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Apr 9, 2016

[CA/Econ] Panama Papers

Panama Papers

What are panama papers?
·       The Panama Papers are an unprecedented leak of 11.5m files from the database of the world’s fourth biggest offshore law firm, Mossack Fonseca.
·       The records were obtained from an anonymous source by the German newspaper Süddeutsche Zeitung, which shared them with the International Consortium of Investigative Journalists (ICIJ).
·       The ICIJ then shared them with a large network of international partners, including the Guardian and the BBC.
·       The documents show how wealthy individuals, including public officials, hide their money from public scrutiny. At the time of publication, the papers identified five then-heads of state or government leaders from Argentina, Iceland, Saudi Arabia, Ukraine, and the United Arab Emirates; as well as government officials, close relatives, and close associates of various heads of government of more than forty other countries.
·       The British Virgin Islands was home to half of the companies exposed and Hong Kong contained the most affiliated banks, law firms and middlemen

Why the name panama?
·       Mossack Fonseca, the law firm is based in panama, hence the name panama papers.
·       Mossack Fonseca provides services like incorporating companies in offshore jurisdictions such as the British Virgin Islands, it also administers offshore firms for a yearly fee and also wealth management.

What do The Panama Papers reveal?
·       The documents show the myriad ways in which the rich can exploit secretive offshore tax regimes.
·       Twelve national leaders are among 143 politicians, their families and close associates from around the world known to have been using offshore tax havens.
·       The papers reveal that
ä Individuals have set up offshore entities through the Panama law firm.
ä Some of the Indians floated offshore entities at a time when laws did not allow them to do so;
ä Some have taken a technically convenient view that companies acquired is not the same as companies incorporated;
ä Some have bunched their annual quota of remittances to subscribe to shares in an offshore entity acquired at an earlier date.
ä Still, some others have received income earned abroad and deposited it in the entity to avoid tax.
ä 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.
 
Why go to Panama to register it?
·       The two big draws that offshore entities in jurisdictions such as British Virgin Islands, Bahamas, Seychelles and more specifically Panama, offer are:

Ø Secrecy of information relating to the ultimate beneficiary owner and zero tax on income generated.
Ø In fact, in Panama, individuals can ask for bearer shares, where the owner’s name is not mentioned anywhere.
·       Besides, it costs little or nothing to set up an entity abroad.
·       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.

 What’s the kind of secrecy that the Panama agent offered?
·       The offshore entity need not appoint natural persons as directors or have individuals as shareholders.
·       The Registered Agent, Mossack Fonseca in this case, offers its own executives to serve as shareholders or directors.
·       Sometimes, an intermediary law firm or a bank acts as a director or a nominee shareholder. So the real beneficiary remains hidden.
·       The registered agent provides an official overseas address, a mail box, etc, none of which traces back the entity to the beneficial owner.
·       In many cases, the shareholding of these entities is vested in a Panamanian Trust or Foundation.
·       The Foundation further masks beneficial ownership.
·       A professional trustee is often the nominee shareholder of the Foundation.
·       The beneficiaries of the Foundation’s assets are mentioned in the Regulations, and these Regulations do not form part of the Public Deed executed by the trustee.

What’s the next step?
·       Prime Minister Mr. Narendra Modi ordered an inquiry, and subsequently the Indian government announced that it was constituting a special multi-agency group comprising officers from the investigative unit of the Central Board of Direct Taxes and its Foreign Tax and Tax Research division, the Financial Intelligence Unit and the Reserve Bank of India.
·       For the Reserve Bank of India, this issue has been work-in-progress.
·       It will have to take a call whether they can allow compounding (recognising that an individual has erred bona fide and regularising the investment in the offshore entity post facto by imposing a penalty) or insist that individuals wind up these investments made prior to August 2013.
·       The Income Tax department will have to probe if there has been ‘round tripping’ of funds i.e. routing of funds invested in offshore entities back to India, and where required, refer the cases to the Enforcement Directorate.
·       It will also have to see if the offshore entities have declared all their incomes and assets to the Income Tax department.


What’s the relevance of The Panama Papers to the black money debate?
·       Offshore entities can be and have been used by individuals to remit funds abroad.
·       Globally, they carry a reputation of being vehicles set up by individuals and corporations to evade or avoid tax.
·       Companies call this tax planning, the tax man sees it as tax avoidance.



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