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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