PANAMA This Tax Haven is a Place on Earth Panama By Num­bers

A tax haven has one of these three char­ac­ter­is­tics: It has no or a very low-rate in­come tax. It has bank se­crecy laws. And it has a his­tory of non-co­op­er­a­tion with other coun­tries on ex­chang­ing tax in­for­ma­tion. Cen­tral Amer­ica’s sec­ond­largest econ­omy has

The Economic Times - - Deep Focus -

ThePana­maPaper­sare­mere­lythe tip of the ice­berg, with 11.5 mil­lion files from the data­base of the world’s fourth-largest off­shore law­firm,Mos­sack­Fon­seca,tum­blin­gout­last­week­end.But­to­pro­vide some per­spec­tive, 400,000 cor­po­ra­tions and foun­da­tions are domi­ciled in Panama.

And then again, this is also only one of the many fi­nan­cial cen­tres used by the rich and fa­mous to off­shore their wealth. It also high­lights the im­pact of Base Ero­sion and Profit Shift­ing (BEPs), con­ser­va­tively es­ti­mated at an an­nual rev­enue loss of $100-240 bil­lion.

Th­es­take­sare­clear­ly­high­for­gov­ern­ments around the world. The im­pact on de­vel­op­ing coun­tries as a per­cent­age of tax rev­enues is beinges­ti­mat­ed­to­beeven­high­erthanin­de­vel­oped coun­tries. So, if there is a poster boy for BEPs, it is the Panama Papers.

The G20 had iden­ti­fied the Au­to­matic Ex­change of In­for­ma­tion (AEoI) as the new in­ter­na­tional stan­dard in 2014 as a re­sponse to check­ing BEPs. Since then, 132 ju­ris­dic­tions have com­mit­ted to this stan­dard on ex­change of in­for­ma­tion ‘on re­quest’. Of these, 96 ju­ris­dic­tions will in­tro­duce AEoI within the next two years, in­clud­ing al­most all the renowned in­ter­na­tional fi­nan­cial cen­tres such the Cay­man Is­lands, Ber­muda, Hong Kong, Jersey, Sin­ga­pore and Switzer­land. But Panama had so far re­fused to make the same com­mit­ment.

Ac­cord­ing to the Wash­ing­ton-based Cit­i­zens for Tax Jus­tice, a tax haven has one of these three char­ac­ter­is­tics: “It has no in­come tax or a very low-rate in­come tax; it has bank se­crecy laws; and it has a his­tory of non-co­op­er­a­tion with other coun­tries on ex­changing­in­for­ma­tion­about­tax­mat­ters.” Panama has all three. Part­ners Juer­gen Mos­sack and Ra­mon Fon­seca in­cor­po­rated more than 113,000 British Vir­gin Is­land (BVI) com­pa­nies, but also branched out to the tiny Pa­cific is­land na­tion Niue where, by 2001, they were con­tribut­ing 80% to Niue’s bud­get. There are no re­port­ing re­quire­ments for non-res­i­dent Pana­ma­ni­an­cor­po­ra­tions.Pana­ma­does­not al­low ‘pierc­ing the cor­po­rate veil’.

Pana­ma­nian cor­po­ra­tion’s share cer­tifi­cates can be bearer (owner) in form. Di­rec­tors or of­fi­cers of cor­po­ra­tions can be of any na­tion­al­ity, res­i­dent in any coun­try, and need not be present in the coun­try to es­tab­lish a cor­po­ra­tion or be share­hold­ers. All this ex­plains the pop­u­lar­ity of Panama and the BVI as off­shore cen­tres be­fore the RBI’s Lib­er­alised Re­mit­tance Scheme in 2004.

The RBI gover­nor has pointed out that although not all ac­counts would be il­le­git­i­mate, vi­o­la­tions would re­quire ver­i­fi­ca­tion. In­vest­ment in off­shore struc­tures could re­sult in vi­o­la­tions un­der the Black Money (Undis­closed For­eign In­come and As­sets) and Im­po­si­tion of Tax Act 2015 with ef­fect from July 1, 2015, the For­eign Ex­change Man­age­ment Act 1999, the Pre­ven­tion of Money Laun­der­ing Act 2012, the Pre­ven­tion of Cor­rup­tion Act 1988, the In­come Tax Act 1961, the Sebi Act 1992, and the Com­pa­nies Act 2013.

US AND PANAMA TREATY In 2008, the US Gov­ern­ment Ac­count­abil­ity Of­fi­cere­port­edlystat­edthat17ofthe100largestAmer­i­can­com­pa­nieswere­op­er­atin­ga­to­talof42­sub­sidiariesinPanama.Afavourable bi­lat­er­al­in­vest­ment­treaty(BIT)be­tween­the US and Panama was signed in Oc­to­ber 1982 an­daTradePro­mo­tionA­gree­ment(TPA)en­tered into force in Oc­to­ber 2012. Thus, even af­ter the in­tro­duc­tion in 2004 of the RBI’s Lib­er­alisedRemit­tanceScheme,anoff­shore struc­ture like a Panama cor­po­ra­tion was a tax-ef­fi­cient struc­ture par­tic­u­larly for pur­chase of prop­erty abroad.

