Message from Paradise

Increase transparency, beef up regulation, and cut taxes

For the second year in a row, the International Consortium of Investigative Journalists (ICIJ) and Süddeutsche Zeitung, Munich, have run an expose that shows how companies across the world use offshore entities to avoid paying taxes. Paradise Papers, as it is being called, is the largest ever leak of such financial data — at 13.4 million files, it is bigger than last year’s Panama Papers expose. This time the records pertain to two firms – Bermuda’s Appleby and Singapore’s Asiaciti – and show how 19 tax havens have been used by the global elite to trick tax officials in different countries. Just like last time, there are several prominent names of personalities and firms that figure in the Paradise Papers — in fact, there are 714 Indian names. Apart from tax evasion, details also point to possible conflicts of interest as well as incomplete disclosures.

The expose has brought back the focus on addressing the long-standing problem of domestic entities using international tax havens to store black money. Moreover, it comes at a time when the Indian government is patting its back for rooting out black money from the economy. In fact, acting against people siphoning off money that should have otherwise contributed to the national exchequer and helped in nation-building was one of the key promises of Prime Minister Narendra Modi as he assumed office. To be sure, the government has promptly ordered a multi-agency group to probe the expose and has stated that officials across the  Enforcement Directorate, the Reserve Bank of India and the Financial Intelligence Unit will swiftly act against any discrepancies between declared tax details and what the Paradise Papers show.

However, past experience bears how this is easier said than done. For instance, in the wake of the Panama Papers expose a similar multi-agency group was announced last year, but there is little to show for results as yet. Part of the problem is that the mere existence of foreign accounts is not illegal. Indeed, many such accounts do not involve any illegality as they comply with domestic regulations. As a result, the government will have to ensure that an express desire to show results should not lead to the probe transforming into tax terrorism where anyone with foreign investments is hounded. It is also important to distinguish between outright tax avoidance as well as stashing of black money in foreign accounts and efficient tax planning done within the rules.

The more sustainable way forward requires a multi-pronged approach. For one, India should move further on improving regulation and forcing greater transparency. For instance, from April 1, India has already implemented the General Anti-Avoidance Rule (GAAR) provisions, which empower tax authorities to act against tax-avoidance strategies. Similarly, as a signatory to the Base Erosion and Profit Shifting (BEPS) initiative of the OECD, India has, in June, signed a multilateral investment agreement to prevent the abuse of tax treaties. India has also widened the scope of the “place of effective management” concept to allow the government to see through offshore entities created to evade taxes. But clearly, more action is needed on these lines. What would help further is to rationalise tax rates and reduce the incentive to avoid them.