A Swiss Maze Of Tax Escape

The tax bench of the Mumbai-based income tax appellate tribunal (ITAT) let go of two residents of the city’s upmarket Nepean Sea Road neighbourhood from paying tax on November 2. The reason cited was that they were “discretionary”, not direct, beneficiaries in a trust which held funds in a Swiss acc­ount. The ruling could have a huge bearing on the way authorities look at people who stash cash in Swiss bank ­accounts—it could potentially help them escape investigation.

For others, who are still not on the radar of India’s tax sleuths, there is a lesson or two to be learnt from the ­recent order. Tax and legal experts say that such a ruling could open new vistas for other Swiss account beneficiaries and investors in off-shore tax havens as the order has the potential to rescue them from the nagging tax authorities.  “Most hidden Swiss account holders may be discretionary beneficiaries and never direct as it is an open secret that a large amount of wealth held in these jurisdictions is hot money,” said Ram Upadhyay, a Mumbai-based senior tax lawyer. He is of the view that ITAT’s ruling could be challenged and it will shape the future of income tax investigations in such cases.

Income tax officials say the wealth largely held in tax havens and secret bank accounts is via a trust structure or a maze of corporate entities and it is difficult to lift the veil in most jurisdictions, despite information, unless it can be proved that the money was sourced through criminal activity. Those who park their money outside India often recruit frontrunners and remain only ‘discretionary beneficiaries’ through close confidantes.

Hidden accounts in the Alpine country and businesses registered in tax ­havens from the Bahamas to Panama and Gibraltar have been part of folklore in India. But the Pandora’s box opened in 2011 when the French government handed a list of 628 entities to India. The dossier included people with accounts in HSBC Bank’s Geneva branch. These accounts were till then not known to the authorities.

The UPA government, which was ­already reeling from allegations of a multi-billion-dollar scam, followed it up with raids, high-pitched tax claims and not­ices from enforcement agencies that look into money laundering. It was the first instance of crackdown on ­secret Swiss accounts by India. But the song and dance ended there. According to experts, for more than eight years now, tax officials, who have been hot on the trail of secret Swiss accounts, seem to have found little while the recent ITAT ruling has complicated the matter for them further.

The ITAT ruling could further render a trust-and-beneficiary structure as a useful tool. Trust is a legal entity created when a person gives assets to ­another entity, to hold for the benefit of a third person (beneficiary). These trustees are banks or law firms in most cases. The rights of a trust and beneficiary may depend on the type of trust and the type of beneficiary agreements they have executed or the powers they have vested on each other at the time of agreement. A discretionary beneficiary is one who just signs himself as a guarantor to the trust and may receive distribution at an appropriate time. In most jurisdictions, these discretionary beneficiaries are said to have no legal propriety interest in a trust.

“Obviously, part of the ITAT ruling could have an impact on other similar cases too and some may even try to take advantage of the current case where ITAT ruled in favour of discretionary beneficiaries. But that said, each case will be subject to facts and circumstances of its own,” said Rohan Shah, founder and managing partner, Economic Law Practices. Shah, who appeared for the appellants in the case, said an NRI claimed full ownership of the money in the account and also acknowledged that he was the chief beneficiary of the trust in the case ­involving the two Mumbai residents, Deepak B. Shah and Kunal N. Shah. The case involves the Balsun Trust, which held funds in HSBC Geneva.  

The department had sought to tax funds in the Swiss bank as “unaccounted income” of two individuals. The peak balance or maximum account balance in the Swiss bank account during the financial years 2005-06 and 2006-07, was equally divided and tax officials added a sum of Rs 3.06 crore and Rs 2.74 lakh each to the ­income of the assessees. Then, tax and interest on the total sum was ­imposed, which the ITAT has now ­refused to allow.  

The ITAT ruling said Balsun Trust was created in 1979 by Dipendu Bapalal Shah, an NRI holding a Belgian passport, and the two appellants were mere discretionary beneficiaries with no contribution or transaction with the said trust.

Lawyers in Mumbai said the ruling implies that the tax department cannot touch most entities whose names figure in such discretionary trust structures and that Swiss bank accounts with such ­arrangements may remain popular. Tax officials say the Swiss authorities have an eye for rulings and often modify their systems and procedures accordingly. Britain’s HSBC bank was once the largest foreign bank in Switzerland. HSBC catered to clients from roughly 150 markets out of Switzerland. Nearly ten years ago, an IT specialist named Hervé Falciani stole data from HSBC on tax evaders and cheats in Switzerland and gave it to the French authorities. After that, HSBC was reprimanded for the data breach by Switzerland’s regulator FINMA (Swiss Financial Market Supervisory Authority).

The bank later invested more than 100 million francs into updating its systems against possible data theft. Not surprisingly, most people named in the French government dossier have denied opening any direct account with HSBC Bank but are discretionary beneficiaries.

Before the French government decided to hand its dossier to India, Germany had in 2009 shared a list of 18 Indians who held ­accounts in the LGT Bank of Liechtenstein, a city nation and tax haven bordering Austria. The German dossier may have escaped the media hype that surrounded the French list, but for the tax department, it was a watershed movement. In the matter relating to the German government list, the ITAT had ruled in ­favour of the tax department.

The HSBC Geneva crackdown became global after an employee of the bank obtained information of around 30,000 bank accounts in 2007 and became a whistle-blower. Regarded as the biggest bank leak in global history before the Panama Papers of 2017, the aggregate sums in these accounts were estimated to be more than $120 billion.

HSBC’s Geneva-based private bank and other subsidiaries faced heavy fines in the US on allegations that it had helped a range of wealthy and influential clients shield their funds from ­income tax authorities. HSBC ­admitted that it has stowed away $604 million in funds towards settling the various ­investigations. The bank had agreed to pay 300 million euros in France to ­settle the tax investigations. But the case has only weakened for the tax ­department in India.

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• The ITAT’s ruling has the potential to rescue beneficiaries and investors in tax havens from tax authorities.

• Those who park their money outside India often recruit frontrunners and ­remain only ‘discretionary beneficiaries’.

By Neel Shah in Mumbai