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In the month of April, Panama paper leaks took the world by storm. These leaks are related to the parking of money by global powerful and rich personalities in a tax haven country, Panama, in order to avoid or evade tax. This information regarding the leaks comes out in open after an anonymous source contacted the German newspaper Süddeutsche Zeitung (SZ) about a year ago and submitted encrypted internal documents from Mossack Fonseca, a Panamanian law firm that sells anonymous offshore companies around the world. Panama as tax haven Panama is a country with no corporate income tax. People normally set up their companies here to avoid tax. Tax avoidance is an inevitable feature of any tax system. In Panama there is complete secrecy of information relating to the ultimate beneficiary owner where individuals can ask for bearer shares, where the owner’s name is not mentioned anywhere. It costs little or nothing to set up an entity here. The Registered Agent charges a few hundred dollars to incorporate an entity. It doesn’t take much time to incorporate one either. Companies are available off-the-shelf and can be registered in a couple of days. Tax evasion and Tax avoidance There’s a difference between tax evasion and tax avoidance . Tax evasion means illegally refusing to pay taxes you owe, and then taking advantage of secret accounts to try to hide the money and get away with it while tax avoidance means hiring clever people to help you find and exploit legal loopholes to minimize your tax bill. So, holding money in offshore companies is not illegal but evidence of wealth hidden for tax evasion, money laundering, sanctions busting, drug deals or other crimes is worrisome. Significance of Panama leaks These is no minimum global standard of taxation of corporate and investment income hasn’t been done, because it hasn’t been a political priority. The leak of the Panama Papers is significant in part because of the specific information the documents contain, but more broadly because they draw attention to what “everyone knows” and may put public pressure on the powers that be to do something about it. Panama paper leaks and India The papers show that some Indians have set up offshore entities through the Panama law firm. Some of them floated offshore entities at a time when laws did not allow them to do so; some have taken a technically convenient view that companies acquired is not the same as companies incorporated; some have bunched their annual quota of remittances to subscribe to shares in an offshore entity acquired at an earlier date. Still, some others have received income earned abroad and deposited it in the entity to avoid tax. Some have opened a bank account to keep payoffs in government contracts, or held “proceeds of crime” or property bought with money made illegally in Trusts/ Foundations. In India there is a lack of clarity persists about the legality of buying offshore companies. The lack of clarity exists despite the Reserve Bank of India’s evolving guidelines on offshore remittances and investments since 2004. While the guidelines, such as those of the Liberalised Remittance Scheme, are specific to remittances utilised by residents to service various overseas requirements such as medical treatment and education, they have been modified over time to permit the setting up of 100 per cent subsidiaries and joint ventures within the limit of $250,000 a year. The RBI guidelines have largely been a reactive measure to address flows to tax havens. But non-disclosure of an overseas asset is the possible violation of Foreign Exchange Management Act, the Prevention of Money Laundering Act, the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, the Prevention of Corruption Act and the Income-Tax Act. India should make it clear what is the exact legal position for those who acquired already existing companies — such as the ones that Mossack Fonseca supplied off the shelf. The government as well as the RBI must now spell out rules that are lucid and explicit. Conclusion: This has been revealed that a large-scale possible tax avoidance and parking of income in shell companies, possibly earned through graft and cronyism by powerful political and governmental actors. The fallout has already begun, with the resignation of one Prime Minister (of Iceland), and a shadow of doubt on the political leadership in countries such as Russia and China. This could be the tip of the iceberg; the leaks relate to just one offshore law firm, even if it is the fourth largest in the world. A global tax avoidance problem requires a coordinated response, and the papers point to the urgent need for much more transparency in the movement of global finance capital. India has passed the Undisclosed Foreign Income and Assets (Imposition of Tax) Act, 2015 and provided a one-time compliance window to declare foreign assets and income. So far, these steps have yielded little by way of repatriation of transferred assets. The problem of black money stashed overseas has to be dealt with both at the multilateral level, through tightened capital flow norms, and domestically, through a zero tolerance approach to illegal transfers.
By: Vishal ProfileResourcesReport error
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