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Global elites continue to exploit the cracks in tax laws and the lax jurisdiction in tax havens to ring-fence their assets, through complex offshore structures, from scrutiny by authorities. The leak of financial documents, called the Pandora Papers, follows similar such exposés in the past, for instance, the Panama Papers and the Paradise Papers. While the earlier revelations had forced governments to tighten the regulatory architecture, owing to worries over these channels being used to launder money and evade taxes, the uncovering of this trove of 12 million documents now only underlines the challenges that the authorities continue to face.

There are at least 300 persons of Indian nationality in the Pandora Papers. The papers consist of as many as 12 million documents from 14 companies in offshore tax havens with details of ownership of 29,000 offshore companies and Trusts.

Let us look at the issue in detail.

What is Pandora papers leak?

The Pandora Papers show that over 300 Indians have set up such offshore structures. It is the largest trove of leaked data exposing tax haven secrecy in history.
It includes over 11.9 million leaked files from 14 global corporate services firms which set up about 29,000 off-the-shelf companies and private trusts in not just obscure tax jurisdictions.
Such structures are typically used to not pay taxes, to launder money gotten through illegal means, and to sequester assets.
They provide a rare window into the hidden world of offshore finance, casting light on the financial secrets of some of the world’s richest people.
Businessmen, who have declared themselves bankrupt before recovery tribunals, hold billions through such offshore entities. Some have set up offshore trusts to hold assets.
The use of such structures may not necessarily be illegal; they do raise questions over the nature of the transactions.
These documents relate to the ultimate ownership of assets ‘settled’ (or placed) in private offshore trusts and the investments including cash, shareholding, and real estate properties, held by the offshore entities.

What do these papers reveal?

They reveal how the rich, the famous and the notorious, many of whom were already on the radar of investigative agencies, set up complex multi-layered trust structures for estate planning.
This is particularly in jurisdictions that are loosely regulated for tax purposes, but characterized by air-tight secrecy laws.
The purposes for which trusts are set up are many, and some genuine too.

But a scrutiny of the papers also shows how the objective of many is two-fold:

Tax Avoidance: to hide their real identities and distance themselves from the offshore entities so that it becomes near impossible for the tax authorities to reach them and,
Tax Evasion: to safeguard investments — cash, shareholdings, real estate, art, aircraft, and yachts — from creditors and law enforcers.

How is Pandora different from the Panama Papers and Paradise Papers?

The Panama and Paradise Papers dealt largely with offshore entities set up by individuals and corporates respectively.
The Pandora Papers investigation shows how businesses disguised as Trusts have created a new normal with rising concerns of money laundering, terrorism funding, and tax evasion.

What is a Trust?

A trust can be described as a fiduciary arrangement where a third party, referred to as the trustee, holds assets on behalf of individuals or organizations that are to benefit from it.
It is generally used for estate planning purposes and succession planning.
It helps large business families to consolidate their assets — financial investments, shareholding, and real estate property.
A trust comprises three key parties:
1. Settlor — one who sets up, creates, or authors a trust;
2. Trustee — one who holds the assets for the benefit of a set of people named by the ‘settlor’; and
3. Beneficiaries — to whom the benefits of the assets are bequeathed.
A trust is not a separate legal entity, but its legal nature comes from the ‘trustee’.
At times, the ‘settlor’ appoints a ‘protector’, who has the powers to supervise the trustee, and even remove the trustee and appoint a new one.

Is setting up a trust in India or one offshore/outside the country illegal?

The Indian Trusts Act, 1882 gives legal basis to the concept of trusts.
While Indian laws do not see trusts as a legal person/ entity, they do recognize the trust as an obligation of the trustee to manage and use the assets settled in the trust for the benefit of ‘beneficiaries’.
India also recognizes offshore trusts i.e., trusts set up in other tax jurisdictions.

If it’s legal, what’s the investigation about?

There are legitimate reasons for setting up trusts — and many set them up for genuine estate planning.
A businessperson can set conditions for ‘beneficiaries’ to draw income being distributed by the trustee or inherit assets after her/his demise.
For instance, while allotting shares in the company to say, four siblings, the father promoter set conditions that a sibling can get the dividend from the shares and claim ownership of the shares.
This could be to ensure ownership of the enterprise within the family.
But trusts are also used by some as secret vehicles to park ill-gotten money, hide incomes to evade taxes, protect wealth from law enforcers.

Why are the trusts set up overseas?

Overseas trusts offer remarkable secrecy because of stringent privacy laws in the jurisdiction they operate. From the investigation, some key tacit reasons why people set up trusts are:

(1) Maintain a degree of separation

Businesspersons set up private offshore trusts to project a degree of separation from their personal assets.

(2) Hunt for enhanced secrecy

Offshore trusts offer enhanced secrecy to businesspersons, given their complex structures. The Income-Tax Department can get information only with the financial investigation agency or international tax authority.

(3) Avoid tax in the guise of planning:

Businesspersons avoid their NRI children being taxed on income from their assets by transferring all the assets to a trust.
Further, the tax rates in overseas jurisdictions are much lower than the 30% personal I-T rate in India plus surcharges, including those on the super-rich (those with annual income over Rs 1 crore).

