Here’s an excerpt from a very interesting interview with the U.S. economist Michael Hudson on the Panama Papers. It was originally posted at Counterpunch.org.
Well, Panama was basically carved off from Colombia in order to have a canal. It was created very much like Liberia. It’s not really a country in the sense that a country has its own currency and its own tax system. Panama uses U.S. dollars. So does Liberia.
The real story didn’t come out in the Panama papers. Reporters naturally focused on criminal people laundering money. But Panama wasn’t designed to launder money. It was designed to launder earnings – mainly by the oil and the gas industries, and the mining industry.
Panama and Liberia were long noted as having “flags of convenience.” Oil tankers and mineral ships would register themselves under the flags of Panama or Liberia, or some other country that used the U.S. dollar, not its own local currency.
I first found out about this about 40 years ago, when I was doing a study of the balance of payments of the oil industry. I went to Standard Oil, whose treasurer walked me through their balance sheet. I said, I can’t figure out whether Standard Oil and the other oil companies make their money at the producing end of oil, or at the distributing end of refining and selling it. And he said, “We make our earnings right here in New York, in the Treasurer’s office.” I asked what he meant He explained: “We sell the oil that we buy from Saudi Arabia or the Near East at very low prices to the tanker company that’s registered in Panama or Liberia.” They don’t have an income tax in their country, because they’re not a real country. The oil companies then sell the crude oil to downstream distributors in the United States or Europe – at a very, very high markup.
The markup is so high that there’s no room for profit to be made at all in refineries or gas stations selling the oil. So the oil companies don’t pay the tax collector in Europe anything. They don’t pay the American government an income tax either. All their earnings are reported as being made in the tankers, which are registered in countries that don’t tax income.
I told him that I had looked at the balance-of-payments reports from the Federal Reserve and the Treasury Bulletin. I see here’s Europe, here’s Latin America, here’s Africa and Asia. I can’t find where the profit remittances are.
He told me to look at the very last line on the right hand of the country tables. It’s called “International.” I asked whether all these countries in Europe and elsewhere were international. He explained to me that “International” was a special category for what was really part of the United States abroad. They’re the offshore banking centers – Panama, Liberia, et cetera.
So I found out that basically Panama, and hence Panamanian companies, were set up initially to register oil tankers and mineral ships in order to give the appearance of taking all of their profits on the transporting the oil, or the copper or other minerals, from third world countries to the United States and Europe.
The United States went along with this. This made the oil industry tax exempt really since the 1920s. When the income tax was created in 1913 or 14, it was intended to capture economic rents. But the big rent extractors, oil and gas and minerals, got away with avoidance.