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Sri Lanka: One Island Two Nations
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Sri Lanka: One Island Two Nations
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Thiranjala Weerasinghe sj.- One Island Two Nations
?????????????????????????????????????????????????Monday, April 3, 2017
Panama Papers explained: They went looking for secrecy and an identity mask
The importance of The Panama Papers, rules and regulations that govern overseas companies floated by Indians
by P Vaidyanathan Iyer | New Delhi - April 5, 2016
Individuals who have set up offshore entities through the Panama law
firm. Some of the Indians floated offshore entities at a time when laws
did not allow them to do so; some have taken a technically convenient
view that companies acquired is not the same as companies incorporated;
some have bunched their annual quota of remittances to subscribe to
shares in an offshore entity acquired at an earlier date. Still, some
others have received income earned abroad and deposited it in the entity
to avoid tax. Some have opened a bank account to keep payoffs in
government contracts, or held “proceeds of crime” or property bought
with money made illegally in Trusts/ Foundations.
Why float a foreign company, why go all the way to Panama to register it?
The two big draws that offshore entities in jurisdictions such as
British Virgin Islands, Bahamas, Seychelles and more specifically
Panama, offer are: secrecy of information relating to the ultimate
beneficiary owner and zero tax on income generated.
In fact, in Panama, individuals can ask for bearer shares, where the
owner’s name is not mentioned anywhere. Besides, it costs little or
nothing to set up an entity abroad. The Registered Agent charges a few
hundred dollars to incorporate an entity. It doesn’t take much time to
incorporate one either. Companies are available off-the-shelf and can be
registered in a couple of days.
Will regulators be interested in this information? How does it affect NRIs?
Non-disclosure of an overseas asset (in this case the company acquired
or floated) will be of interest to authorities and regulators here.
Floating these companies and depending on the reason for which they are
put to use, could also violate, individually or jointly, 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. NRIs
do not have to report their offshore entities to Indian authorities. But
any income earned by them in India has to be filed with regulators in
the country.
What’s the kind of secrecy that the Panama agent offered?
The offshore entity need not appoint natural persons as directors or
have individuals as shareholders. The Registered Agent, Mossack Fonseca
in this case, offers its own executives to serve as shareholders or
directors. Sometimes, an intermediary law firm or a bank acts as a
director or a nominee shareholder. So the real beneficiary remains
hidden.
The registered agent provides an official overseas address, a mail box,
etc, none of which traces back the entity to the beneficial owner. In
many cases, the shareholding of these entities is vested in a Panamanian
Trust or Foundation. The Foundation further masks beneficial ownership.
A professional trustee is often the nominee shareholder of the
Foundation. The beneficiaries of the Foundation’s assets are mentioned
in the Regulations, and these Regulations do not form part of the Public
Deed executed by the trustee.
Couldn’t
those in the list argue that when they set up these companies, FERA was
a draconian law and they had to do this to go around it?
Foreign Exchange Regulation Act severely restricted even current account
transactions, forget those on capital account. Since India’s foreign
exchange holdings were low or inadequate in the 1980s and 1990s, the law
was aimed at preventing an outflow of foreign exchange.
In those days of controls, many secretly opened Swiss bank accounts and
offshore entities by sending money abroad through hawala. It was to
these offshore accounts that money flowed in several cases of over
invoicing or under-invoicing of trade transactions. But progressively,
after liberalisation in 1991, and with an improvement in macro economic
indicators, FERA was replaced with FEMA in 1999.
And as India’s foreign exchange reserves rose and topped $100 billion in
2004, in January 2004, RBI allowed companies to invest up to 100 per
cent of their net worth (now it’s 400 per cent of net worth) abroad by
doing away with the $100 million cap and started its experiment with
limited capital account convertibility by introducing the Liberalised
Remittance Scheme (LRS) in February 2004 which permitted resident
individuals to remit up to $25,000 a year.
This was increased in phases to $200,000 by September 2007, but was
reduced to $75,000 in August 2013 to arrest a sharp slide in rupee. The
LRS limit was subsequently increased again in phases and now stands at
$250,000 a year. This means, an Indian resident individual can invest
$250,000 abroad in buying shares or property or gift or donate to anyone
living abroad up to this limit every year.
But RBI’s intent and internal understanding in opening the LRS windows
was to allow resident individuals in the spirit of liberalisation to
diversify their assets, promote trade and boost exports and earnings,
but not to let them set up companies, which could be put to misuse.
Are regulators, RBI and Income Tax authorities, aware of these firms?
There are many who have set up companies dating back to the pre-2004
period when the LRS was not even announced. So, they are clearly
outliers.
Then there are individuals who have taken an interpretation of the LRS
to mean that offshore entities can be set up. The LRS did allow for
buying shares, but did not specifically allow incorporation of companies
by individuals abroad going by a clarification in the RBI FAQs of
September 17, 2010.
On August 5, 2013, the RBI allowed resident Indians to invest directly
in joint ventures and overseas subsidiaries through the LRS route too.
So, technically, those individuals who had set up companies overseas
prior to August 2013 would have violated the rules on LRS. In certain
cases, there has been a compounding of payment of fines by individuals
after the LRS violations came to the notice of the RBI or were disclosed
by individuals themselves. In some other cases relating to the pre-2013
period, individuals who set up companies abroad using the LRS facility
were directed by the RBI to divest their holdings or unwind their
operations.
Before 2013, many chartered accountants took a technical view and
advised individuals that acquiring companies was not the same as setting
up companies, and facilitated buying companies off-the-shelf made
available by the likes of Mossack Fonseca.
While some have declared all this to Income Tax authorities, many others
have refrained from doing so fearing the current adverse environment
where any irregularity can be seen as tax evasion or attempt to stash
black money.
So what’s the next step once these names are out?
For the Reserve Bank of India, this issue has been work-in-progress. It
will have to take a call whether they can allow compounding (recognising
that an individual has erred bona fide and regularising the investment
in the offshore entity post facto by imposing a penalty) or insist that
individuals wind up these investments made prior to August 2013. The
Income Tax department will have to probe if there has been ‘round
tripping’ of funds i.e. routing of funds invested in offshore entities
back to India, and where required, refer the cases to the Enforcement
Directorate. It will also have to see if the offshore entities have
declared all their incomes and assets to the Income Tax department.
Read | Full Coverage: Panama Papers
What’s the relevance of The Panama Papers to the black money debate?
Offshore entities can be and have been used by individuals to remit
funds abroad. Globally, they carry a reputation of being vehicles set up
by individuals and corporations to evade or avoid tax. Companies call
this tax planning, the tax man sees it as tax avoidance. With
coordinated moves by G-20 countries to introduce stringent anti-money
laundering measures, as part of a global crackdown on tax avoidance,
there is rising international scrutiny over such jurisdictions and giant
company incorporators such as Mossack Fonseca which facilitate setting
up of offshore entities.
Searching 36,957 Needles In An 11-million Haystack
Given the humongous
2.6 tera byte dump size of Project Prometheus — as the investigation was
aptly named — the task was cut out for the team. Tracing Indians in the
database comprising over 11 million files and 2,14,488 offshore
entities was akin to searching for a needle in a haystack. And all the
giga bytes did not come in one go, forcing us to what management experts
call ‘fix the aircraft while it flies’. In all, the dump finally threw
up 36,957 India-related files. Online tools were created to unravel
complex web-like linkages between individuals and multiple entities.
Internal mails of Mossack Fonseca and legal incorporation documents
attached in these revealed not only addresses and passports of
individuals, but in some cases also their source of wealth and the
intent in setting up offshore entities.