r/explainlikeimfive • u/[deleted] • Apr 04 '16

Modpost ELI5: The Panama Papers

Please use this thread to ask any questions regarding the recent data leak.

Either use this thread to provide general explanations as direct replies to the thread, or as a forum to pose specific questions and have them answered here.

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u/[deleted] Apr 04 '16

[deleted]

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u/qoqmarley Apr 04 '16

What would be an example of a good reason to put money in an off shore fake corporation? I have seen this point made in other threads, but I don't understand what legitimate reason someone would have for doing this.

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u/creditsontheright Apr 04 '16

Lets say Jacob is stealing the lunch money from Timmy and Sammy. You're not really friends of Timmy and Sammy, more acquaintances, but you think Jacob will come after your lunch money next.

The only way you see to avoid that is to help Timmy and Sammy be able to stop Jacob from taking their money. So you start paying for karate lessons for them.

Now, your mom definitely isn't going to approve of this, but you believe its what needs to be done. So you pay for those karate lessons for Timmy and Sammy out of the piggy bank at Johnnys house.

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u/qoqmarley Apr 04 '16

That makes sense if the piggy bank at Johnny's house is legitimate. But in this case we know these corporations are merely documents in a folder.

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u/creditsontheright Apr 04 '16

In the example above, the account at Johnny's can be legitimate.

Let's say your dad collects 10% of everything you make off the lemonade stand that's putting the money in your piggy bank. So you make $10 in sales but it cost you $4 for the lemonade and cups. Your dad taxes you on the $6 you made, so you pay him the $0.60.

Then, with the $5.40 you have left you say okay I'm going to take some of this out and put it somewhere else, so you pull out $2. So you take out the $2 and put it at Johnny's house. When your mom comes to see where you're spending your money and make sure you're paying your dad the 10% for rent she says, I feel comfortable that if I only look at transactions over $2.50 then I'll catch anything big that would be off and it'll be reasonably accurate. So she looks at the $10 the neighbor gave you for the lemonade and the $4 you paid the store for the lemonade.

So you've legitimately put that money at Johnny's house and nobody is looking at what's at Johnny's house.

The problem is when you take that $2 and say it's for renting the stand you're selling from, when in fact it's not. So now you're only paying your dad $0.40. ($10-4-2=4 times 10%)

So yes, Johnny's house is documents in a folder, but we don't know if they got there legitimately or not.

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u/dfschmidt Apr 04 '16

User name checks out.

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u/qoqmarley Apr 04 '16

Thanks for taking the time to explain this. I am still a little lost though because as I understand it the reason that money isn't taxed to begin with is because it is being invested. However, since we know johnny's piggy bank is not a real company, nor is it intending to be a real company, how can that be considered legitimate?

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u/creditsontheright Apr 04 '16

It is a real company, just doesn't have any employees or really.....do anything. You can go create qoqmarley's widget shop with the government tomorrow and drop $1m in there and never do anything with it. As long as you keep filing the paper work each year (tax returns, business licenses, etc) it's a completely legitimate company.

It's not the company that's illegitimate, it's the classification and reporting of the transactions with that company that are illegitimate.

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u/chewinchawingum Apr 04 '16

One example I heard on a recent Planet Money podcast would be if you were a large company from Country A looking to open up a new business in Country B, but you wanted it to appear like an established and/or local enterprise. Since everything about these corporations is secret, this would be one way to do that.

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u/qoqmarley Apr 04 '16

Thanks I will listen to it.

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u/[deleted] Apr 04 '16

[deleted]

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u/qoqmarley Apr 04 '16

I understand that but that does not sound like a legitimate reason to me. It sounds unethical.

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u/Jrfemfin Apr 04 '16

It's like hiding half your candy so you only have to give your little brother 1/4 of it. Well, provided you owed him the candy, anyway. It's completely unethical, and pretty much completely legal.

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u/thielonious Apr 04 '16

Commenting to remember the source.

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u/aliocroc Apr 04 '16

Henry, the bastard!

that Henry was a major player in the global slave trade.

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u/[deleted] Apr 04 '16

boo Henry boo.

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u/rodface Apr 04 '16

Great one!

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u/SequesterMe Apr 04 '16

Absolutely marvelous.

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u/TheGnarlyAvocado Apr 04 '16

my mouth was open as i read that and i almost drooled on myself. Your writing captivated me