Why in news?
Centre reconstitutes the Multi-Agency Group formed in 2016 to investigate disclosures on offshore accounts of 714 Indians.
What are the 'Paradise Papers'?
- These are around 13 million leaked files from offshore service providers and company registries obtained by a German newspaper.
- It was made public by the International Consortium of Investigative Journalists (ICIJ) and its media partners.
- They essentially reveal the offshore interests and activities of politicians, world leaders and celebrities, and the tax engineering of more than 100 MNCs, from around 180 countries.
- It also includes details of corporate registries maintained by governments in 19 secrecy jurisdictions often referred to as “tax paradises”.
- Notably, a major portion of these files are in relation with a Bermuda firm Appleby and a Singapore-based Asiaciti Trust.
- Unlike the previous leaks, the latest revelations are more about mega corporates than individual players, on their misuse of offshore jurisdictions.
- India ranks 19th in terms of the number of names that feature in the papers.
What is the Multi-Agency Group?
- The latest report comes a few months after a similar ‘Panama Papers’ disclosure that came in 2016.
- The Panama Papers named several prominent Indian politicians, actors, and businessmen as having offshore undisclosed bank accounts.
- Following this, a Multi-Agency Group (MAG) was constituted.
- The government has now reconstituted this MAG led by the Central Board of Direct Taxes (CBDT), to investigate cases relating to the ‘Paradise Papers’ data disclosure.
- This will have representatives from CBDT, Enforcement Directorate, Reserve Bank of India and the Financial Intelligence Unit.
How are offshore companies a concern?
- Legality - It is not necessarily illegal to set up offshore companies.
- This is because India has double-taxation avoidance agreements (DTAAs) with several countries with lower tax rates than its own.
- The companies incorporated in such countries can use their tax residency certificates (TRC) to enjoy the tax benefits available legally.
- Concerns - However, increasingly, companies and bank accounts are created overseas, providing nominee office-bearers and facilitating bank loans or transfer of shares in multiple secrecy jurisdictions.
- This essentially means using or incorporating overseas shell companies to take tax advantages through illegal means.
- These include:
- operating as fake entities and engaging in tax evasion, manipulation of the market, money laundering, parking black money, etc.
- round tripping i.e. taking untaxed money out of the country through inflated invoices and then bringing it back as investment.
- 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 in Indian companies without paying taxes in India.
- Complication - A company is generally entitled to arrange its financial affairs in whichever way it wishes, to reduce its tax liability.
- The fact that the motive for a particular transaction is to avoid tax does not necessarily invalidate the transaction unless the law of the land specifies so.
- There is a corporate army engaged in imaginative bookkeeping to discover and exploit legal loopholes to evade tax in most cases.
- The burden of justification thus is always on the financial regulators.
- Revelations - The recent disclosures help regulators overcome the obstacle of secrecy, enabling them to investigate instances of financial malpractices.
- The sheer size of the Paradise Papers disclosures and the corporate-centric leads they provide, mark a big step forward.
- Such insight into corporate ingenuity allows regulators to bring in better laws and global tax reforms.
Source: The Hindu, Indian Express
