explained : Panama Papers

The hidden wealth of some of the world’s most prominent leaders, politicians and celebrities has been revealed by an unprecedented leak of millions of documents that show the myriad ways in which the rich can exploit secretive offshore tax regimes.

Article mostly in Indian Perspective .

What do The Panama Papers reveal?

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.

What is Mossack Fonseca?

It is a Panama-based law firm whose services include incorporating companies in offshore jurisdictions such as the British Virgin Islands. It administers offshore firms for a yearly fee. Other services include wealth management.

Where is it based?

The firm is Panamanian but runs a worldwide operation. Its website boasts of a global network with 600 people working in 42 countries. It has franchises around the world, where separately owned affiliates sign up new customers and have exclusive rights to use its brand. Mossack Fonseca operates in tax havens including Switzerland, Cyprus and the British Virgin Islands, and in the British crown dependencies Guernsey, Jersey and the Isle of Man.

How big is it?

Mossack Fonseca is the world’s fourth biggest provider of offshore services. It has acted for more than 300,000 companies. There is a strong UK connection. More than half of the companies are registered in British-administered tax havens, as well as in the UK itself.

How much data has been leaked?

A lot. The leak is one of the biggest ever – larger than the US diplomatic cables released by WikiLeaks in 2010, and the secret intelligence documents given to journalists by Edward Snowden in 2013. There are 11.5m documents and 2.6 terabytes of information drawn from Mossack Fonseca’s internal database.

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.

size of panama papers

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.

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.

Sources  :

1 thought on “explained : Panama Papers”

  1. Short-Circuiting of Round-Tripping !

    # What is Round Tripping ?
    Black Money sent to tax havens ( eg: Panama ) for laundering and which returns to the country of origin as White Money , in the form of investments
    # What is the Global Amount ?
    Approx $ 23 Trillion ( China’s GDP is about $ 17 Trillion )
    # What is the mechanism ?
    In India , it is LRS ( Liberalized Remittance Scheme ), under which any Indian ( including minors ! ) can remit abroad officially / legally , EVERY YEAR , $ 250,000 for any of the following reasons (and without prior RBI permission ! ) :
    * Under Current Account
    # Medical Treatment
    # Education

    * Under Capital Account
    # Buying Property overseas
    # Holding shares in an overseas company
    # Combination of these two

    # What is the safeguard ?
    Details of foreign assets have to be declared in the Income Tax Returns

    # How black money gets sent to tax havens ?
    Some amount by Hawala route but most by legitimate banking channels !
    You don’t see plane-loads of cash landing in Panama !

    # Does that mean Indian Banks are party to these ?
    Without doubt ! They will advise you how to do this ! Of course, legally !

    # If these remittances are legal, will 500 Indians get jail ?
    Forget it !
    Most legal experts say , they will be let off with some fines , if they have failed to declare these assets in IT returns

    # Are laws designed so as to prevent Round Tripping ?
    Far from that ! Here is what President Obama said yesterday :
    ” There is no doubt that the problem of global tax avoidance generally is a huge problem
    The problem is that a lot of this stuff is legal , not illegal
    We shouldn’t make it legal to engage in transactions just to avoid taxes
    A lot of these loopholes come at the expense of middle class families
    Alternatively , it means that we are not investing as much as we should in schools , in making college more affordable, in putting people back to work rebuilding roads, our bridges, our infrastructure , creating more opportunities for our children ”

    # What is the best SOLUTION ?
    * Make it unnecessary for our Black Money to first travel abroad ( to tax havens ) , before returning ( as White Money ) and getting invested in capital market
    * Short-circuit the Round Trip by enabling our Black Money to become White Money , HERE itself ( no need for help from Mossack Fonseca ! )
    * As suggested in my recent blog ( Make India a Tax Haven ? ), abolish Personal Income Tax ( remove incentive for tax evasion )
    * Enable direct investment of ” Black-turned-White ” money into government approved INFRASTRUCTURE BONDS , thru creation of designated bank accounts where Black Money can be deposited , without any questions asked
    * Obviously , interest / dividend earned from such investments will be tax
    free , being Personal Income !

    # Is this a practical solution ?
    Not if you ask the Economists / Bankers etc
    Just ask the man on the street !
    This is a too serious matter to be left to the Experts !

    # Will such a bill pass the legislative muster ?
    Rahul Gandhi promised to pass the GST bill in 15 minutes if amendments proposed by Congress get incorporated
    ” Short-circuiting of Round-Tripping Bill ” will get passed in 5 minutes – and unanimously too ! You know why !
    hemenparekh.in / blogs
    08 April 2016


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