Paradise Papers - Offshore Companies

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:

1. operating as fake entities and engaging in tax evasion, manipulation of the market, money laundering, parking black money, etc.
2. round tripping i.e. taking untaxed money out of the country through inflated invoices and then bringing it back as investment.
3. 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 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