Paradise Papers

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What is Paradise Papers?

The Paradise Papers is a set of 13.4 million confidential electronic documents relating to offshore investment that were leaked to a German newspaper by the International Consortium of Investigative Journalists (ICIJ) and released on 5 November 2017 into the public domain.

After Swiss Leaks & Panama Papers, Paradise Papers has come with striking revelations regarding tax avoidance measures adopted by the off-shore companies in the ‘tax heavens’. 

The leak shows how big corporates and ultra-rich individuals moved money to and from tax havens (like Mauritius, Monaco, Panama, Cayman Islands etc.) to evade taxes.

 

Why does Paradise Papers matter?

-> Setting up offshore entities for corporate restructuring or expansion in a rapidly globalizing world may not be illegal but it raises a crucial issue: MNCs exploiting loopholes in law to avoid filling in legitimate taxes in their country.

-> Thus, Paradise Papers opens up the door for regulatory bodies to investigate and ascertain the legitimacy of these offshore transactions.

-> The Paradise Papers highlight the extent to which offshore corporate structures permeate financial services, making the task of identifying Ultimate Beneficial Owners (UBO) even more onerous.

 

India’s position:

-> Among the 180 countries represented in the data, India ranks 19th in terms of the number of names.

-> The disclosure comes 18 months after disclosure of Panama papers, which named several prominent Indian politicians, actors, and businessmen as having offshore undisclosed bank accounts.

 

How taxes are evaded through offshore holdings:

-> Money laundering process of creating the appearance that makes ‘dirty money’ look like ‘clean money’.

-> Hawala Transaction underground banking system that turn cash in one country to cash or asset in another country.

-> Shell companies fake companies which do not have commercial or business substance in real, but they are established & maintained just in papers & taxes are avoided on the name of CSR spent by these companies etc.

-> Treaty shopping third party takes tax avoidance benefit on the account of the Tax Avoidance Treaty between two parties.

-> Round Tripping  laundered money is sent out of the country (preferably in a tax haven where minimal records are kept) and sent back to the country as investments like FDI exempt from taxation or in the form of Participatory notes which guarantee anonymity as well.

-> Parking black-money.

 

Measures to deal with:

-> Plugging the loopholes of General Anti Avoidance Rules (GAAR), FATCA in America, European Anti Avoidance Rules.

-> Double Taxation Avoidance Agreement also needs reform to make it more clear.

-> Envisaging Global Tax Avoidance Rules & Reforms so that the legal battles against the global giants like Google, Amazon, Star Bucks which are being fought now can be resolved easily.

-> Bring changes in IT Act & its rules like a company being called a resident company if its important commercial & management decisions are taken in India, needs to be adhered to.

-> Strengthening tax avoidance sanctions and deterrents.

-> Impose an additional asset-based penalty for the most serious cases of offshore evasion.

-> A new special penalty to be awarded in exceptional cases (possibly equivalent to the amount recoverable if a confiscation order for the assets had been made).

-> Stringent action against shell companies as a deterrence to others.

 

Way ahead:

-> The lack of transparent databases with useful ownership information is a significant barrier for organizations striving to conduct levels of due diligence aligned with regulatory expectations.

-> The Panama Papers and now the Paradise Papers demonstrate the extent to which offshore corporate structures permeate financial services.

-> The ramifications from these papers are likely to be far-reaching with even greater scrutiny by organizations such as the Financial Action Task Force and the OECD to increase transparency to facilitate the due diligence process.

 

Conclusion:

Tax Avoidance is provided to the companies as an incentive but using illegal ways to evade taxes is a crime. This global menace of tax avoidance needs the collaboration of all the stakeholders on the international level.

 

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