Inside The Shad­owy World of Tax Havens Evad­ing Tax Set to Hurt, Warns FM

Spot­light on Panama pa­pers has raked up in­ter­est­ing ques­tions; ET takes a close look

The Economic Times - - Front Page - Su­gata.Ghosh @times­

Mum­bai: Some are more vul­ner­a­ble than oth­ers while some have been clever enough to cover their tracks. And, for some, ex­otic, lay­ered in­vest­ments were smart ways to es­cape cap­i­tal gains and estate duty. Among the list of names in the un­fold­ing Panama pa­pers, there are those who have used mul­ti­ple av­enues to park money abroad, us­ing ser­vices of count­less con­sul­tants who tell you how to go about it. They may be on the right side of law – even if their prac­tices are sharp and money isn’t ex­actly kosher. And there are those who have reck­lessly gone ahead to stash money and own as­sets, obliv­i­ous that one day some hack­tivists or whistle­blow­ers will get a whiff of what they are up to. The names of peo­ple own­ing firms in Panama and the Bri­tish Virgin Is­lands were re­leased by a con­sor­tium of in­ter­na­tional jour­nal­ists. This was first re­ported by the In­dian Ex­press news­pa­per on Mon­day. FM Arun Jait­ley has said trans­parency is in­creas­ing due to global ef­forts and warned of costly con­se­quences for any­one try­ing to evade taxes, re­fer­ring to the ‘Panama pa­pers’.

This devel­op­ment has once again cast a shadow on tax havens, off­shore trusts, and se­cret ac­counts in bou­tique banks.

The me­dia glare on the mat­ter have raked up ques­tions on the na­ture of such in­vest­ments, deals that cross the line, peo­ple who in­dulged in them, and most im­por­tantly, whether the per­sons would be hounded by the tax of­fice and en­force­ment direc­torate – the way in­come tax of­fi­cers went af­ter those who were named in a list of ac­coun­thold­ers of HSBC Geneva. Here are some of the ques­tions that have cropped up:

Why Panama and BVI? Easy laws on off­shore trusts, ab­so­lute se­crecy and the pre­ferred des­ti­na­tion of ser­vice providers in Lon­don and Dubai make some of these tax havens ir­re­sistible. Sev­eral trusts with In­di­ans as ben­e­fi­cia­ries and hav­ing bank ac­counts in Switzer­land are in­cor­po­rated in BVI and Panama. Till some years ago, Panama even had ‘bearer shares’ – stocks that do not re­veal the names of ac­tual share­hold­ers. A favourite struc­ture for many wealthy In­di­ans has been set­ting up a Panama trust that owns a com­pany in BVI which in turn holds prop­er­ties and bank ac­counts in des­ti­na­tions across the world.

Who are the ones likely to be caught off guard? Per­sons who bought shares of Panama and BVI firms be­fore 2003, when RBI first al­lowed res­i­dent In­di­ans to in­vest in stocks and prop­er­ties abroad, are on a sticky wicket. They had ei­ther moved money from In­dia us­ing the hawa- la route or di­verted a slice of their overseas earn­ings to buy the shares. They didn’t set up new com­pa­nies but bought shares of ex­ist­ing shell firms from ser­vice providers who form these out­fits for such pur­pose. Even today, RBI’s lib­er­alised remit­tance scheme dis­al­lows an in­di­vid­ual to float a new com­pany abroad.

What about NRIs? Pur­chase of shares and prop­er­ties by NRIs and res­i­dents us­ing the RBI’s remit­tance win­dow have lit­tle to fear. But those who bought into tax haven com­pa­nies be­fore 2003 and at a time when they were not NRIs would find them­selves on thin ice. Also, those who never both­ered to dis­close these in­vest­ments af­ter re­turn­ing to In­dia in their tax re­turns may be pulled up. In 2012, tax au­thor­i­ties added a new col­umn in the tax re­turn form for spell­ing out overseas as­sets. Many, fear­ing it would at­tract un­nec­es­sary at­ten­tion, chose not to re­veal these in­vest­ments.

What if some­one is a di­rec­tor but not a share­holder in a tax haven firm? A per­son named as a di­rec­tor in a BVI firm can­not be pulled up if there’s no way to prove that the firm’s as­sets be­long to him. There may be se­cret (but le­gal un­der­stand­ing) be­tween such direc­tors and share­hold­ers who act as fronts; but, it is tough to lift the veil and es­tab­lish such ar­range­ments.

Why buy an apart­ment in Lon­don via BVI? Even for le­git­i­mate trans­ac­tions (to buy prop­er­ties abroad), this is a tax-ef­fi­cient route. First, a BVI firm can bor­row to buy a prop­erty in Lon­don but a per­son in In­dia, even with a fat net worth, can’t. Sec­ond, it’s a neat struc­ture to avoid estate duty in Europe. Third, no tax is paid on cap­i­tal gains when the prop­erty is sold: in such deals the per­son sells shares of the BVI com­pany to trans­fer the prop­erty rights. Such loop­holes in Bri­tish tax laws are now be­ing plugged. From this month there would be tax on cap­i­tal gains when the ul­ti­mate ben­e­fi­cial owner of a tax haven en­tity (own­ing prop­er­ties in UK) changes. But not all deals are le­gal: over the years Bol­ly­wood celebri­ties and busi­ness­men have used some of their overseas earn­ings to buy prop­er­ties abroad in­stead of bring­ing the money back to pay tax in In­dia.

So, how will the tax­man go af­ter these peo­ple? It’s a familiar plot. It’s likely to pan out like the HSBC Geneva case. Tax depart­ment will raise de­mand and ED may slap no­tices, while the per­sons in ques­tion will ei­ther claim that the trans­ac­tions were above board or deny that they ever had any links with any off­shore firm. Some HSBC ac­coun­thold­ers have so far con­fessed while most have moved the court. Their ar­gu­ments: the ac­counts be­longed to dis­cre­tionary trusts and not in their name; the trusts did not dis­trib­ute any money to them; and they are clue­less how they were named as ben­e­fi­cia­ries. How­ever, those with di­rect num­bered Swiss ac­counts may find it more dif­fi­cult to de­fend them­selves. More­over, if the BVI and Panama com­pa­nies were closed be­fore 2000, then the tax depart­ment can’t re­open mat­ters that are more than 16 years old.

Can some of them come clean now? It’s com­pli­cated. The BVI com­pa­nies can sell prop­er­ties, close bank ac­counts, bring back the money through hawala, and pay 45% tax on the undis­closed cash un­der the lo­cal black money scheme. Maybe even the gov­ern­ment would pre­fer this. More so, af­ter the luke­warm re­sponse to last year’s quasi-amnesty scheme for dec­la­ra­tion of for­eign ac­counts. But will that keep tax of­fi­cials at bay? Can they buy peace? Many are wait­ing to find out from the finance min­istry which will soon re­lease the rules of the scheme.


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