clearly conclude that legal entities in panama are under an obligation to
comply with know your client (KYC) policies and client due-diligence measures in
order to identify or verify the identity of clients or beneficial owners. This is to assist
authorities in order to ensure that foreign companies are subject to Panamas tax
laws. Mossack Fonseca (the law firm from which the leaks were reported) was
legally and practically limited in its ability to regulate the use of companies they
were incorporating or companies to which they were providing services considering
the numbers of companies to which they were serving.
However, the law firm was under an obligation in terms of KYC and client due
diligence measures to gather all necessary information from their clients and report
suspicious transactions where same is discovered and reported.
One needs to emphasise that the only legal obligation upon the law firm in this
instance is to know the identity of their clients and to report any illegal activity. There
is no obligation to merely report that Mr So and So registered a company in
Panama. To expect this type of reporting obligation on lawyers would stifle proper
tax structuring, compromise constitutional principles of the right to trade as well
and the right to privacy.
Therefore, the leaking of the Panama documents may be embarrassing and have
political consequences in some countries as for example what happened with the
Prime Minister of Iceland. Embarrassing definitely, but absolutely not illegal, unless
criminal activities were committed with the full awareness of the law firm in
question.

Ronny Mkhwanazi 082 485 1114

Assisted by Lubabalo Jayiya
Candidate Attorney.
Mkhwanazi Inc.