Pandora Papers Leak

05 Oct 2021 Pandora Papers Leak

Posted at 16:43h in Daily current-affairs by khyati khare 0 Comments

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Recently, several prominent Indian names have been included in the Pandora Papers leak.
There are over 300 Indian names in the leak, including over 60 prominent ones.
Pandora Papers are 9 million leaked files from 14 global corporate services firms which set up about 29,000 off-the-shelf companies and private trusts.

About:

A trust can be described as a fiduciary arrangement where a third party, referred to as the trustee, holds assets on behalf of individuals or organisations that are to benefit from it.
A trust is not a separate legal entity, but its legal nature comes from the ‘trustee’. At times, the ‘settlor’ appoints a ‘protector’, who has the powers to supervise the trustee, and even remove the trustee and appoint a new one.

Indian Law:

The Indian Trusts Act, 1882, gives legal basis to the concept of trusts. Indian laws recognise the trust as an obligation of the trustee to manage and use the assets settled in the trust for the benefit of ‘beneficiaries’. India also recognises off shore trusts.

Off-the-Shelf Company

An ‘off-the-shelf’ company or ready-made company is a pre-registered limited company, however, it has never been traded. An ‘off-the-shelf’ company is ready for immediate use and can be purchased after paying a certain cost for it.

About:

The Pandora Papers reveal how trusts are used as a vehicle in conjunction with offshore companies set up for the sole purpose of holding investments and other assets by business families and ultra-rich individuals.
The trusts can be set up in known tax havens which offer relative tax advantages.
For Example: Samoa, Belize, Panama, and the British Virgin Islands.
They reveal how the rich set up complex multi-layered trust structures for estate planning, in jurisdictions which are loosely regulated for tax purposes, but characterised by air-tight secrecy laws.
Businesses have created a new normal after countries have been forced to tighten the laws on such offshore entities with rising concerns of money laundering, terrorism funding, and tax evasion.
The Panama and Paradise Papers dealt largely with offshore entities set up by individuals and corporations respectively.

Reasons for Setting up Trusts Overseas:
Secrecy:

Overseas trusts offer remarkable secrecy because of stringent privacy laws in the jurisdiction they operate in.

Maintain a Degree of Separation:

Businesspersons set up private offshore trusts to project a degree of separation from their personal assets.

Avoid Tax in the Guise of Planning:

Businesspersons avoid their Non-resident Indians (NRI) children being taxed on income from their assets by transferring all the assets to a trust.

Prepare for Estate Duty Eventuality:

There is a pervasive fear that estate duty, which was abolished back in 1985 will likely be re-introduced soon.
Setting up trusts in advance will protect the next generation from paying the death/inheritance tax, which was as high as 85% in the more than three decades after its enactment (The Estate Duty Act, 1953).

Flexibility in a Capital-Controlled Economy

India is a capital-controlled economy. Individuals can invest only USD 2,50,000 a year under the Reserve bank of India’s : Liberalised Remittance Scheme (LRS)
To get over this, businesspersons have turned to NRI , and under Foreign Exchange Management Act, 1999,NRIs can remit USD 1 million a year in addition to their current annual income, outside India.
Further, the tax rates in overseas jurisdictions are much lower than the 30% personal Income-Tax rate in India

Grey Areas of Indian Taxation:

There are certain grey areas of taxation where the Income-Tax Department is in contest with offshore trusts.
After the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015,came into existence, resident Indians have to report their foreign financial interests and assets.
NRIs are not required to do so.
The I-T Department may consider an offshore trust to be a resident of India for taxation purposes if the trustee is an Indian resident.
In cases where the trustee is an offshore entity or an NRI, if the tax department establishes the trustee is taking instructions from a resident Indian, then too the trust may be considered a resident of India for taxation purposes.

Government’s Initiatives:
Legislative Action:

The Fugitive Economic Offenders Act, 2018
The Central Goods and Services Tax Act, 2017
The Benami Transactions (Prohibition) Amendment Act, 2016
The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015
Prevention of Money Laundring Act, 2002

International Cooperation:
Double Taxation Avoidance Agreements (DTAAs):

India is proactively engaging with foreign governments with a view to facilitate and enhance the exchange of information under Double Taxation Avoidance Agreements (DTAAs)/Tax Information Exchange Agreements (TIEAs)/Multilateral Conventions.

Automatic Exchange of Information:

India has been a leading force in the efforts to forge a multilateral regime for proactive sharing of financial information known as Automatic Exchange of Information which will greatly assist the global efforts to combat tax evasion.

Foreign Account Tax Compliance Act of USA: