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