India: Paradise Papers - "Catch Me If You Can"

Last Updated: 28 November 2017
Article by Phoenix Legal

Two days prior to observance of 'Anti-Black Money Day' by the Government of India to mark the first anniversary of demonetisation, comes the largest ever leak of financial data dubbed the 'Paradise Papers'. The Hunk of 13.4 million documents relating to offshore investment, leaked to the public on 5 November, 2017. It is suggested that the documents originate from the offshore law firm Appleby, the corporate services providers Estera and Asiaciti Trust, and business registries in 19 tax jurisdictions, often referred to as 'tax paradises'.

On 17 November, 2017, the International Consortium of Investigative Journalists (ICIJ) published additional data in the Offshore Leaks Database on close to 25,000 entities connected to the Paradise Papers investigation. More than 70 percent of the new records belong to entities incorporated in Bermuda and the Cayman Islands. Other jurisdictions that also include hundreds of new records are the Isle of Man, Jersey and Mauritius. Most of the online registries from these jurisdictions don't provide ownership or shareholder information1.

The leaks which constitute the most detailed revelations ever of such records were obtained by the German newspaper Süddeutsche Zeitung, and shared with the ICIJ which has been investigating the documents, together with 100 media partners including the Indian Express.

Nearly 7 million records from Appleby and affiliates, a noted multi-jurisdictional law firm, cover the period from 1950 to 2016 and include emails, billion-dollar loan agreements and bank statements involving at least 25,000 entities connected to people in 180 countries. Appleby is a member of the 'Offshore Magic Circle,' an informal clique of the planet's leading offshore law practices. The firm was founded in Bermuda and has offices in Hong Kong, Shanghai, the British Virgin Islands, the Cayman Islands and other offshore centers.2

Combating offshore tax evasion and enhancing a worldwide cooperation for exchange of information was one of the key objectives of India when the country signed the multilateral pact with the Organisation of Economic Cooperation and Development (OECD) in June 2017.

Also, Automatic Exchange of Information (AEOI) Implementation Report 2017 released a peer report on five countries including India at the tenth meeting of the Global Forum on Transparency and Exchange of Information of Tax Purposes held in Yaounde, Cameroon. The meeting was graced 200 delegates from 90 delegations and witnessed the adoption of the first report on the status of implementation of the AEOI Standard and also released the Paradise Papers. The Forum on Tax Administration's Joint International Task Force on Shared Intelligence and Cooperation (JITSIC) is already working collaboratively on the issues raised by the Paradise Papers leaks3.

Appleby has issued a statement warning clients that their private files may have been compromised by a successful hacking attack on the firm last year.  ICIJ claims to have seen some of Appleby's files and is seeking further information about their implications. Appleby was aware of the attack when it occurred, and acknowledges that some its data was compromised. However, it says that it reviewed its cybersecurity procedures in accordance with advice from a leading IT forensics team.4

Tax havens - promise of secrecy

Tax havens don't only attract their global clientele with low or no tax. One of the chief USP is secrecy. Tax havens are masters of opacity, resultantly there are strict laws in place that forbids any form of disclosure or investigation. The new files shine a light on a different cast of underexplored island havens, including some with cleaner reputations and higher price tags, such as the Cayman Islands and Bermuda.

Paradise Papers vis-à-vis Offshore Leaks (2013), Swiss Leaks (2015) & Panama Papers

Paradise Papers do unearth tracks of veiled offshore financial activities. Like Mossack Fonseca (of Panama Papers, 2016), Appleby helps set up companies and bank accounts overseas, provides nominee office-bearers, and facilitates bank loans or transfer of shares, in multiple secrecy jurisdictions. But unlike in the previous leaks, the latest revelations are more about mega corporates than individual players and how they took advantage of and, in many cases, misused offshore jurisdictions. It is indeed the fifth major leak of financial papers in the past four years and, yes, last year's Panama Papers were bigger in size - 2.6 to 1.4 terabyte - but the scale of the information in the Paradise Papers and how it lifts the lid on sophisticated, upper-end offshore dealings, many linked to the UK, is unprecedented.5

Offshore footprints of India INC.

Papers do suggest offshore footprints of some of India's major corporate players as well as of a few high net worth individuals. Appleby itself red-flagged round tripping on occasion by questioning if offshore funds meant for investing in India were sourced from India. There are instances of assets of Indian companies being used to guarantee loans raised by offshore companies without disclosing it to Indian regulators. Changing ownership of offshore companies to actually change the ownership of shares held by them in Indian companies without paying taxes in India turns out to be another common feature.

Among the 180 countries represented in the data, India ranks 19th in terms of the number of names, a report on the Indian Express website said. In all, there are 714 Indians in the tally.

