The Indians allegedly involved, if found guilty, may land themselves in trouble not only under the Income Tax Act, 1961 and/or the Black Money Act, 2015 but also under the Foreign Exchange Management Act, 1999; and Prevention of Money Laundering Act, 2002 At several global platforms, leaders of developed as well as developing nations have highlighted the issue of global tax evasion...
The Indians allegedly involved, if found guilty, may land themselves in trouble not only under the Income Tax Act, 1961 and/or the Black Money Act, 2015 but also under the Foreign Exchange Management Act, 1999; and Prevention of Money Laundering Act, 2002
At several global platforms, leaders of developed as well as developing nations have highlighted the issue of global tax evasion as a challenge and the anomalies in the taxation mechanism.
At a recently held press conference, the current President of the United States, Barack Obama, voicing his thoughts on global tax evasion said, "It's not that they are breaking the laws, it's that the laws are so poorly designed that they allow people, if they have got enough lawyers and enough accountants, to wiggle out of responsibilities that ordinary citizens are having to abide by".1
Last year, it was the Swiss banks leaks, revealing a global list of some 30,000 accounts holding USD 120 bn of assets, including over 1100 Indians holding undisclosed bank accounts in HSBC Geneva2, which shaped the debate over the issue of black money parked overseas and led to enactment of The Black Money (Undisclosed Foreign Income and Asset) Imposition Act, 2015.
This year again, the Panama exposé conducted by the International Consortium of Investigative journalists, is being termed as the biggest leak of confidential data in the world's history.3
Public reporting suggests that the uncover involves leaking of data of about 11.5 million documents from Mossack Fonseca, the world's fourth largest offshore law firm ('firm'). The data reveals information on 2.15 lakh offshore entities, suggesting involvement of several world-renowned political leaders, industrialists, actors, sportspersons who have been suspected of utilising services of the firm; covering a period of nearly 40 years beginning from 1977 through the end of 2015 and allege involvement of some companies domiciled in low tax jurisdictions in money laundering, arms and drugs deal and tax evasion.
PANAMA??
The Republic of Panama, a small country in Central America, with a population of mere 3.864 million4 inter alia offers the following:
- favourable and flexible laws for incorporation, with the process of incorporating a corporate being concluded in as short a period of three days;
- physical presence not required for incorporating a corporate and can be done with the help of registered agents;
- no reporting requirements for non-resident Panamanian corporations;
- prohibits piercing of corporate veil;
- permits anonymous ownership by issuing share certificates in bearer or nominative capacity;
- authorises appointment of individuals as well as other than natural persons to be designated as directors/ shareholders holding nationality and residency of a country other than Panama;
- does not mandate maintaining books and holding board meetings in Panama;
- no requirement for disclosure of ultimate beneficiary(ies);
- transfer of shares and securities permitted freely;
- no exchange controls and regulatory restrictions, thereby authorising free flow of funds in and out of Panama;
- no withholding taxes on dividends, interests, branch profits, royalties remitted abroad;
- secure offshore financial centre with robust bank secrecy laws and revealing of banking information to third persons is a crime, punishable with imprisonment;
Legal Framework: For Consideration Purposes
While the Panama Papers deal with complex financial arrangements and structures benefitting the world's elite, they do not necessarily imply that the scheme is illegal.
For instance, the Reserve Bank of India ('RBI'), the Central Bank of India, does permit resident individuals to remit up to USD 2,50,000 (equivalent to INR 1.63 crores)5 abroad in each financial year i.e. April-March for any of the purposes mentioned under the Liberalised Remittance scheme ('LRS'). Accordingly, resident Indians can use LRS as a mechanism for acquiring immovable property, shares or any other assets outside India.
As reported, about USD 1.3 bn was transferred outside India in the financial year 2015 through LRS and about USD 250 mn was utilised for the purchase of property and investment in shares and debt.6
Similarly, the Overseas Direct Investment scheme ('ODI') of the RBI allows a company owned by resident Indians to invest up to 400% of its net worth in an offshore entity.
