Worldwide more than $7.5 trillion — 8 per cent of the world’s financial wealth—is squirreled away in offshore tax havens. Almost 80 per cent or $6 trillion of this is never taxed at all, said Economist Gabriel Zucman in his book, ‘The Hidden Wealth of Nations’
Neeraj Mahajan
In an unprecedented move, the “Panama Papers” have exposed the complicated maze of tax havens, bogus shell companies, and clandestine deals to hide wealth from the tax authorities. The files leaked from Panama-based law firm Mossack Fonseca, have unearthed the manner in which the wealthy and powerful conceal their ill-gotten wealth in offshore accounts so the money stashed there can’t be traced by the authorities.
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Taking cognizance of the “Panama Papers” leak, the Bhartiya government has asked questions to about 50 individuals and enterprises that have been named and accused in these papers of stashing wealth in tax havens. The official communiqué from the tax authorities has sought answers to two broad questions: One, whether they are the same individual as named in these papers and secondly the specific details of their transactions with the law firm Mossack Fonseca.
Tax havens also called tax shelters are the hubs of a growing shadow economy of unregulated global capital. A tax haven is a place where taxes are low, and banking supervision is also inadequate, making it possible to hide the money trail easily. It allows individuals and corporations from all over the world to exploit the possibility of tax evasion, money laundering or illicit dealings.
Reasons why people park their funds in tax Havens
Avoid/Evade Tax: People wish to evade taxes in the country of their residence. While tax evasion or non-disclosure of income is illegal, tax avoidance is legal.
Hide any criminal activity: The criminal activity might be tax evasion itself.
Anonymity: They want their activities to be anonymous, even if legal.
Bypass financial watchdogs: Tax havens are used by those seeking to do business without any regulations or taxes
Shell Companies
The process of camouflaging the source of money offshore involves setting up a shell company based in a tax haven like British Virgin Islands, Macao, Bahamas, and Panama. Each of these places has utmost banking secrecy and very low or non-existent taxes. The shell company conveys the impression of a legitimate business. Shell, Offshore Financial Centre or “letterbox” companies, have little more than an address to post documents.
Tax haven companies are extremely secretive. No information about them is available in any public register. The local tax authorities know nothing about them either. Their management is made up of lawyers, accountants, clerks and peons who sign documents. This name appears on the letterhead. They manage the money while hiding the identity of the actual owners.
Tax havens are the biggest boon for the money launderers. An offshore company owned by a Trust presents an almost impenetrable barrier to law enforcement agencies and tax authorities. All over the world some fifty countries are offering various tax benefits to non-residents as part of the offshore business. Some of those like British Virgin Islands, Panama or Seychelles are hugely popular and widely perceived as foreign tax havens. Many tax havens follow the ‘Don’t ask, don’t tell’ policy.
In Panama, for instance, firms can provide nominee directors/shareholders and help set up a company within 48 hours. Many international banks operate from Panama. Banking confidentiality is guaranteed in Panama which follows a strict territorial system of taxation. Panama has no official central bank and no exchange control.
Dual Passport & Citizenship
Cyprus—an island in the Mediterranean Sea is one of several tax havens located in the European continent. Cyprus specialises in services like the incorporation of offshore companies and formation of Cyprus Trusts and other offshore services.
There are many ways to apply for citizenship of a country—by birth, marriage, descent, naturalisation or marriage. Foreigners can acquire citizenship of Cyprus by investing 2,500,000 – 5,000,0000 Euros depending on the investment option. In addition to the above investment, an applicant is expected to purchase a residence the cost of which must exceed the amount of Euros 500,000 (+ 5 % VAT) in Cyprus. The Cypriot Citizenship by Investment programme offers various opportunities to invest in the country. The practical costs of acquiring Cypriot citizenship are relatively small (no payment to a national fund is required).
Cyprus is attracting many non-EU citizens from around the globe. It is considered the most straightforward route to become a European citizen. One could apply for dual citizenship and get a dual Cyprus passport in only 90 days. Cypriot citizens can visit 157 countries without a visa. These include the European Union and the Schengen Area, Israel, Indonesia, Morocco, Oman, Paraguay, and Thailand. Visas for the USA are usually granted for ten years. A European Union passport enables holders to take up residence and work in every other EU country and Switzerland.
Cyprus is a full member of the European Union. Hence Cypriot citizens enjoy all the privileges of EU citizens: free movement of people and capital within the countries of the EU and free establishment and movement of services and goods in all the EU countries. EU citizens enjoy the right to travel freely, reside, work and study in any EU member state, purchase property, transfer funds, and invest in any member state.
Cyprus imposes the same tax rate for all companies incorporated in the jurisdiction. There is no withholding tax applied to the payment of dividends in Cyprus. Incorporation of Cyprus Company normally costs EUR 3,000. Cyprus also has no wealth tax.
Cyprus is well known for offshore banking. The low tax environment of Cyprus allows for offshore bank accounts at many banking institutions . There are no taxes applied to the interest earned by offshore bank accounts in the tax haven of Cyprus. Cyprus International Trusts have several advantages. The offshore tax haven allows for the formation of beliefs; which pay no taxes on income gained outside of the territory. Trust dividends and interest earned are tax-free in the low tax haven Cyprus. Cyprus trusts are granted privacy. The names of the trust owners are not disclosed to the registrar, and there is no need for Cyprus trusts to do financial reporting to any authority in tax haven Cyprus.
(The writer is a Senior Journalist)
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