Panama Papers’ Leak:
Panama Papers’ leak is a work done by a special team over a period of eight months starting from July. The project was called The Prometheus, a new ICIJ (International Consortium of Investigative Journalists) project on offshore companies considered as one of the most ambitious collaborative journalism. They had to work on the leads by going through 2600 GB of data, which had more than 36,000 files. It is one of the largest probes with over 100 media groups involved.
Legal Position of Panama Papers’ Leak:
Over 500 Indians and thousands of people around the world set up overseas entities in various tax havens including British Virgin Islands, Seychelles, Bahamas and Panama.
The legal position in India has been as follows:
Until 2004, India did not allow convertibility of Indian Rupees to US Dollars. In February 2004, RBI allowed the Liberalised Remittance Scheme(LRS) which allowed an individual to carry 25,000 dollars a year which could be used for various purposes like medical treatment, children education, gift, charitable purposes and other purposes like making portfolio investment. This limit gradually increased to 250,000 dollars.
While the limit was increased and investment in shares was allowed, there was nothing about whether Indians could incorporate entities in these tax havens. However, it was assumed that since one can invest in shares abroad, one can even incorporate companies. Therefore, RBI released an FAQ on September 17, 2010, wherein it specifically declared that ‘LRS allows for buying shares, but specifically prohibits setting up of companies abroad by individuals.’
However, many individuals interpreted this in a different way to mean that one cannot set up company, but can acquire companies. The Chartered Accountants also suggested the same allowing buying company off the shelves. Whereas, what RBI meant was while one can buy shares abroad, one cannot own a company abroad. Therefore, after elaborate discussions within the regulatory framework, another window was opened in 2013 in the form of allowing resident Indians to make overseas direct investment (ODI) in Joint Ventures and overseas subsidiaries, which meant that a resident individual could set up a 100% subsidiary or invest in a joint venture company.
Wrongdoing in Panama Papers’ Leak:
Therefore, the overall legal structure was such that, any person who set up a company abroad before 2013 had violated the Foreign Exchange Management Regulations. In fact there were people who had set up companies even before 2004 when LRS was not even allowed. Hence, many people had acquired companies bit by bit with the help of Mossack Fonseca using money in their foreign accounts.
The issue with investment in offshore entities is the layers of secrecy and tax avenues. The layers of secrecy in the sense that there is no link between director or shareholder of the company and the owner of the company. Sometimes the corporate themselves like Mossack Fonseca appoint real person as nominee director or nominee shareholder so there is no link between shareholders, directors and owner of the company. Also, while the corporates may call it tax planning, income tax officers call it tax avoidance.
Ironically Panama papers’ leak comes at a time when government is cracking down on black money parked in places around the world. Important people whose names have been leaked are Amitabh Bachchan, Aishwarya Rai Bachchan, politicians like Shishir Bajoria of Kolkata and former chief of Delhi Unit of Loksatta party, Anurag Kejriwal.
Many heads of state like Chinese President, Xi Jinping, Pakistan Prime Minister Nawaz Shariff and king of Saudi Arabia have been named. Paradoxically, Xi Jinping had run an anti-corruption crusade against black money stocked by Communist party cadres. Other famous names like Lionel Messi and his family members and close associates of Russian President Vladimir Putin have also been leaked. Unfortunately, the leak has let down these individuals not just in their own eyes but in the eyes of the millions who held them in high regard.
Further Steps after Panama Papers’ Leak:
It is now left for the RBI, Income Tax Department and Special Investigative Team set up in 2014 to look into the matter of offshore entities which is seen world over as an issue of tax avoidance, bring clarification into this matter and look into the report of the investigation carried out under The Prometheus and decide whether it is a bonafide error allowing people to regularise their investments by paying penalty or direct them to wind up investments made prior to August 2013.
The RBI will also have to check if there has been routing of any money invested in offshore entities back to India and refer such cases to Enforcement Directorate and check if the offshore companies have revealed their income and assets to the Income Tax Department.
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