Accordingly, if the tax paid money (source disclosed) via the channels of government recognised and approved schemes such as the LRS/ODI has been transferred outside India for investment purposes or others even in low tax jurisdictions, the same shall not be considered in violation of any laws of India.
Global View: What May Follow
The leaks have also led to another fascinating disclosure, being unknown for years that the picturesque country of New Zealand is the heart of a tangled web of shell companies and trusts being used by Latin Americans to channel funds around the world.7
The Government of New Zealand has promised to review its foreign trust laws after the leaks highlighted vulnerabilities in its legal framework that made it a possible link in international tax avoidance structures due to a poor tax trust mechanism.
Further, the government of United Kingdom has the agenda to set a guideline for imposing stringent anti-corruption laws on low-tax overseas British territories and Crown dependencies in a forthcoming summit to be attended by 50 countries and international institutions.
One may also be mindful of the fact that in terms of commitments towards the Organisation for Economic Cooperation and Development ('OECD') Automatic Exchange of Information, Panama is said to undertake its first exchange by 2018. However, the OECD tax chief on the purported leaks said, "Panama has an extremely aggressive and obstructive attitude. Dialogue has broken down. It is the last financial centre that has refused to implement global standards of fiscal transparency. There has been very strong pressure from the law firms on the Panamanian government."8
Further, the OECD Tax chief also remarked that offshore secrecy is on the wane in most of the world, but becoming more concentrated in Panama.
Although as recent as May 12, 2016, Panama has committed to share financial account information automatically with other countries.9
Indian Impact
The Panama Papers' leaks assert involvement of around 500 Indians following which the Indian Government has set up a multi-agency group to probe the legitimacy or illegitimacy of every transaction undertaken; with the assurance that the requisite action shall be undertaken to resolve the issue including inter alia seeking of information from foreign governments.
Post the leaks, the tax authorities have already initiated survey proceedings on three Delhi-based businessman.10
The Modi Government did launch prosecutions against 154 persons out of 600-odd account holders in HSBC Bank, Switzerland and also did provide respite from prosecution by introducing the Voluntary Disclosure scheme under the newly enacted Black Money Act, 2015.
The current exposé deems it necessary for the ruling party being in its third term to stay true to its perspective and recover the illegitimate unpaid money as well as assets invested overseas.
The alleged if found guilty may land themselves in trouble not only under the Income Tax Act, 1961 and/or the Black Money Act, 2015 but also under the Foreign Exchange Management Act, 1999, Prevention of Money Laundering Act, 2002 as an offence of wilful attempt to evade any tax, penalty or interest referred in Section 51 of the Black Money Act in Part C of the schedule offences in light of the amendments passed by Finance Act, 2015.
Panama has also been listed in the past in the grey list by the Financial Action Task Force on the basis of a report of the International Monetary Fund suggesting flaws in Panama's anti-money laundering activities. However, as recent as February 2016, Panama is no more a part of the grey list.
In light of the current revelations in April 2016, as well as delisting from the grey list, it will be interesting to see what developments do take place in India especially keeping in consideration that judicial decisions in the HSBC bank leaks are awaited affirming the taxation of income in the hands of the alleged account holders and the veracity of the stolen documents is yet to be established.
Footnote:
1. Panama papers: Global Tax avoidance huge problems, says - Business Standard, April 6, 2016; 2. US government faces pressure after biggest leak in banking history, February 8, 2015; 3. Economic Times: Panama Papers: New ICIJ data shows about 2000 Indian Names dated May 10,2016; 4. Source: World Bank reported in 2013; 5. Currency Rate: One USD equivalent to INR 65.2; 6. The Economic Times: Panama Papers: Initial inquiries suggest 90% Indians have used Liberalised Remittance Scheme, dated April 13, 2016; 7. Panama papers: New Zealand prime place for channelling funds, alleges report, May 9,2016; 8. How the OECD had a 'bad Panama Papers' - and why it matters April 19, 2016 Tax Justice Network; 9. Panama signs up to OECD tax sharing deal, 12 May 2016; 10. Indian Express: Panama heat: Income Tax Department knocks on 3 Delhi doors, April 27, 2016
Disclaimer - The views expressed in this article are the personal views of the authors and are purely informative in nature.