Pandora Papers Leak

WHY IN THE NEWS?

Recently, several prominent Indian names have been included in the Pandora Papers leak.

• There are over 300 Indian names in the leak, including over 60 prominent ones.
• Pandora Papers are 11.9 million leaked files from 14 global corporate services firms which set up about 29,000 off-the-shelf companies and private trusts.

About:

• The Pandora Papers reveal how trusts are used as a vehicle in conjunction with offshore companies set up for the sole purpose of holding investments and other assets by business families and ultra-rich individuals.
  • The trusts can be set up in known tax havens which offer relative tax advantages.
  • For Example: Samoa, Belize, Panama, and the British Virgin Islands.
• They reveal how the rich set up complex multi-layered trust structures for estate planning, in jurisdictions which are loosely regulated for tax purposes, but characterised by air-tight secrecy laws.
• Businesses have created a new normal after countries have been forced to tighten the laws on such offshore entities with rising concerns of money laundering, terrorism funding, and tax evasion.
  • The Panama and Paradise Papers dealt largely with offshore entities set up by individuals and corporations respectively.

Reasons for Setting up Trusts Overseas:

• Secrecy:
  • Overseas trusts offer remarkable secrecy because of stringent privacy laws in the jurisdiction they operate in.
• Maintain a Degree of Separation:
  • Businesspersons set up private offshore trusts to project a degree of separation from their personal assets.
• Avoid Tax in the Guise of Planning:
  • Businesspersons avoid their Non-resident Indians (NRI) children being taxed on income from their assets by transferring all the assets to a trust.
• Prepare for Estate Duty Eventuality:
  • There is a pervasive fear that estate duty, which was abolished back in 1985 will likely be re-introduced soon.
  • Setting up trusts in advance will protect the next generation from paying the death/inheritance tax, which was as high as 85% in the more than three decades after its enactment (The Estate Duty Act, 1953).
• Flexibility in a Capital-Controlled Economy:
  • India is a capital-controlled economy. Individuals can invest only USD 2,50,000 a year under the Reserve Bank of India’s Liberalised Remittance Scheme (LRS).
  • To get over this, businesspersons have turned to NRI , and under Foreign Exchange Management Act, 1999, NRIs can remit USD 1 million a year in addition to their current annual income, outside India.
    • Further, the tax rates in overseas jurisdictions are much lower than the 30% personal Income-Tax rate in India

• Grey Areas of Indian Taxation:
  • There are certain grey areas of taxation where the Income-Tax Department is in contest with offshore trusts.
  • After the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, came into existence, resident Indians have to report their foreign financial interests and assets.
    • NRIs are not required to do so.
  • The I-T Department may consider an offshore trust to be a resident of India for taxation purposes if the trustee is an Indian resident.
  • In cases where the trustee is an offshore entity or an NRI, if the tax department establishes the trustee is taking instructions from a resident Indian, then too the trust may be considered a resident of India for taxation purposes.
• Government’s Initiatives:

Legislative Action:

• The Fugitive Economic Offenders Act, 2018
• The Central Goods and Services Tax Act, 2017
• The Benami Transactions (Prohibition) Amendment Act, 2016
• The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015
• Prevention of Money Laundering Act, 2002.

International Cooperation:

• Double Taxation Avoidance Agreements (DTAAs):
  • India is proactively engaging with foreign governments with a view to facilitate and enhance the exchange of information under Double Taxation Avoidance Agreements (DTAAs)/Tax Information Exchange Agreements (TIEAs)/Multilateral Conventions.
• Automatic Exchange of Information:
  • India has been a leading force in the efforts to forge a multilateral regime for proactive sharing of financial information known as Automatic Exchange of Information which will greatly assist the global efforts to combat tax evasion.
• Foreign Account Tax Compliance Act of USA:
  • India has entered into an information sharing agreement with the USA under the act