TheSkep­tic Panama Papers: How Big is the Fire Be­hind The Smoke?

The Economic Times - - Money - MC GOVARDHANA RANGAN

Pfizer Inc this week ter­mi­nated a $160-bil­lion deal to ac­quire Ire­land’s Al­ler­gan Plc not be­cause the ‘syn­er­gies’ of the merger vapourised since it an­nounced the plan, but the tax ben­e­fits that might have ac­com­pa­nied it have.

Let’s face it; given a choice, few would vol­un­teer to pay taxes. Ap­ple Inc, which made a profit of $53 bil­lion last year doesn’t want to pay, and so is it with Al­pha­bet Inc, Google’s par­ent, which is val­ued at $516 bil­lion. Back home the likes of Sun Pharma and Re­liance In­dus­tries, pay a lesser rate than many in­di­vid­u­als who stump up the peak 30% tax rate.

Come Fe­bru­ary, we are all busy look­ing for that in­sur­ance pol­icy, or a mu­tual fund scheme that would help us re­duce taxes. How­ever pa­tri­otic one may be, when it comes to pay­ing tax, it takes a back seat.

Char­tered ac­coun­tants, pri­vate bankers, and for many who can’t af­ford the two, it is the car­ing neigh­bour who be­comes the ad­vi­sor sug­gest­ing ways to avoid tax. Buy­ing any of the fi­nan­cial in­stru­ments rec­om­mended by these gen­tle­men is le­git­i­mate. But what is not le­git­i­mate is the non-dis­clo­sure of in­come, like tak­ing prof­its in cash from sale of prop­erty or other as­sets and not pay­ing tax on them.

Where­does­thePana­maPapers, the­ex­poseof trans­ac­tion­sin­tax haven­scomein?Ithas11.5mil­lion doc­u­mentsspread­over­morethan 45coun­triesin­volv­ing2.15lakh com­pa­nies,and­has­claimed­its firstvic­tim,theIce­landPrime Min­is­ter.InIn­di­aitranges­from mati­neei­dolAmitab­hBachchanto renowned­taxlawyerHar­ishSalve.

None can deny the ex­is­tence of these com­pa­nies and their in­volve­ment. It is also true they trans­ferred money out of In­dia, and the in­come at those shell com­pa­nies can’t be taxed here.

The ob­vi­ous ques­tion is, which laws did these ac­tions vi­o­late? Nei­ther do re­ports in­di­cate, nor are ex­perts com­ing up with con­vinc­ing an­swers at this point.

Initsab­sen­ceit­may­bepru­dentto re­ly­on­thewis­do­mof twoem­i­nent men—RBI­gov­er­norRaghu­ram Ra­janandSalve,the­man­whowon the­biggest­tax­ca­seinIn­di­afor Voda­fone.“Allmy­off­shore­as­sets up­to2014w­erecre­ated­outof funds re­mit­ted­from­myIn­di­an­bankto myUKbankac­count,’’Sal­ve­told In­di­an­Ex­press.“After2014,Ihave in­comeintheUK­too — and­made somein­vest­mentsoutof that. Since­bankac­countsarerou­tinely called­for­by­tax­au­thor­i­ties,all In­di­anandUKbankde­tail­sare filed.Nothingiswith­held.’’

As a reg­u­la­tor, Ra­jan had this to say: “It is im­por­tant to note that there are le­git­i­mate rea­sons also to have ac­counts out­side, the LRS (Lib­er­alised Re­mit­tance Scheme of the RBI) al­lows you to take money out. We have to see what is le­git­i­mate and what is not le­git­i­mate.’’

It is rea­son­able to con­clude that all trans­ac­tions may not be vi­o­la­tions, though the idea be­hind them may be to avoid tax. Law per­mits such trans­ac­tions.

If so why the noise? Some trans­ac­tions are surely crim­i­nal acts and si­phon­ing off of even bank funds by crooked en­trepreneurs. What is im­por­tant is that pros­e­cu­tion chooses its bat­tles cor­rectly, where it has a fair chance of get- ting con­vic­tions, rather than hyp­ing only to lose the case ul­ti­mately which has of­ten been the prac­tice.

Here’s where Pfizer aban­don­ing the Al­ler­gan deal gives a les­son. Af­ter 22 com­pa­nies did such in­ver­sion­deals — apro­cess­whereUS com­pa­nies shifted their ad­dress to a tax-friendly na­tion via a merger —since2012,theUShas­comeup with laws to stop them.

The Voda­fone Plc tax case showed the loop­holes in our sys­tem,whenHutchisonof Hong Kong made prof­its, tax­men are chas­ingth­eUK­firm.Law­mak­ers are not plug­ging the loop­hole.

In­dian reg­u­la­tors have to go be­yond con­vic­tions and come up with rules and pun­ish­ments that would de­ter smart ones from gam­ing the sys­tem.

It will be a long and wind­ing road to con­vic­tion of those who evaded taxes. But Ra­mon Fon­seca, the founder of law firm Mos­sack Fon­seca that’s in the eye of the Panama Papers storm, has this to say now: “The only crime that has been proven is the hack.’’

If prose­cu­tors bun­gle in build­ing as­trong­casethey­mayendup mak­ing a hero out of a vil­lain.

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