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THE PANAMA PAPERS – EXPLAINED

For those of you who don’t know about the Panama Papers, essentially a lot of big names were caught escaping income taxes by making “business expenses” to a “company” in Panama.

The user community of Reddit.com made some EXCELLENT “Explain Like I’m Five [Years Old]” posts explaining this phenomenon.

Here are my two favorites:

/u/DanGliesack for the simplest of simple:

When you get a quarter you put it in the piggy bank. The piggy bank is on a shelf in your closet. Your mom knows this and she checks on it every once in a while, so she knows when you put more money in or spend it.

Now one day, you might decide “I don’t want mom to look at my money.” So you go over to Johnny’s house with an extra piggy bank that you’re going to keep in his room. You write your name on it and put it in his closet. Johnny’s mom is always very busy, so she never has time to check on his piggy bank. So you can keep yours there and it will stay a secret.

Now all the kids in the neighborhood think this is a good idea, and everyone goes to Johnny’s house with extra piggy banks. Now Johnny’s closet is full of piggy banks from everyone in the neighborhood.

One day, Johnny’s mom comes home and sees all the piggy banks. She gets very mad and calls everyone’s parents to let them know.

Now not everyone did this for a bad reason. Eric’s older brother always steals from his piggy bank, so he just wanted a better hiding spot. Timmy wanted to save up to buy his mom a birthday present without her knowing. Sammy just did it because he thought it was fun. But many kids did do it for a bad reason. Jacob was stealing people’s lunch money and didn’t want his parents to figure it out. Michael was stealing money from his mom’s purse. Fat Bobby’s parents put him on a diet, and didn’t want them to figure out when he was buying candy.

Now in real life, many very important people were just caught hiding their piggy banks at Johnny’s house in Panama. Today their moms all found out. Pretty soon, we’ll know more about which of these important people were doing it for bad reasons and which were doing it for good reasons. But almost everyone is in trouble regardless, because it’s against the rules to keep secrets no matter what.

 

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Sometimes, the simplest explanation is the best explanation. 

/u/lucaspon with a slightly more advanced (and detailed) explanation:

You guys know income taxes, right? Okay, so companies also have to pay them, but business expenses are tax-deductible, which means that if companies spend the money they made they don’t have to pay the taxes on those moneys.

Stay with me.

Suppose you’re a newly rich guy in a capitalist nation and your company has made $300m in profits. You owe about ~35% in income tax, or $105m. I know right? That’s a lot of money.

Now let’s assume that you’re a good guy and aren’t inherently evil or anything. You go to a cocktail party with some also-very-rich friends (because, you know, that’s what rich people do, they flock together) and you’re talking to the “cool kids”, trying to mingle and stuff, and you complain that you have to pay this mind-boggling huge amount of money to the gov’t and how “that sucks, right guys?”.

Instantly they laugh at you and go like: “You silly, you must be new here. You’re not really thinking on paying all those taxes right? All you gotta do is spend most of that money so that your profits are close to $0, and you have to pay no income tax, duuh!”

Now, you can’t buy things for yourself with your company’s money prior to income-taxation (that’s against the law) and you don’t even want to spend it all at once, so you just transfer them to another fake company in Panama and label that as “expenses” in your company’s income tax papers. Yes. The same one your friends use. Incorporated by the same law firm your friends use.(Mossack Fonseca)

If you transfer $295m to Panama Co. and declare a $5m profit, you pay only ~$1.8m in taxes, about 1% of the amount you really owe the gov’t. And no one has to know that company belongs to you as well.

And voilà, with a simple combination of group-pressure and “well-if-everyone’s-doing-it-since-forever-and-nothing-has-ever-gone-wrong” thinking you’ve dodged the law and effectively stole millions from the gov’t and the peoples. Except that, well… things don’t always repeat the past, and now they have gone terribly wrong. Oh shit.

Alright. But it doesn’t stop here. These offshore companies in Panama aren’t obliged to disclose information about the owners, sources and use of the proceeds they incorporate.

And so, they can also be used to hide money earned from/used in criminal activities such as financing terror groups and prostitution forced prostitution/people trafficking and pedophiles and all sorts of disturbing inhumane things.

Hope I made a decent job explaining 🙂

You did, Lucaspon. You really did.

All quotes were derived from this Reddit page: 
https://www.reddit.com/r/explainlikeimfive/comments/4d8rta/eli5_the_panama_papers/?sort=confidence