It helped own­ers bor­row cheaply abroad, avoid Euro­pean Es­tate Duty, and cap­i­tal gains by sim­ply sell­ing the shares of the com­pa­ny­to­trans­fer­the­p­rop­er­tyrights.The favourableTPAs­re­quiretheUS­towaive‘Buy Amer­ica’re­quire­ments­for­pro­cure­ment­bids from­for­eign­firm­sin­cor­po­rat­ed­here­andthe BIT helps busi­ness.

NEW LEGISLATION All this is go­ing to change in a post-BEPs sce­nario.Bri­tain­is­bringingin­leg­is­la­tion­to­tax cap­i­tal gains when the ul­ti­mate ben­e­fi­cial owner of a tax haven en­tity changes. Al­most 100ju­ris­dic­tion­shave­joinedtheMul­ti­lat­eral Con­ven­tion on Mu­tual Ad­min­is­tra­tive As­sis­tan­ceinTaxMat­ters. Theuse­of­bearer share com­pa­nies is on the wane and the ben­e­fi­cial own­er­ship rules have been strength­ened­toen­surethat­in­for­ma­tion­isac­ces­si­ble by tax au­thor­i­ties.

As a re­sult of the OECDs Peer Re­view process, mem­ber coun­tries and ju­ris­dic­tions whose­le­ga­lan­dreg­u­la­to­ryframe­work­forthe ex­change­ofin­for­ma­tion­is­no­tyetup­toin­t­er­na­tional stan­dards, or ju­ris­dic­tions where a lack of in­for­ma­tion on ben­e­fi­cial own­er­ship of cor­po­rate and other en­ti­ties is fa­cil­i­tat­ing il­licit flows, have been iden­ti­fied.

TheIn­di­an­govern­men­thasan­nouncedthe con­sti­tu­tion of a spe­cial multi-agency group com­pris­ing of­fi­cers from the in­ves­tiga­tive unitoftheCen­tralBoard­ofDirec­tTax­e­sand its For­eign Tax and Tax Re­search di­vi­sion, the Fi­nan­cial In­tel­li­gence Unit and the RBI.

The RBI gover­nor has pointed out that al­though­no­tal­lac­countswould­beil­le­git­i­mate, vi­o­la­tions would re­quire ver­i­fi­ca­tion. All re­mit­tances made be­fore 2004 would raise a red flag since this was be­fore the RBI’s Lib­er­alised Re­mit­tance Scheme.

Sim­i­larly, from the fi­nan­cial year 20112012 on­wards, all res­i­dent tax­pay­ers were re­quired to dis­close their for­eign as­sets and in­come earned out­side In­dia, even if they were not li­able to file their re­turns. If they have not dis­closed de­tails of in­come earned out­side In­dia, of for­eign bank ac­counts and peak bal­ance of that ac­count, of for­eign in­ter­est in any en­tity with to­tal in­vest­ment in ru­pees, of im­mov­able prop­erty with to­tal in­vest­ment, of con­cerns in which the per­son has sign­ing au­thor­ity, of any other over­seas asset,oftrustin­whichin­di­vid­u­al­isatrustee, in their re­turns of in­come, it shall be deemed to be un-dis­closed in­come with pe­nal con­se­quences as per the In­come Tax Act 1961.

The odds of be­ing found out hid­ing your money in a tax haven in an age of dig­i­tal trans­parency are at an all-time high. And the fall­out of be­ing found out in a leak or a hack — and be­ing la­belled a tax avoider, the loss of rep­u­ta­tion and dig­nity built over a life­time all in a twit­ter-sec­ond — makes one won­der whether it’s re­ally worth the taxes saved. Wouldn’t one rather pay taxes and stand proud? It’s a per­sonal call.

Thewri­ter­isanLLMfromtheUniver­sity ofMichi­ganLawS­chool,USA.The­views

ex­pressedinthis­ar­ti­cleare­herown PART­NERS IN CRIME Juer­gen Mos­sack & Ra­mon Fon­seca

– mak­ing it the largest leak in off­shore his­tory. Con­tains de­tails on more than 214,000 off­shore en­ti­ties con­nected to peo­ple in more than 200 coun­tries and ter­ri­to­ries

PART­NERS IN CRIME Juer­gen Mos­sack and Ra­mon Fon­seca In­clude 11.5 mil­lion records, dat­ing back nearly 40 years

Newspapers in English

Newspapers from India

© PressReader. All rights reserved.