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Synopsis: There are at least 380 persons of Indian nationality in the Pandora Papers. The papers consist of as many as 12 million documents from 14 companies in offshore tax havens with details of ownership of 29,000 offshore companies and Trusts. A look at various dimensions of the issue.
What are the Pandora Papers?
These are the leaked files from 14 global corporate services firms which set up about 29,000 off-the-shelf companies and private trusts in obscure tax jurisdictions and in countries such as Singapore, New Zealand, and the United States, for clients across the world.
These documents relate to the ultimate ownership of assets ‘settled’ (or placed) in private offshore trusts and the investments including cash, shareholding, and real estate properties, held by the offshore entities.
The trusts are set up in known tax havens such Samoa, Belize, Panama, and the British Virgin Islands, or in Singapore or New Zealand which offer relative tax advantages, or even South Dakota in the US, the biggest economy.
What do the Pandora Papers reveal?
The Pandora Papers reveal how the rich, the famous and the notorious, set up complex multi-layered trust structures for estate planning, in jurisdictions which are loosely regulated for tax purposes, but characterized by air-tight secrecy laws.
The purpose for which trusts are set up are many is two-fold:
i) to hide their real identities and distance themselves from the offshore entities so that it becomes near impossible for the tax authorities to reach them and
ii) to safeguard investments — cash, shareholdings, real estate, art, aircraft, and yachts — from creditors and law enforcers.
What is a trust?
A trust can be described as a fiduciary arrangement where a third party, referred to as the trustee, holds assets on behalf of individuals or organizations that are to benefit from it.
It is generally used for estate planning purposes and succession planning. It helps large business families to consolidate their assets — financial investments, shareholding, and real estate property.
A trust comprises three key parties: ‘Settlor’ — one who sets up, creates, or authors a trust; ‘trustee’ — one who holds the assets for the benefit of a set of people named by the ‘settlor’; and ‘beneficiaries’ — to whom the benefits of the assets are bequeathed.
A trust is not a separate legal entity, but its legal nature comes from the ‘trustee’. At times, the ‘settlor’ appoints a ‘protector’, who has the powers to supervise the trustee, and even remove the trustee and appoint a new one.
Is setting up a trust in India, or one offshore/ outside the country, illegal?
The Indian Trusts Act, 1882, gives legal basis to the concept of trusts.
While Indian laws do not see trusts as a legal person/ entity, they do recognise the trust as an obligation of the trustee to manage and use the assets settled in the trust for the benefit of ‘beneficiaries’.
India also recognises offshore trusts i.e., trusts set up in other tax jurisdictions.
Why are trusts set up?
i). Maintain a degree of separation: Businesspersons set up private offshore trusts to project a degree of separation from their personal assets. This way, he insulates these assets from creditors.
ii). Hunt for enhanced secrecy: Offshore trusts offer enhanced secrecy to businesspersons, given their complex structures. The Income-Tax Department in India can get to the ultimate beneficial owners only by requesting information with the financial investigation agency or international tax authority in offshore jurisdictions. The exchange of information can take months.
iii). Avoid tax in the guise of planning: Businesspersons avoid their NRI children being taxed on income from their assets by transferring all the assets to a trust. The ownership of the assets rests with the trust, and the son/ daughter being only a ‘beneficiary’ is not liable to any tax on income from the trust.
Source: This post is based on the article “Explained: Why do the Pandora Papers matter?” published in The Indian Express on 4th Oct 2021.