Panama Papers

What are “Panama Papers”?

The “Panama Papers” reveal financial arrangements of politicians and public figures. The Papers are an unprecedented leak of 11.5m files from the database of the world’s fourth biggest offshore law firm, Mossack Fonseca. The records were shared by the International Consortium of Investigative Journalists (ICIJ).
What’s there in that?
The documents show the myriad ways in which the rich can exploit secretive offshore tax regimes. Twelve national leaders are among 143 politicians, their families and close associates from around the world known to have been using offshore tax havens.
Significance of these findings:
There’s a difference between tax evasion — illegally refusing to pay taxes you owe, and then taking advantage of secret accounts to try to hide the money and get away with it — and tax avoidance, which is hiring clever people to help you find and exploit legal loopholes to minimize your tax bill.
  • Panama is a country with no corporate income tax. People set up their companies here to avoid tax. Tax avoidance is an inevitable feature of any tax system, but the reason this particular form of avoidance grows and grows without bounds is that powerful politicians in powerful countries have chosen to let it happen.
  • As the global economy has become more and more deeply integrated, powerful countries have created economic “rules of the road” that foreign countries and multinational corporations must follow in order to gain lucrative market access.
  • Establishing some kind of minimum global standard of taxation of corporate and investment income hasn’t been done, because it hasn’t been a political priority.
  • The leak of the Panama Papers is significant in part because of the specific information the documents contain, but more broadly because they draw attention to what “everyone knows” and may put public pressure on the powers that be to do something about it.
  • Also, while holding money in offshore companies is not illegal, evidence of wealth hidden for tax evasion, money laundering, sanctions busting, drug deals or other crimes is worrisome.
What are offshore accounts?
Offshore bank accounts are located outside a client’s country of resident, usually in “tax haven” territories chosen because of financial and legal advantages.
  • They can be used to squirrel money away from the oversight of national banking systems, evading regulatory oversight or tax obligations.
  • Companies or individuals often use shell companies – set up purely a vehicle for financial transactions and initially incorporated without significant assets or operations – to disguise ownership or other information about the funds involved.
  • Panama, the Channel Islands and Bermuda are among more than a dozen small, low-tax locations that specialise in handling business services and investments of non-resident companies.
Are they legal?
Yes. Companies or trusts can be set up in offshore locations for legitimate uses such as business finance, mergers and acquisitions and estate or tax planning, according to the global money laundering watchdog, the Financial Action Task Force.
  • But as well as being used to avoid tax, the secrecy they lend also makes them attractive to criminals and terrorist groups wishing to conceal the sources of their funds.
What’s in it for India to worry?
The papers show that some Indians have set up offshore entities through the Panama law firm. Some of them 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.
But, why set up entities in Panama?
It is for the following reasons-
  • Secrecy of information relating to the ultimate beneficiary owner.
  • Zero tax on income generated.
  • In Panama, individuals can ask for bearer shares, where the owner’s name is not mentioned anywhere.
  • It costs little or nothing to set up an entity here. 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.
Why Indian regulators are interested in this?
Non-disclosure of an overseas asset will be of interest to authorities and regulators in India. 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.
Also, 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 which facilitate setting up of offshore entities.



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