Prof. Bhagwati Prakash
The massive trove of secret financial dealings and unimaginable quantum of illicit wealth, stashed in 19 tax havens, surfaced in the recent and fourth consecutive global financial leak in a short span of five years, is a mind boggling expose. This leak of the “Paradise Papers”, reported in the news papers on November 7, 2017 is containing 13.4 million documents of just two leading offshore finance firms. It will bring to surface, huge quantum of black money stashed in these tax havens. Almost, 1,20,000 entities, including both people and companies, involving around $10 trillion (Rs 650 lac crore) i.e. almost 4 times the GDP of India have figured in these papers. The stalwarts, whose financial affairs figure in these papers are as high ranking as the Queen Elizabeth II, the President of Columbia, Juan Manuel, US Secretary of commerce, Mr. Wilburloss. India ranks 19th out of 180 countries with 714 names in the offshore-wealth data leak, in these Paradise Papers, a synonym for papers related to money stashed in tax havens.
Among the three preceding leaks of similar clandestine global financial dealings in last 5 years, the first one was Offshore Leaks (2013), the second was Swiss Leaks (2015) and the third one was the Panama Papers leak of 2016. The eighteen month old Panama Papers’ leak had contained particulars of 2 lakh companies in 21 offshore jurisdictions. Swiftly switching into action, the Government of India has already ordered a multi-agency probe, within hours of the eruption of names of 714 Indian entities, including corporates, politicians, celebrities, media persons and corporate lobbyists. The multi-agency group, already probing the Panama Papers is being reconstituted to monitor a probe into Paradise Papers as well, and to take swift action in the matter. The probe is being headed by the chief of the Central Board of Direct Taxes (CBDT), to be conducted in coordination with, Enforcement Directorate (ED), Reserve Bank of India (RBI) and Financial Intelligence Unit (FIU).
Modus Operandi
However, mere presence of the name of an individual or company in the files does not point to any malfeasance or wrongdoing, except if there is an evasion of taxes as well. So, the probing agencies have to rigorously tally the details, surfaced in the leaks with the income tax returns of the concerning entities. Some of the persons named in these papers are already being investigated. The ED has taken cognisance and had already begun its probe in at least two cases: Ziqitza Health Care Ltd, a company where Sachin Pilot and former finance minister P Chidambaram’s son Karti were once directors. The company is under probe by CBI and ED for its alleged involvement in an ambulance scam in Rajasthan. The agency has also taken into cognisance, the financial dealings between Diageo and USL, once owned by Vijay Mallya. In the case of Ziqitza, which was founded by former Union Vayalar Ravi’s son Ravi Krishna, ED sources said some new details have emerged through the Paradise Papers and some of the same offshore investments too have been mentioned in the Paradise Papers, which are already being investigated. Investigating agencies have also sent judicial requests abroad, to get details, certified documents and evidence related to these investments. The agencies are yet to receive a reply from abroad. However, many investments, as mentioned in the papers, are completely new as well. The team probing the Panama Papers has already been given directions to begin a probe into the Paradise Papers as well.
Stashing Illicit Wealth
However, in view of the serial leaks (4 in 5 years) and the quantum of wealth stashed clandestinely in the tax havens, governments of major economies, the global financial architecture, the international financial system and the international financial governance structures need to take up the problem of stashing such illicit wealth in tax havens, at multilateral level. Governments must now work together effectively and seek to eviscerate the under cover activities of tax havens and their banks. In the present era of rapid globalisation, free mobility of capital and aggressive tax planning by the tax planners, including the Big Four accounting firms, tax avoidance is now a big business.
Some governments crazy for foreign investments too often are seen to be encouraging tax avoidance, in order to attract more and more foreign investments, wherein the sole long-term winners are and would always be the multinational corporations (MNCs) concerned. Basically, the corporate tax avoidance worldwide is huge in volume. At the end of 2016 the giant US technology companies alone were estimated, by the ratings agency, the Moody’s Investor Service, to have been around $ 1.84 trillion (£ 1.4 trillion) of cash held offshore. These were the mainly profits that firms such as Apple, Microsoft and Google registered outside the US, and piled up in tax havens. But personal tax avoidance is bigger. The economist Gabriel Zucman- after analysing discrepancies in countries’ national accounts asserts that around $ 7.6 trillion, or 8 percent of global wealth, is held by the entities offshore. It is almost 25 percent in the past five years. The Tax Justice Network campaign group too has disclosed that corporate tax avoidance is costing various governments $ 500bn a year, along with a personal tax avoidance costing around $200bn a year.
