MUMBAI: Some are more vulnerable than others while some have been clever enough to cover their tracks. And, for some, exotic, layered investments were smart ways to escape capital gains and estate duty. Among the list of names in the unfolding Panama papers, there are those who have used multiple avenues to park money abroad, using services of countless consultants who tell you how to go about it. They may be on the right side of law – even if their practices are sharp and money isn’t exactly kosher. And there are those who have recklessly gone ahead to stash money and own assets, oblivious that one day some hacktivists or whistleblowers will get a whiff of what they are up to.
The names of people owning firms in Panama and the British Virgin Islands were released by a consortium of international journalists. This was first reported by the Indian Express newspaper on Monday.
This development has once again cast a shadow on tax havens, offshore trusts, and secret accounts in boutique banks. The media glare on the matter have raked up questions on the nature of such investments, deals that cross the line, people who indulged in them, and most importantly, whether the persons would be hounded by the tax office and enforcement directorate – the way income tax officers went after those who were named in a list of accountholders of HSBC Geneva. Here are some of the questions that have cropped up:
Why Panama and BVI?
Easy laws on offshore trusts, absolute secrecy and the preferred destination of service providers in London and Dubai make some of these tax havens irresistible. Several trusts with Indians as beneficiaries and having bank accounts in Switzerland are incorporated in BVI and Panama. Till some years ago, Panama even had ‘bearer shares’ – stocks that do not reveal the names of actual shareholders. A favourite structure for many wealthy Indians has been setting up a Panama trust that owns a company in BVI which in turn holds properties and bank accounts in destinations across the world.
Who are the ones likely to be caught off guard?
Persons who bought shares of Panama and BVI firms before 2003, when RBI first allowed resident Indians to invest in stocks and properties abroad, are on a sticky wicket. They had either moved money from India using the hawala route or diverted a slice of their overseas earnings to buy the shares. They didn’t set up new companies but bought shares of existing shell firms from service providers who form these outfits for such purpose. Even today, RBI’s liberalised remittance scheme disallows an individual to float a new company abroad.
What about NRIs?
Purchase of shares and properties by NRIs and residents using the RBI’s remittance window have little to fear. But those who bought into tax haven companies before 2003 and at a time when they were not NRIs would find themselves on thin ice. Also, those who never bothered to disclose these investments after returning to India in their tax returns may be pulled up. In 2012, tax authorities added a new column in the tax return form for spelling out overseas assets. Many, fearing it would attract unnecessary attention, chose not to reveal these investments.
What if someone is a director but not a shareholder in a tax haven firm?
A person named as a director in a BVI firm cannot be pulled up if there’s no way to prove that the firm’s assets belong to him. There may be secret (but legal understanding) between such directors and shareholders who act as fronts; but, it is tough to lift the veil and establish such arrangements.
Why buy an apartment in London via BVI?
Even for legitimate transactions (to buy properties abroad), this is a tax-efficient route. First, a BVI firm can borrow to buy a property in London but a person in India, even with a fat net worth, can’t. Second, it’s a neat structure to avoid estate duty in Europe. Third, no tax is paid on capital gains when the property is sold: in such deals the person sells shares of the BVI company to transfer the property rights. Such loopholes in British tax laws are now being plugged. From this month there would be tax on capital gains when the ultimate beneficial owner of a tax haven entity (owning properties in UK) changes. But not all deals are legal: over the years Bollywood celebrities and businessmen have used some of their overseas earnings to buy properties abroad instead of bringing the money back to pay tax in India.
So, how will the taxman go after these people?
It’s a familiar plot. It’s likely to pan out like the HSBC Geneva case. Tax department will raise demand and ED may slap notices, while the persons in question will either claim that the transactions were above board or deny that they ever had any links with any offshore firm. Some HSBC accountholders have so far confessed while most have moved the court.
Their arguments: the accounts belonged to discretionary trusts and not in their name; the trusts did not distribute any money to them; and they are clueless how they were named as beneficiaries. However, those with direct numbered Swiss accounts may find it more difficult to defend themselves. Moreover, if the BVI and Panama companies were closed before 2000, then the tax department can’t reopen matters that are more than 16 years old. Can some of them come clean now?
It’s complicated. The BVI companies can sell properties, close bank accounts, bring back the money through hawala, and pay 45% tax on the undisclosed cash under the local black money scheme. Maybe even the government would prefer this. More so, after the lukewarm response to last year’s quasi-amnesty scheme for declaration of foreign accounts. But will that keep tax officials at bay? Can they buy peace? Many are waiting to find out from the finance ministry which will soon release the rules of the scheme.