The hidden wealth of nations

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."