Tax avoidance – a global scourge

Recently, global corporations such as Google, Amazon and Starbucks have faced strong regulatory intervention for allegedly manipulating legal loopholes to avoid paying tax. Former US President Barack Obama had called for international tax reform to curb the 'huge problem' of global tax avoidance and make sure 'everyone pays their fair share'.6

India's progress so far

(i) Constitution of the Special Investigation Team on Black Money, (ii) Enactment of 'The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015' to specifically deal with black money stashed away abroad, (iii) Constitution of Multi-Agency Group consisting of officers of Central Board of Direct Taxes, Reserve Bank of India, Enforcement Directorate and Financial Intelligence Unit for investigation of recent revelations in Panama paper leaks, (iv) Proactively engaging with foreign governments with a view to facilitate and enhance the exchange of information under Double Taxation Avoidance Agreements (DTAAs) /Tax Information Exchange Agreements (TIEAs) /Multilateral Conventions, (v) Enhancing global efforts to combat tax evasion/black money, inter alia, by joining the Multilateral Competent Authority Agreement in respect of Automatic Exchange of Information and having information sharing arrangement with USA under its Foreign Account Tax Compliance Act, (vi) Renegotiation of DTAAs with other countries to bring the Article on Exchange of Information to International Standards and expanding India's treaty network by signing new DTAAs and TIEAs with many jurisdictions to facilitate the exchange of information and to bring transparency, (vii) Amending the Prevention of Money-laundering Act, 2002, (viii) Enactment of the Benami Transactions (Prohibition) Amendment Act, 2016 to amend the Benami Transactions (Prohibition) Act, 1988, (ix) Initiation of the information technology based 'Project Insight' for strengthening the non-intrusive, information driven approach for improving tax compliance, and (x) Launching of 'Operation Clean Money' on 31st January 2017.

Despite a 'largely compliant' status in the recently released OECD tax transparency report, India's plans to support sustainable development through investments in infrastructure, health and other major issues face challenges due to an unremitting tax skirting rampant among overseas enterprises.

The Indian Finance Ministry issued a press release7 saying that "investigations in cases of Paradise Papers will be monitored through a reconstituted Multi Agency Group (MAG), headed by the chairman, CBDT (Central Board of Direct Taxes), having representatives from CBDT, ED (Enforcement Directorate), RBI (Reserve Bank of India) and the FIU (Financial Intelligence Unit)". One agency is missing from this list – the Directorate of Revenue Intelligence.

The Paradise Papers findings add to the revelations from 2016 Panama Papers investigation. The Panama Papers contained brief particulars of about 426 persons, prima facie, Indians or persons of Indian origin. The Income Tax Department conducted enquiries in all 426 cases, inter alia, through making 395 references to 28 foreign jurisdictions. Based on analysis of the information obtained and investigation conducted, the outcome so far indicates 147 actionable cases and 279 nonactionable cases (non-residents/no irregularities etc). Out of the 147 actionable cases searches conducted in 35 cases and surveys in 11 cases, 5 cases criminal prosecution in which complaints have been filed, 7 cases in which notices under section 10 of the Black Money (Undisclosed Foreign Income & Assets) and Imposition of Tax Act, 2015 have been issued, etc.8

Way Forward

The Paradise Papers, just like the earlier Panama papers, give ordinary people a glimpse into the parallel world. Yet these exposures continue a narrative that mystifies the nature and scope of what is really happening. This is another wakeup call reminding about industrial-scale tax dodging, call for stronger regulation of intermediaries, including penalties for those proven to be involved in tax evasion, aggressive tax avoidance or money laundering.

The policy makers should have a pragmatic realisation as to how it wishes to deal with past offences considering the tipid response to the Income Declaration Scheme, 2016, though not termed as an 'Amensty Scheme', when considered with overwhelming response to such initiatives of Indonesia & Latin American countries. In so far as future outlook is concerned, all the above enlisted measures should yield a desired behavioral pattern, lest one still believes that there is enough room to continue to run, till the time the authorities can catch up!!

Footnotes

1 https://www.icij.org/investigations/paradise-papers/icij-releases-paradise-papers-data-appleby/

2 https://www.icij.org/investigations/paradise-papers/paradise-papers-exposes-donald-trump-russia-links-and-piggy-banks-of-the-wealthiest-1-percent/

3 http://www.oecd.org/tax/10th-meeting-of-the-global-forum-on-transparency-and-exchange-of-information-for- tax-purposes-15-17-november-2017-in-yaounde-cameroon.htm and http://www.oecd.org/ctp/administration/paradise-papers-leaks-statement-by-hans-christian-holte-chair-of-the-oecd-forum-on-tax-administration.htm

4 https://www.step.org/news/appleby-prepares-clients-disclosure-stolen-documents

5 BBC

6 https://www.theguardian.com/news/2016/apr/05/justice-department-panama-papers-mossack-fonseca-us-investigation

7 http://pib.nic.in/newsite/PrintRelease.aspx?relid=173268

8 http://www.incometaxindia.gov.in/Lists/Press%20Releases/Attachments/669/Press-Release-Cases-pertaining-Panama-Papers-Investigation-full-swing-7-11-2017.pdf

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