Panama Papers has become one of the biggest controversy and nightmare of various billionaires, sport stars, celebrities, politicians, public official and even the regulatory bodies not only of India but also of the entire world.

 

The question that arises is what is “Panama Paper”, where have these papers come from and what type of the information it contains and why it has become big time worry for the few of the most powerful people in the world.

 

‘Mossack Fonseca & Co‘ is one of the biggest law firms and corporate service provider based in Panama with more than 40 offices worldwide. An anonymous person related to this Firm has leaked set of confidential documents that provides information about thousands of offshore entities with identities of their shareholders and directors. This data also covers information of about 2.15 lakhs offshore entities that are connected to people of more than 200 countries. It covers information of nearly 40 years period from 1977 through the end of 2015. The database also contains information of the all individuals that have set up offshore entities through Panama law firm beyond that these papers also specify that whether these individual have direct ownership or indirect ownership (beneficial ownership) in the offshore entities.

 

Interestingly, there are few Indians who have also floated offshore entities within that phase of time when the foreign exchange laws of India did not permit to do so. This is one of the major reasons why it has become nightmare for few of the richest people in our country.

 

As per the rules and regulation of Reserve Bank of India resident individuals are permitted to remit US$ 2,50,000 abroad per year for any purpose whether it is capital account transaction or current account transaction or a combination of both under the Liberalised Remittance Scheme (LRS).

 

There are two essential conditions that have to be followed by the individual resident. First, there are no restrictions on the frequency of remittances under LRS.

 

Second, the remittance can be made for an amount up to USD 2,50,000 during the financial year, a resident individual is not be eligible to make any further remittance, even if the proceeds of the investments have been brought back into the country.

 

Here comes a little more twist that in 2010 RBI had clarified that LRS scheme only allows residents to purchase shares outside India and it does not allow setting-up a company abroad. Thus, companies incorporated abroad during this period were considered as having violated FEMA. But then RBI from 2013 onwards allowed the resident individual to make overseas direct investment in the equity shares and compulsorily convertible preference shares of a Joint Venture (JV) or Wholly Owned Subsidiary (WOS) outside India but after satisfying the prescribed criteria.

 

Another hurdle for Indian who has offshore entities or offshore account in Panama will face is due to Rule 3 of the FEMA (Acquisition and Transfer of Immovable Property outside India) Regulations, 2000 restricts acquisition or transfer of immovable property outside India without general or special permission of the Reserve Bank.

 

With so much of restrictions, why so many of so rich where so desperate to incorporate offshore companies in Panama or any other tax heavens?

 

In Panama or any other tax havens “Shell companies” can be created with ease.  Shell companies are legal entities with no independent operations, significant assets or employees.

 

In other words it is an operational company. There are many advantages of having shell companies.

 

First, have low tax in the country of residence.

 

Second, the compliance reporting requirements for offshore companies are limited, as most offshore shell companies are not required to file annual reports and accounts in the jurisdiction of the company formation.

 

Third, offshore companies are regularly utilized to own property and real estate. In addition to confidentiality, the benefits and advantages they offer include exemption from certain types of taxes.

 

Fourth, these companies are very often used for share or foreign exchange transactions. The main reasons being the anonymous nature of the transaction (the account can be opened under a company name) and little or no tax levied on profits made.

 

Fifth, capital gains arising from the disposal of particular investments can be made without taxation. In the case of dividend payments, lower withholding taxes can be achieved through the use of a company incorporated in a zero or low tax jurisdiction that has double tax agreements with the contracting state.

 

Sixth, companies wishing to invest in countries where a double tax agreement does not exist between both countries can establish an intermediary company in a jurisdiction where there is a suitable treaty.

 

 Non- disclosure of these shell companies or offshore accounts/ companies leads to violation of number of laws either jointly or individually.

 

We have listed below provisions of law, with violations and also penal provisions as far India is concerned.

 

 Action that can be taken by CBDT (Income Tax Department)

 

The Prime Minster of India has already ordered an enquiry, which would be carried on by multi agencies including Income tax department. The CBDT can take following actions in case where person who has not disclosed his financial interest, income or assets in overseas entitieshaving named in “Panama Papers “.

 

• A notice can be issued under Section 147 or Section 143(2).

 

• Survey under Section 133A.

 

• Search and seizure under Section 132

 

• Can call for information under Section 133

 

• Imprisonment of minimum 6 months which can be extended to 7 years with fine.

 

• Penalty of 100% to 300% of tax evaded.

 

• Transfer pricing provisions can be invoked in case of under-invoicing or over-invoicing, etc.

 

Action that can be taken under the Black Money (Undisclosed foreign income and assets) and imposition tax act

 

Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act has come into force with effect from 01-07-2015.

 

The Act has been specifically enacted to tax the foreign income and assets (including financial interest in any entity located outside India) of a resident individual which were not declared earlier to the tax authorities.

 

In case where information that is leaked in the Panama Paper have the name of India residence and the Indian resident would have not declared their foreign income or foreign assets in their return of income or under Voluntary Disclosure Scheme, they shall be taxed at a flat rate of 30%.

 

The penalty for such suppression of income or asset shall be equal to 3 times of the amount of tax payable thereon. Further, there shall be rigorous imprisonment from 3 years to 10 years for such tax evasion.

 

What OECD says about “Panama Papers “ – This revelations have thrown light on Panama’s culture and secretive ways of carrying out business.

 

Panama is the last major tax haven that continues to allow funds to be hidden offshore from tax and law enforcement authorities flouting international best practices with impunity.

 

The OECD has been leading a global crackdown on these practices since 2009, working hand-in-hand with the G20 countries. OECD has been constantly and consistently warning of the risks of countries like Panama failing to comply with the international tax transparency standards.

 

The consequences of Panama’s failure to meet the international tax transparency standards are now out there in full public view. Hence, Panama must put its house in order, by immediately implementing these standards.”

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