The hid­den wealth of na­tions

The Pak Banker - - OPINION - G. Sam­path

THIS could be a bumper year for the ever-lu­cra­tive tax avoid­ance in­dus­try. The 2015 fi­nal re­ports of the Or­gan­i­sa­tion for Eco­nomic Co-op­er­a­tion and De­vel­op­ment (OECD)-led pro­ject on Base Ero­sion and Profit Shift­ing (BEPS) - which re­fer to the ero­sion of a na­tion's tax base due to the ac­count­ing tricks of Multi­na­tional En­ter­prises (MNEs) and the le­gal but abu­sive shift­ing out of prof­its to low-tax ju­ris­dic­tions re­spec­tively - lays out 15 ac­tion points to curb abu­sive tax avoid­ance by MNEs. As a par­tic­i­pant of this pro­ject, In­dia is ex­pected to im­ple­ment at least some of th­ese mea­sures. But can it? More per­ti­nently, does it have the political will? The BEPS pro­ject is no doubt a pos­i­tive de­vel­op­ment for tax jus­tice. If In­dia's re­cent eco­nomic his­tory tells us any­thing, it is that eco­nomic growth with­out pub­lic in­vest­ment in so­cial in­fra­struc­ture such as health care and education can do very lit­tle to bet­ter the life con­di­tions of the ma­jor­ity. Which is why curb­ing tax eva­sion to boost pub­lic fi­nance is part of the United Na­tions' Sus­tain­able De­vel­op­ment Goals (SDGs).

How­ever, not­with­stand­ing the BEPS pro­ject, MNEs and their ded­i­cated army of highly paid ac­coun­tants are not about to roll over and com­ply. Again, if past his­tory is any in­di­ca­tion, the catand-mouse game be­tween ac­coun­tants and tax­men will con­tinue, with new loop­holes be­ing un­earthed in new tax rules. The pri­mary cause of con­cern here is the qual­ity of In­dia's political lead­er­ship, which has con­sis­tently be­trayed its own tax­men. All it takes - re­gard­less of the party in power - is for the stock mar­ket to sneeze, and the In­dian state swoons. We've seen it hap­pen time and again: the post­pone­ment of the en­force­ment of Gen­eral Anti-Avoid­ance Rules (GAAR) to 2017, and more spec­tac­u­larly, on the is­sue of par­tic­i­pa­tory notes, or P-notes. Last year, the Spe­cial In­ves­ti­ga­tion Team (SIT) on black money had rec­om­mended manda­tory dis­clo­sure to the reg­u­la­tor, as per Know Your Cus­tomer (KYC) norms, of the iden­tity of the fi­nal owner of P-notes. It was a sane sug­ges­tion be­cause the bulk of P-note in­vest­ments in the In­dian stock mar­ket were from tax havens such as Cay­man Is­lands. But the mar­kets threw a fit, with the Sen­sex crash­ing by 500 points in a day. The Na­tional Demo­cratic Al­liance (NDA) govern­ment, which had come to power promis­ing to fight black money, promptly is­sued a state­ment as­sur­ing in­vestors that it was in no hurry to im­ple­ment the SIT rec­om­men­da­tions. Given such a patchy record, what are the re­al­is­tic chances of In­dia ac­tu­ally clamp­ing down on tax dodg­ing?

Let's take, for in­stance, Ac­tion No. 6 of the OECD's BEPS re­port: it urges na­tions to curb treaty abuse by amend­ing their Dou­ble Tax­a­tion Avoid­ance Agree­ments (DTAA) suit­ably. The ob­vi­ous lit­mus test of In­dia's se­ri­ous­ness on BEPS is its DTAA with Mau­ri­tius. By way of back­ground, Mau­ri­tius ac­counted for 34 per cent of In­dia's FDI equity in­flows from 2000 to 2015. It's been In­dia's sin­gle-largest source of FDI for nearly 15 years. Now, is it pos­si­ble that there are so many rich busi­ness­men in this tiny is­land na­tion with a pop­u­la­tion of just 1.2 mil­lion, all with a touch­ing faith in In­dia as an in­vest­ment desti­na­tion? If not, how do we ex­plain an is­land econ­omy with a GDP less than one-hun­dredth of In­dia's GDP sup­ply­ing more than one-third of In­dia's FDI? We all know the an­swer: Mau­ri­tius is a tax haven. While not in the same league as Cay­man Is­lands or Ber­muda, Mau­ri­tius is a ris­ing star, thanks in no small mea­sure to In­dia's pa­tri­otic but trag­i­cally tax­al­ler­gic busi­ness elite. In Trea­sure Is­lands: Tax Havens and the Men Who Stole the World, fi­nan­cial jour­nal­ist Ni­cholas Shax­son notes how Mau­ri­tius is a pop­u­lar hub for what is known as "roundtrip­ping". He writes, "A wealthy In­dian, say, will send his money to Mau­ri­tius, where it is dressed up in a se­crecy struc­ture, then dis­guised as for­eign in­vest­ment, be­fore be­ing re­turned to In­dia. The sender of the money can avoid In­dian tax on lo­cal earn­ings."

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