(4) Prepare for estate duty eventuality

There is pervasive fear that estate duty, which was abolished back in 1985 when Rajiv Gandhi was PM, will likely be re-introduced soon.
Setting up trusts in advance, business families have been advised, will protect the next generation from paying the death/ inheritance tax, which was as high as 85 per cent.

(5) Flexibility in a capital-controlled economy

India is a capital-controlled economy. Individuals can invest only $250,000 a year under the Reserve Bank of India’s Liberalized Remittance Scheme (LRS).
To get over this, businesspersons have turned NRIs, and under FEMA, NRIs can remit $1 million a year in addition to their current annual income, outside India.

(6) The NRI angle

Offshore trusts, as noted earlier, are recognised under Indian laws, but legally, it is the trustees — not the ‘settlor’ or the ‘beneficiaries’ — who are the owners of the properties and income of the trust.
An NRI trustee or offshore trustee taking instructions from another overseas ‘protector’ ensures they are taxed in India only on their total income from India.

Can offshore Trusts be seen as resident Indians for tax purposes?

There are certain grey areas of taxation where the Income-Tax Department is in contestation with offshore trusts.
After the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, came into existence, resident Indians — if they are ‘settlors’, ‘trustees’, or ‘beneficiaries’ — have to report their foreign financial interests and assets.
NRIs are not required to do so — even though, as mentioned above, the I-T Department has been sending notices to NRIs in certain cases.

What are the grey areas of Indian taxation

There are certain grey areas of taxation where the Income-Tax Department is in contest with offshore trusts.
After the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, came into existence, resident Indians have to report their foreign financial interests and assets.
NRIs are not required to do so.
The I-T Department may consider an offshore trust to be a resident of India for taxation purposes if the trustee is an Indian resident.
In cases where the trustee is an offshore entity or an NRI, if the tax department establishes the trustee is taking instructions from a resident Indian, then the trust may be considered a resident of India for taxation purposes.

What are the government initiatives on Indian Taxation?

(1) Legislative Action

The Fugitive Economic Offenders Act, 2018

It seeks to confiscate properties of economic offenders who have left the country to avoid facing criminal prosecution or refuse to return to the country to face prosecution.

The Central Goods and Services Tax Act, 2017

Uniform SGST and IGST rates will reduce the incentive for evasion by eliminating rate arbitrage between neighboring States and that between intra and inter-state sales.

The Benami Transactions (Prohibition) Amendment Act, 2016
- It is designed to curb black money and passed by parliament in came into effect.
- Persons indulging in benami transactions may face up to 7 years’ imprisonment and fine.
- Furnishing false information is punishable by imprisonment up to 5 years and fine.
- Properties held benami are liable for confiscation by government without compensation.
- Initiating Officer may pass an order to continue holding property and may then refer case to Adjudicating Authority which will then examine evidence and pass an order.
- Appellate Tribunal will hear appeals against orders of Adjudicating Authority. High Court can hear appeals against orders of Appellate Tribunal.
The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015
- It penalizes the concealment of foreign income and provides for criminal liability for attempting to evade tax in relation to foreign income.
- The Act gave a one-time opportunity to Indian residents to declare undisclosed foreign income and assets.
- The concerned person had to pay tax at the rate of 30% and an equal amount by way of penalty if found having undisclosed overseas wealth.
- However, in case of non-declaration, the provisions included slapping of tax at the rate of 30% along with a penalty equal to three times the amount of tax evaded or 90% of the undisclosed income or the value of the asset.
- The Act provides for punishment of jail for 3-10 years for the willful evasion.
Prevention of Money Laundering Act, 2002
- The PMLA was enacted in 2002 and it came into force in 2005. The chief objective of this legislation is to fight money laundering, that is, the process of converting black money into white.
- The Act enables government authorities to confiscate property and/or assets earned from illegal sources and through money laundering.
- Under the PMLA, the burden of proof lies with the accused.

(2) International cooperation

Double Taxation Avoidance Agreements (DTAAs): India is 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.
Automatic Exchange of Information: India has been a leading force in the efforts to forge a multilateral regime for proactive sharing of financial information known as Automatic Exchange of Information which will greatly assist the global efforts to combat tax evasion.
Foreign Account Tax Compliance Act of USA: India has entered into an information sharing agreement with the USA under the act.

Way Forward

In the current running economy, the measures taken by the governments are not sufficient enough to solve the problems of over growing scams and other economic crimes.
There is need of strict provisions to deal with such problems.
The governments are required to bring out certain reforms to overcome these issues such as to govern the crimes of economics the government should revamp the laws since the existing laws are not so harsh.
Also the enforcement agencies should try to keep bars on the benefits arising out of such crimes by the offenders or scam.
Side by side, all the private or public agencies such as income tax department, custom offices, police departments, SEBI, etc. should work in a coordination to quickly get rid of these economics crimes.

Conclusion

It is clearly evident from the aforementioned cases that the occurrence and re – occurrence of such scams can only be attributed to the weak financial regulations and a failure of corporate governance in finance.