Corruption Challenges – Lokpal, POCA, etc

Pandora Papers on Offshore Financial Trusts


From UPSC perspective, the following things are important :

Prelims level: Trusts and thier establishments

Mains level: Tax evasion

There are at least 380 persons of Indian nationality in the Pandora Papers.

What are the Pandora Papers?

  • The Pandora papers are the largest trove of leaked data exposing tax haven secrecy in history.
  • 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.
  • 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.
  • 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.

Indians included in these

  • There are at least 380 persons of Indian nationality in the Pandora Papers.
  • There are almost 60 prominent individuals and companies including the most decorated cricketer of India.

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:

  1. 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,
  2. 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 recognise 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 recognises 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 trusts set up overseas?

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

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

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.

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).

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.

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 Liberalised 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.

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 Indian 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.

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