Why Par­adise Papers mat­ter: they lift the veil for reg­u­la­tors to peek in

The Miracle - - Special -

A trove of 13.4 mil­lion cor­po­rate records, pri­mar­ily from Ber­muda firm Ap­pleby, as well as from Sin­ga­pore-based Asiac­iti Trust and cor­po­rate reg­istries main­tained by gov­ern­ments in 19 se­crecy ju­ris­dic­tions, of­ten re­ferred to as “tax par­adises”.

Writ­ten by Jay Ma­zoom­daar

A trove of 13.4 mil­lion cor­po­rate records, pri­mar­ily from Ber­muda firm Ap­pleby, as well as from Sin­ga­pore-based Asiac­iti Trust and cor­po­rate reg­istries main­tained by gov­ern­ments in 19 se­crecy ju­ris­dic­tions, of­ten re­ferred to as “tax par­adises”. The leaks — which con­sti­tute the most de­tailed rev­e­la­tions ever of such records — were ob­tained by the Ger­man news­pa­per Süd­deutsche Zeitung, and shared with the In­ter­na­tional Con­sor­tium of In­ves­tiga­tive Jour­nal­ists (ICIJ). As a part­ner of ICIJ, The In­dian Ex­press in­ves­ti­gated all doc­u­ments that had an In­dia con­nec­tion.

How are Par­adise Papers dif­fer­ent from Off­shore Leaks (2013), Swiss Leaks (2015) and Panama Papers (2016)?

Like the three ma­jor global fi­nan­cial leaks in the past (all in­ves­ti­gated by The In­dian Ex­press) Par­adise Papers also re­veal tracks of veiled off­shore fi­nan­cial ac­tiv­i­ties. Like Mos­sack Fon­seca (of Panama Papers, 2016), Ap­pleby helps set up com­pa­nies and bank ac­counts over­seas, pro­vides nom­i­nee of­fice-bear­ers, and fa­cil­i­tates bank loans or trans­fer of shares, in mul­ti­ple se­crecy ju­ris­dic­tions. But un­like in the pre­vi­ous leaks, the lat­est rev­e­la­tions are more about mega cor­po­rates than in­di­vid­ual play­ers and how they took ad­van­tage of and, in many cases, mis­used off­shore ju­ris­dic­tions.

What do the Par­adise Papers show?

They re­veal off­shore foot­prints of some of In­dia’s ma­jor cor­po­rate play­ers as well as of a few high-value in­di­vid­u­als — the as­tound­ing scale of in­cor­po­rat­ing shell over­seas com­pa­nies to var­i­ous ends. In­ter­nal com­mu­ni­ca­tions show how a ma­jor­ity of these com­pa­nies with off­shore res­i­dency were wholly con­trolled from In­dia. Ap­pleby it­self red-flagged round trip­ping on oc­ca­sion by ques­tion­ing if off­shore funds meant for in­vest­ing in In­dia were sourced from In­dia. There are in­stances of as­sets of In­dian com­pa­nies be­ing used to guar­an­tee loans raised by off­shore com­pa­nies with­out dis­clos­ing it to In­dian reg­u­la­tors. Chang­ing own­er­ship of off­shore com­pa­nies to ac­tu­ally change the own­er­ship of shares held by them in In­dian com­pa­nies with­out pay­ing taxes in In­dia turns out to be an­other com­mon mal­prac­tice.

Is it il­le­gal to set up off­shore com­pa­nies?

Not nec­es­sar­ily. In­dia has dou­ble-tax­a­tion avoid­ance agree­ments (DTAAs) with sev­eral coun­tries with lower tax rates than its own, and com­pa­nies — over­seas cor­po­rate bod­ies (OCBs) — in­cor­po­rated in such coun­tries can use their tax res­i­dency cer­tifi­cates (TRC) to en­joy the tax benefits avail­able legally.

So what is the ex­cite­ment about?

The rev­e­la­tions help reg­u­la­tors over­come the ob­sta­cle of se­crecy. Af­ter the Panama Papers, for ex­am­ple, reg­u­la­tors ev­ery­where were able to in­ves­ti­gate sev­eral in­stances of fi­nan­cial mal­prac­tices hid­den in the records of Mos­sack Fon­seca. The sheer size of the Par­adise Papers trove, and the cor­po­rate-cen­tric leads they pro­vide, mark a big step for­ward. Nor­mally, a com­pany is en­ti­tled to ar­range its fi­nan­cial af­fairs in which­ever way it wishes to re­duce its tax li­a­bil­ity. Merely the fact that the mo­tive for a par­tic­u­lar trans­ac­tion is to avoid tax does not in­val­i­date the trans­ac­tion un­less the law of the land specif­i­cally says so. There is a cor­po­rate army en­gaged in imag­i­na­tive book­keep­ing to dis­cover and ex­ploit le­gal loop­holes and evade tax un­der the cor­po­rate veil. The bur­den of jus­ti­fi­ca­tion is al­ways on reg­u­la­tors who are not en­cour­aged to fish for mo­tive or ev­i­dence of sus­pected wrong­do­ing. Ac­cord­ing to the West­min­ster prin­ci­ple, if a doc­u­ment or trans­ac­tion is gen­uine, courts or the reg­u­la­tor can­not go be­hind it to look for any sup­posed un­der­ly­ing sub­stance. Only if a fraud is es­tab­lished can a court or reg­u­la­tor pierce the cor­po­rate struc­ture, since fraud unravels ev­ery­thing — even a law, if it is a stum­bling block — be­cause no leg­is­la­ture in­tends to guard fraud. In such cases, the prin­ci­ple of lift­ing the cor­po­rate veil or the doc­trine of (eco­nomic) sub­stance over (le­gal) form can be ap­plied. The Par­adise Papers are a trea­sure trove of such leads and ev­i­dence. For ex­am­ple, in its bou­quet of ser­vices, Ap­pleby pro­vides proxy di­rec­tors for com­pa­nies set up in tax havens. These di­rec­tors, ei­ther per­sons or shell com­pa­nies, ob­vi­ously have no real author­ity to de­cide the fate of the mil­lions of dol­lars they move on the direc­tions of their clients — hold­ing com­pa­nies or ben­e­fi­cia­ries, or their rep­re­sen­ta­tives. Most of­ten, these di­rec­tors are no more than pup­pets. Many off­shore com­pa­nies, the Papers re­veal, are “sham” en­ti­ties en­gaged in tax eva­sion/avoid­ance, ma­nip­u­la­tion of the mar­ket, money laun­der­ing, round trip­ping (tak­ing un­taxed money out of the coun­try through in­flated in­voices and then bring­ing it back as in­vest­ment), park­ing black money, brib­ing, etc. Such in­sight into cor­po­rate in­ge­nu­ity al­lows reg­u­la­tors to step in, be­sides strength­en­ing the case for bet­ter laws and global tax re­forms.

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