PANAMA PAPERS - LIMELIGHT ON THE ROLE OF TAX HAVENS

By Ruma Dubey

The Panama Paper leaks, touted to be bigger than the wikileaks. Apart from the usual suspects like Putin and his bunch of oligarchs, it came as no surprise at all to see the names of other global leaders like Nawaz Sharif, the PM of Iceland, China’s Xi and almost everyone in power.

We in India did not even bat an eyelid when the names of some Indians came out – Aishwarya Rai, Sameer Gehlot of Indiabulls, KP Singh of DLF, Amitabh Bachchan. There are apparently some 500 Indians who have parked their funds, truckloads of money for cure, in these tax havens.

Somehow this did not even evince a cursory raising of the eyebrows to show some wonder. We are so used to seeing the ultra-rich indulge in everything to make their money so very far, albeit making using of any channel, that it came as a usual “ho-hum, aur kya” type of news.

But the sad truth is that this should be worrisome. We can take refuge in the comfort that others too have been named; Indians are not the only ones to be named. But really, is that any comfort at all?

The biggest question which one cannot help but ask – if tax havens are legally allowed by countries to flourish, are these ultra-rich doing something illegal by parking their money there? The Govt allows manufacture and use of cigarettes despite the risks to health – does that make it right?

The question here is not whether or not tax havens are illegal, it is whether these super rich have declared these parked funds in their Income Tax filings? Has this money been shown and then details given of how much parked where to avoid more tax? And therein lay the crime – most of them have not declared the existence of this money to the IT authorities at all. If this is not tax avoidance, what is?

If one see’s the modus operandi, its all very simple. Like setting up any company, the tax or lawyer firm helps you set up the shell or holding company – there is no active business and it sometimes owned by shares of another company. They weave a labyrinth of holding companies to hide the source of the registered shell company’ something which we see in P-Notes – you never really know who really owns them. These shell companies are disguised the ownership of assets.

There is nothing illegal or wrong about setting up a shell company or even transferring assets to that shell company. What is illegal though is when the person does not disclose his ownership in the offshore shell company as required by law to the IT authorities. And if it is found that ownership was hidden, he is subject to penalties.

These papers are legitimate given the fact that the expose was a result of over one year of investigation by the International Consortium of Investigative Journalists. More than 100 media organizations spent a year poring over 11.5 million leaked files with 40 years' worth of data connecting more than 214,000 offshore companies to people in 200-plus countries. So what these ultra-rich have done is not termed as “illegal” but what is unearthed is a murky web of shell companies where the name of the real owner is shrouded under layers and layers of secrecy.

Tax havens like the Bahamas, Panama, Cayman Islands, Isle of Man, British Virgin Islands, Luxemborg, Bermuda, Switzerland and many more offer very low tax rates and other tax features that make them particularly attractive to foreign investors. The concern is often expressed that the availability of foreign tax haven locations may have the effect of diverting economic activity away from countries with higher tax rates, and eroding tax bases that might otherwise be used to raise government revenue. The worst is that many of these tax havens are now being used by terrorists to fund their activities.

The vexing part, like the one on cigarettes is, why do these tax havens exist when what they do is so clandestine and sinister? They exist because they run a business – what you do outside their country is not their business as long as you follow the regulations stipulated by them. There is minimal intrusive legislation. The best part - tax havens cannot exist without the consent of the countries whose transactions they accept. So the very developed countries which cry foul that ultra-rich are avoiding tax by using these tax havens are the ones supporting them. But aren’t the banking systems equally responsible for clearing the movement of money to these tax havens?

What we need is something like the Foreign Account Tax Compliance Act (FATCA), which was signed into law by President Obama in 2010. Under FATCA, all foreign banks are required to identify any American citizens among their clients and to disclose to the Internal Revenue Service the amount of their holdings and any dividends and interest paid on them. Or else the penalties are huge. What we could also have is an international treaty to uncover hidden wealth.  These tax havens need to promote financial transparency. Why not issue serious sanctions against these tax havens, including customs tariff against nations that help defrauders evade their home countries’ laws.

And after all this, let us just hope (that’s all we can do) that the names of all mentioned in the list does become public, especially the politicians. Tax havens can exist but we need to prevent its abuse.