Black Money – Domestic and International Efforts

Why Paradise Papers matter: they lift the veil for regulators to peek in

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Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: International Consortium of Investigative Journalists (ICIJ), round tripping, double-taxation avoidance agreements (DTAAs), general anti-avoidance rule (GAAR), FATCA, common consolidated corporate tax base (CCCTB), Direct Taxes Code Bill, 2010

Mains level: Various measures to counter tax avoidance and results of these measures


What are the Paradise Papers?

  1. A trove of 13.4 million corporate records, primarily from Bermuda firm Appleby, as well as from Singapore-based Asiaciti Trust and corporate registries maintained by governments in 19 secrecy jurisdictions, often referred to as “tax paradises”
  2. The leaks — which constitute the most detailed revelations ever of such records — were obtained by the German newspaper Süddeutsche Zeitung, and shared with the International Consortium of Investigative Journalists (ICIJ)

How are Paradise Papers different from Offshore Leaks (2013), Swiss Leaks (2015) and Panama Papers (2016)?

  1. Paradise Papers also reveal tracks of veiled offshore financial activities
  2. 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

What do the Paradise Papers show?

  1. They reveal offshore footprints of some of India’s major corporate players as well as of a few high-value individuals — the astounding scale of incorporating shell overseas companies to various ends
  2. Appleby itself red-flagged round tripping on occasion by questioning if offshore funds meant for investing in India were sourced from India
  3. There are instances of assets of Indian companies being used to guarantee loans raised by offshore companies without disclosing it to Indian regulators
  4. 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 malpractice

Is it illegal to set up offshore companies?

  1. India has double-taxation avoidance agreements (DTAAs) with several countries with lower tax rates than its own
  2. Companies — overseas corporate bodies (OCBs) — incorporated in such countries can use their tax residency certificates (TRC) to enjoy the tax benefits available legally

Laws related to financial affairs of company

  1. A company is entitled to arrange its financial affairs in whichever way it wishes to reduce its tax liability
  2. Merely the fact that the motive for a particular transaction is to avoid tax does not invalidate the transaction unless the law of the land specifically says so
  3. According to the Westminster principle, if a document or transaction is genuine, courts or the regulator cannot go behind it to look for any supposed underlying substance
  4. Only if a fraud is established can a court or regulator pierce the corporate structure
  5. In such cases, the principle of lifting the corporate veil or the doctrine of (economic) substance over (legal) form can be applied

Revelations done by Paradise papers

  1. The Papers revealed that many offshore companies are “sham” entities engaged in tax evasion/avoidance, manipulation of the market, money laundering, round tripping (taking untaxed money out of the country through inflated invoices and then bringing it back as investment), parking black money, bribing, etc.
  2. Such insight into corporate ingenuity allows regulators to step in, besides strengthening the case for better laws and global tax reforms

Global laws against tax avoidance

  1. Laws specifying general anti-avoidance rule (GAAR) are in force in countries like the UK, Canada, Australia, New Zealand, South Africa and Hong Kong
  2. There is FATCA in the US
  3. In Europe, anti-tax avoidance measures in the pipeline include a blacklist of offshore tax havens and a common consolidated corporate tax base (CCCTB) for the EU, meant to block transfer of profit to low-tax jurisdictions
  4. India’s Direct Taxes Code Bill, 2010 envisages creation of an economically efficient, effective direct tax system, proposing GAAR to prevent tax avoidance
  5. GAAR came into effect on April 1, 2017. India introduced this retrospective clarification to the I-T Act to ensure that cross-border transactions of assets would be taxable if they derive, directly or indirectly, their value substantially from assets located in India
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