Paradise Papers Leak Controversy – Analysis

By | December 1, 2017
Paradise Papers Leak Controversy - Legal Bites

Why in News?

Centre reconstitutes the Multi-Agency Group formed in 2016 to investigate disclosures on offshore accounts of 714 Indians.

More than 700 Indian names, including those of politicians, corporates, and celebrities, on 6 November 2017 figured in the leaked ‘Paradise Papers’ detailing business dealings of “the world’s most powerful people and companies” in offshore tax havens.

Regulatory and enforcement agencies swung into action by promising a multi-regulatory probe soon after the names started tumbling out as part of the latest global expose by the International Consortium of Investigative Journalists (ICIJ), even as several of those named denied any wrongdoing.

The ICIJ, which worked with 95 media partners globally for the investigation, said it explored 13.4 million leaked files from offshore law firms, majorly Bermuda-based Appleby, and company registries in several secretive tax jurisdictions.

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 is in relation to 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.

Key Highlights

  • Among the 180 countries represented in the data, India ranked 19th in terms of a number of names (714), while Sun Group, founded by NandLalKhemka, figured as Appleby’s second largest client with as many as 118 offshore entities.
  • The ICIJ said the ‘Paradise Papers’ reveal the offshore activities of some of the world’s most powerful people and companies and the files were obtained by the German newspaper Suddeutsche Zeitung.
  • The Indian names on the list included a number of listed entities, some of which saw their shares falling, while regulatory officials said they would look into any wrongdoing on the part of such companies or their promoters with regard to alleged fund diversion and corporate governance lapses.
  • Rights group Transparency International called for stricter measures to regulate the financial sector and their participants, including real estate brokers, lawyers, and bankers. US-based think-tank Global Financial Integrity (GFI) said multi-national companies (MNCs) should be required to publicly report their number of employees, facilities and their revenue on a country-by-country basis to help check tax abuses.
  • The ICIJ said the ‘Paradise Papers’ reveal offshore interests and activities of more than 120 politicians and world leaders, including Queen Elizabeth II whose private estate indirectly invested in a rent-to-own loan company accused of predatory tactics.
  • The leaked files also detailed how owners of jets and yachts, including royalty and sports stars, used Isle of Man tax avoidance structures and revealed tax haven shopping sprees by MNCs in Africa and Asia that use shell companies in Mauritius and Singapore to reduce taxes. Paradise Papers Leak Controversy - Legal Bites

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 i) operating as fake entities and engaging in tax evasion, manipulation of the market, money laundering, parking black money, etc. ii) round tripping i.e. taking untaxed money out of the country through inflated invoices and then bringing it back as an investment. iii) instances of assets of Indian companies being used to guarantee loans raised by offshore companies without disclosing it to Indian regulators. iv 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.

– Wakeman Neutron

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