Though, in technical terms, the term 'black money' refers to income which has not been reported or disclosed to public authorities. But, it also includes money earned from illegal activities like crime (such as drug trafficking, smuggling, human trafficking etc.) and corruption as well. Various estimates made from time to time, since 1960s have reported the quantum of black money being generated in the economy to be between 20 to 40 percent of the GDP. But, It would be a mis-assumption that all black money flown out is lying in the offshore bank accounts alone. In reality a large portion of the black money flowing out illegally is also being brought back into India through 'Round Tripping' as white, either as export income or as foreign investment or via other means of laundering as upto 70 per cent of FDI flows into India have been through tax havens.
Round Tripping of Funds
Likewise, when the issue of black money had hotted up in 2010, India's exports began to boom then, despite an unprecedented stagnation in the world economy. Official data for 2010-11 showed a huge increase of $ 30 billion in engineering goods, while engineering companies falling in the BSE 500 list (The Top 500 companies of the Bombay Stock Exchange) show an export increase of only $ 1.38 billion. Who generated these balance exports of $ 28 billion? Minor companies, not listed on stock exchanges or Ghost companies? Likewise, export of metals and metal products increased from $ 13 billion to $ 29 billion. But, the export growth for these items by the BSE 500 companies is less than a billion dollar. Export of copper articles more than quadrupled to Rs. 36700 crore. The importing countries are also non-conventional importers of brass and copper wares and engineering goods. One such new destination for brassware handicrafts is China, which is not a normal buyer of such products.
Anomalies had then been pointed out by the researchers of Kotak Securities with respect to the inflows from Foreign Institutional Investors (FIIs). Official inflows in 2010-11 were shown at $ 22 billion. But, the data of EPFR Global (an International authority providing fund flows and asset allocation data to financial institutions around the world) shows inflows of only $ 4.5 billion, leaving a gap of $ 17.5 billion against official data, open to apprehension of round tripping of illicit flow of black money. Thus, the black money is being brought into circulation as white also by such means. So, it is not true that the black income would always stand black.
Moreover, the grinding issues pertaining to indiscriminate capital market liberalisation for FDI as well as FPI facilitating terrorist financing, money laundering and tax evasion need to be properly addressed through global tax coordination. The illegitimate ideational resistance from offshore financial centres and tax havens, involved in such deals and perpetrating all such financial irregularities also need to be addressed at multilateral or even at plurilateral level, if the tax havens do not cooperate at multilateral level. India, in coordination with the other governments, willing to cooperate, including the US and other industrialised countries must initiate to curb the menace of tax havens perpetrating tax evasion worldwide. Endeavours are already underway, wherein India has been taking a lead for last 3 years. The proposal moved by the Prime Minister Modi in the G-20 Summit held in Brisbane in Australia on November 16, 2014 on the exchange of tax related information and transparency in that regard, having been duly accepted by the G-20 was also a major breakthrough.
Dealing with the Devil
So far, there was no universally accepted institutional mechanism to deal with all such problems. But, now to tackle this problem, the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) has come into existence, which was constituted in 2009. This Global Forum has 146 member countries aiming to ensure that all the countries fully implement the international standards on tax transparency and exchange of information (EOI). These standards prescribe that all requisite tax information should be exchanged by a country requested for it on requisition by a requesting country, where it is relevant and essential for the enforcement of the domestic laws of the requesting country. Every country is peer reviewed on these standards and their compliance. After review, a rating is awarded to the member, which may be in the form of ‘Compliant’, ‘Largely Compliant’, Partly Compliant’ or ‘Non Compliant’. The peer review pressure has already led to the elimination of bank secrecy in a large number of countries. The Tax Transparency Report 2016 reveals that at the start of the review process in 2009, there were 65 countries which had bank secrecy laws, which could not exchange their banking information. This number has now been reduced to a meagre five countries at the end of 2016.
