On October 3rd, the International Consortium of Investigative Journalists (“ICIJ”) released a data trove that it had been collating for over a year, exposing the offshore properties and assets held by the rich all over the world, sparking a debate over the effectiveness of the measures taken by governments globally, in curbing tax evasion and black money escalation.
The information so released brings to light the beneficial ownership of treasures of the wealthy, ranging from politicians to cricketers, celebrities and religious leaders.
The Pandora papers leak is one of the many data leaks in recent times, such as the 2016 Panama Papers or 2017 Paradise Papers that seek to disclose the financial details of wealthy individuals across the globe.
In the quest to save taxes and to ringfence their assets, the wealthy very often resort to exotic tax planning strategies that involve setting up vehicles in low tax jurisdictions that offer an attractive alternative to house their assets. On the compliance aspects, such jurisdictions are very loosely regulated and coupled with stringent secrecy laws, they offer little to no transparency in their ownership or management to outsiders.
The tax authorities across the globe have recognised the thin line of difference that exists between tax evasion and tax planning which has led to the evolution of tax laws to deal with aggressive tax planning practices.
The BEPS initiative, adoption of Multi-Lateral Instrument (‘MLI’) are some of the measures that various countries have adopted at a global level to curb aggressive tax planning. In India, the government in 2012 enacted the General Anti-Avoidance Rules, for restraining tax evasion. Similarly, the Black Money law was enacted in 2015 for curbing the proliferation of black money in India.
The evolution of such regulations seeks to put in place the necessary framework needed to address the issue of undisclosed wealth.
On the journalistic front, the world is witnessing a periodic release of names that seem to suggest alleged tax evasion and act as a tip-off to the tax authorities. The ICIJ, in its release, has stated that it obtained over 2.94 terabytes of data bringing to light the masked information of various trusts, foundations, shell companies such as shareholder and director data, ultimate beneficial owners, etc. Maximation of technological feasibility and data management in investigative journalism has substantially assisted the enforcement authorities in analysing such cases consequent to which appropriate regulatory action can be taken against such fugitives and offenders. Steps are being taken by sectoral regulators on this front to curb such cases of opaque routing of funds and tax evasion.
Investigative journalism has now started to complement the tax authorities globally in implementing their enforcement measures.
The Central Board of Direct Taxes, in its press release dated October 4, 2020, has stated that it has set up a multi-agency group, comprising of executives from the CBDT, RBI, ED and FIU, for analysing the Pandora Papers. These proactive measures have led to increased scrutiny of assessees, with regulatory proceedings then being initiated against the identified offenders, as per the due procedure of law.
Such investigative journalism raises the bar for scrutiny and acts as a deterrent in adopting aggressive tax planning strategies and seek to establish higher disclosure standards. However, the leaks merely address a fraction of the whole issue, and it would take strict policy enforcement beyond such leaks to address the same.
Considering that the anti-evasion laws are relatively new, it would take some time before the issue is resolved at a systemic level globally. Until then, the hope is that factors such as the gradual transition to a globally lower tax regime, increased public scrutiny and a more evolved law coupled with stricter enforcement should assist in significantly reducing instances of tax evasion sooner than later.
So, what does all this mean for India? As far as India is concerned, there is an exchange control angle to these situations. Whilst many kinds of asset building overseas by Indian residents is legitimately permitted, the key is to be within the framework and also ensure that appropriate disclosures are made under tax and other laws. Though the initial list of Indians involved may appear too big, many of them may also be compliant and within the framework.
Will be very interesting to watch this space.
(The writer is the founder of Transaction Square – a tax regulatory and business advisory firm)
