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