Pandora Papers and Illegal offshore investments from India – Explained, pointwise

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A few years after the release of the Panama Papers, a new exposé, Pandora Papers has burst into the news. The papers reveal complex web of offshore dealings by wealthy individuals around the world, creating Illegal offshore investments.

There are names of at least 380 persons of Indian nationality in the Pandora Papers. This shows how the rich, the famous and the notorious safeguard their investments — cash, shareholdings, real estate, art, aircraft, and yachts — from creditors and law enforcement agencies.

What are the Pandora Papers?

The Pandora Papers sourced by the International Consortium of Investigative Journalists (ICIJ) feature people from various walks of life, ranging from sports and entertainment to public affairs and business; some who are already under the state scanner for hidden assets.

The papers consist of as many as 12 million documents belonging to 14 global corporate services firms which set up about 29,000 off-the-shelf companies and private trusts in obscure tax jurisdictions.

The trusts and shell companies have been set up in tax havens like 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.

Read more: Explained: Why do the Pandora Papers matter?

In India, the Centre has ordered a multi-agency probe into the offshore secrets of wealthy elites unravelled in the Pandora Papers. The complex ownership structures and ringfencing of wealth in the records will be scrutinised by a group headed by the chairman of the Central Board of Direct Taxes (CBDT).

What are the previous such leaks exposing illegal offshore investments from India?

Mauritius Leaks, 2019: The data of 200,000 documents were leaked. One-fourth of those disclosed in the Mauritius leaks had India as their only country or one of the countries of business activity.

Paradise Papers leaks, 2017: These are around 13 million leaked files from offshore service providers and company registries obtained by a German newspaper. India ranked 19th in terms of the number of names that feature in the papers.

Panama Papers, 2016:  These are 11.5 million files from the database of the world’s fourth-biggest offshore law firm, Mossack Fonseca. The data revealed offshore links to many wealthy individuals. Over 500 Indians, including high-profile actors and businessmen, were exposed in the Panama papers.

Note: India recovered Rs 20,352 crore from the investigations following the leaks of Panama Papers.

Swiss leaks or HSBC Leaks, 2015: These are secret documents from HSBC’s Swiss private banking arm. They come from over 200 countries, with a total balance of over $100 billion. The leaks exposed 1,195 Indian HSBC clients.

Note: Indian government investigations found undisclosed income of Rs 8,465 crore in Swiss leaks and levied taxes and a penalty worth Rs 1,294 crore.

According to GoI, the leaks have been used to check for possible tax evasion and the last two leaks have resulted in the detection of undisclosed income of Rs 20,352 crore.

How Indian government is curbing illegal offshore investments and tax evasions?
International Collaborations

India is proactively engaging with foreign governments to facilitate and enhance the exchange of information under the Double Taxation Avoidance Agreements (DTAAs)/Tax Information Exchange Agreements (TIEAs). For instance, at present, India has double tax avoidance treaties with more than 80 countries around the world.

Further, India is also a member of various international conventions like the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, United Nations Convention against Corruption, Financial Action Task Force etc.

Apart from that, India also takes part in the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS).

Common Reporting Standards: In 2009, G20 leaders pledged to root out banking secrecy. Later, in 2013 the foundation was laid for common reporting standards that led to an automatic exchange of information between countries and information sharing on request.

Today, 110 jurisdictions are signatories to the standard, India is also a signatory. Through 4,200 bilateral exchange relationships, they have exchanged 84 million pieces of information uncovering $107 billion in tax revenue.

Apart from that, India is open to participate and engage in discussions about the Global Minimum Corporate Tax structure which aims to curb tax evasion by MNCs.

National initiatives

Legislative actions: These include legislations such as the Foreign Exchange Management Act, the Prevention of Money Laundering Act, the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, the Prevention of Corruption Act and the Income-Tax Act to deal with offshore illegal investments and tax evasions from India.

Investigative agencies such as the Central Board of Direct Taxes (CBDT), Central Bureau of Investigation (CBI), Enforcement Directorate (ED), etc are also looking into tax evasions and Illegal offshore investments from India.

Other actions: Apart from that, the government also introduced an Income declaration scheme to encourage voluntary disclosure of black money and offshore investments. Under the scheme, the person indulging in illegal offshore investments can avoid prosecution after paying a fine of 50% on the undisclosed income.

The income tax department is implementing ‘Project Insight‘ which will monitor high-value transactions within India and from India to abroad to curb black money.

The government also formed a Special Investigation Team under Justice M B Shah to curb black money and illegal offshore investments.

What are the challenges in curbing illegal offshore investments?

Difficulty in tracking the investments: Offshore trusts offer enhanced secrecy to businesspersons, due to their complex structures. Businesspersons set up private offshore trusts to project a degree of separation from their personal assets. This way, Businesspersons insulate the assets from tracking and taxing them from source countries like India.

Challenges in prosecuting illegal investments: Tax Haven countries have long been associated with their financial secrecy laws that allow the creation of anonymous accounts while prohibiting the disclosure of financial information.

So, the Income-Tax Department in India cannot get the details from the financial investigation agency or international tax authority in offshore jurisdictions. This makes prosecuting these offshore investments even harder than identifying them.

Tax laws and treaties are long and complex: The global laws are divided up between the world’s 320 national and sub-national jurisdictions. So, the possibilities of exploiting loopholes are almost limitless.

Unrestrained capital flows: With globalisation and the liberalisation of the global economy, countries offer excessive capital flows between nations to boost the economy. While capital can move across borders without restraint, a small portion of that money will always be available to those who want to keep their wealth out of the hands of legal or tax authorities.

Lack of comprehensive enforcement agencies: Separate wings of law enforcement agencies deal with tax evasion and illegal offshore investments from India. They lack coordination, lack of skills to handle the issue holistically.

How to curb illegal offshore investments better?

Faster implementation of Global Minimum Corporate Tax: The recent meeting of G7 countries resulted in the adoption of a 15% Global Minimum Corporate Tax(GMCT). This has to be implemented globally to reduce tax evasion and encourage information sharing between various offshore tax jurisdictions.

Revisiting the capital account convertibility by nations that opened capital accounts: If governments want to address tax avoidance rather than apply endless Band-Aids, then their decision to permit capital account convertibility will have to be revisited.

UN Convention against corruption: India can try an alternate route instead of signing Double Taxation Avoidance Agreements. India can demand offshore illegal investments as proceeds of crime and corruption, mentioned under the UN Convention against corruption. This will make an obligation for the foreign countries to provide bank details and other investment details.

Implementing the recommendations of SIT: The Special Investigation Team (SIT) on black money in its fifth report suggested amending the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. The report recommended incorporating the provision that “undisclosed foreign income and assets would vest in the Union of India“.

“The person who is holding the said property outside the country shall have to prove that it was acquired legally and/or held after obtaining necessary permission from the RBI,”. The government can implement the recommendation.

Amendments to Indian Laws and regulations: Laws such as FEMA, FERA can be amended to curb tax evasions and illegal offshore investments.

Imposing deterrent punishments in a time-bound manner without judicial delay will send a definite message to all illegal offshore investors in India. For that, more technological advancement and an Integrated Taxpayer Data Management System (ITDMS) for 360- degree profiling is needed to recognise the defaulters in time.

Further, India also has to provide domestic and international training to the personnel of the Law enforcement agencies.

A holistic and all-around attack from within and outside the country is the need of the hour. India should quickly take up appropriate reforms at home that will aid in curbing tax evasions and illegal offshore investments. Further, India can engage in bilateral and multilateral mechanisms to deal with the issue.

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