Many persons do not know, and may also wish to know how tax havens work. The prima facie method involved is corporate profit shifting from the country of corporate operations to a tax haven. A multinational company registers its headquarters in low-corporation tax justification and then brings in the investments through that headquarter and books its profits there. Most of the foreign direct investment (FDI) into India i.e. around 50 per cent are routed through Mauritius and Singapore.
Though, the Modi government has already signed a protocol on May 1, 2016, amending the Double Taxation Avoidance Agreement (DTAA) with Mauritius to be fully effective from April 1, 2019, when capital gains will attract tax at the full domestic rates of 15 per cent and 40 per cent of India and Mauritius are also set to begin fresh round of negotiations to amend the 33 year old DTAA. Investments into India routed through Mauritius-based companies alone crossed $114 billion between April 2000-June 2017 are participant in drafting the multilateral treaty, adopted in June 2017 in Paris, wherein 71 countries are now party to global anti-tax avoidance framework. But Mauritius has kept its DTAA with India, out of purview of this treaty. So we have to hold separate talks with Mauritius. For individuals, it is the mode of framing a trust in the tax haven to avoid tax in the country where the individual is based.
Today, there cannot be any other issue of greater priority, than curbing the tax havens, for the global polity of nations, seriously hurt from tax evasions. In the Cayman Islands a tax haven, a single address houses 18,857 corporations, very few of which have a physical presence in the Islands. All countries including, India, US, European Union and most of the countries other than tax havens are collectively suffering from more than a trillion dollars in tax revenue every year.
(The writer is a Vice-Chancellor of the Pacific Academy Higher Education and Research, Udaipur , Rajasthan)
Opinion : Perils of Paradise
Shshank Saurav
Almost eighteen months after Panama papers leak there is another leak which has raised the temperature in the already intensified electoral battle of Gujarat and Himachal Pradesh. Opposition has dared the government to take action on the names appearing in Paradise Papers and finance ministry has ordered an enquiry in this matter.
Election in a democracy is largely driven by emotions and corruption is an emotional issue for Indian electorate. While Congress party is trying to push BJP on back foot by raising this issue and daring the government to arrest the culprits, government is trying to appear serious by ordering an investigation into this matter. The Tax Department has confirmed that it has recovered close to Rs 800 Crore after investigation on Panama Papers leak matter.
Beyond Sensation
If we discuss the merit of the disclosure then we must distinguish between legal and moral. What is immoral doesn’t become illegal and vice-versa in all the cases. While While appreciating the efforts of investigative journalists, it would be improper to draw a conclusion that all these accounts are having black money. There might be legitimate account holders who had paid tax on the money lying in offshore account s with disclosed income. If mere publication of name makes someone guilty then I would like to remind that a Swiss magazine named Schweizer Illustrierte published an article in November, 1991 and alleged that Rajiv Gandhi held 2.5 Billion Swiss Francs.
If we take an example of Paradise Papers leak, name of MoS Jayant Sinha is also coming because he was Managing Director of India operations of Omidyar Network in the past and this company has made certain investments in tax heavens. Going by the rule book, transacting through a tax heaven is not illegal provided the fact has been disclosed. If anyone named has done legitimate transactions through tax heavens and it has been properly disclosed then there is no point sensationalising this leak.
Share Information
Another aspect which needs discussion is round tripping. For a perspective it may be noted that money is coming to India from tax friendly countries but significant part of our outbound investments is also going to destinations like Netherland, Singapore, British Virgin Island etc. where tax rates are very low and various tax concessions are given to investors. All these outbound investments are taking place with due regulatory approval and can withstand the legal scrutiny. Challenges relating to detection of round tripping is that the person involved in this kind of crime creates multiple layer of investment in various tax jurisdictions and in the absence of information, source of investment remains unknown. Information sharing across the countries is required for tracing the actual source of money but political interests come as a spoiler in this case.
Government is tightening the noose by enforcing various anti abuse provisions under Income Tax law but action can be taken only when there is enough information available to book the culprit. Be it Panama Papers or Paradise Papers, these are relating to channelisation of
ill-gotten money but checks over generation of black money is more important. Economic interest of the country should not be sacrificed on the altar of political differences and law should be allowed to take its own course. All political parties should discuss the ways to check the black money circulating within our economy and it will happen if central and state authorities put collective efforts.
(The writer is a Chartered Accountant and Anti-Money Laundering Specialist)
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