Pandora Articles Reveal Legislative Limits To Preventing Tax Evasion


The discovery of around 12 million corporate files in tax havens by the International Consortium of Investigative Journalists (ICIJ) only underscored the endemic use of tax havens. Pandora’s Diaries, as detailed in this Diary, reveal how income and assets are hidden by the who’s who through a clever baton. Five years after the Panama Papers, the latest presentation only reveals the legislative limits to preventing tax evasion around the world.

The Panama and Paradise papers marked a significant shift in public perception of notions of the rich paying their fair share of taxes. The resulting public pressure encouraged governments to play a more proactive role in cracking down on shell companies, improving tax transparency and introducing anti-avoidance measures. Apparently, 16 of the 88 countries identified in Panama’s documents have undertaken at least one substantive reform by 2019. India has recovered Rs 20,352 crore through investigations following the leaks. Yet the change has been slow and limited.

Over the years, international initiatives have been undertaken to uncover the trail of untaxed or under-taxed funds. The OECD introduced the common reporting standard, through which countries could better work together to exchange financial information about their residents. Today, 110 jurisdictions are signatories to the standard and, through 4,200 bilateral exchange relationships, have exchanged 84 million pieces of information, revealing $ 107 billion in tax revenues.

However, there are countries which, even today, have not adhered to this framework. Notably absent are the United States (it uses the Foreign Account Tax Compliance Act or FATCA to unilaterally receive information on American residents), the Philippines, Thailand and Vietnam. Essentially, this means that tax authorities seeking to investigate siphoning of money from one country to another may not be able to obtain substantial evidence if a country is not obligated to exchange such information.

🗞️ Read the best investigative journalism in India. Subscribe to the Indian Express e-Paper here.

Despite the measures taken, financial secrecy thrives not only on virgin islands, but also in countries like the United States. The Tax Justice Network reports that the United States ranks second in the world, ahead of Switzerland and after the Cayman Islands, in financial secrecy. This is not surprising since states like Delaware and South Dakota, as identified by the ICIJ, are hotbeds of relocation. The ICIJ claims that between 2000 and 2019, US-based trusts held assets worth over $ 1 billion (the amount mentioned for some US-created trusts) that include property real estate and bank accounts in Panama, Switzerland, Luxembourg and the Bahamas.

Clearly, the days of offshoring are far from over. Individuals and businesses seek complex structures such as corporations and trusts to hold assets or operate through low tax jurisdictions. In fact, according to the latest information reported by the OECD on the country-by-country operations of some multinational companies, more than 40 percent of entities located in the British Virgin Islands, Isle of Man, Bermuda and Mauritius, the function passive holding of shares or equity instruments, indicating the recognition of profits without actual activity. Many of these countries have adopted a lax regulatory framework to remain economically relevant.

An important debate that emerges from these leaks, more relevant to India, is the distinction between tax evasion and tax evasion. While morally both can be socially unacceptable, legally parties to the former can only be reprimanded if it is established that the intention is to undermine the tax law. In the past, as has been observed in landmark judgments such as that of Vodafone, a higher tolerance threshold is applied to avoidance, especially in the name of economic benefits such as investment inflows.

Unfortunately, India’s FDI statistics allude to indirect investment through jurisdictions such as Mauritius and Singapore. In 2019, the stock of inward direct investment from these two jurisdictions reported by India exceeded what these countries reported as ongoing outward investment, indicating that investors, including Indian entities, were using them as intermediaries.

It is often difficult to disclose transactions, especially since legal persons are treated as a separate entity from shareholders. This places the burden of proof on tax administrators if the structure thus adopted is intended only to avoid taxes. In addition, the company / trust facilitating tax evasion or evasion and the individuals associated with it are often disassociated using layers of entities across countries. To this end, the concept of beneficial ownership has gained in importance. Countries including India under company law maintain a register of beneficial owners accessible to regulators so that they can establish the true ownership model. However, there are limits to traceability due to non-cooperative jurisdictions.

Therefore, while it may be thought that celebrities associated with entities operating in tax havens are engaging in outrageous behavior, it may not be illegal. The ICIJ itself cautions – that there are “legitimate uses” of trusts and corporations. And that the data does not suggest that “the companies or other entities included in the ICIJ offshore leak database have broken the law or acted inappropriately.”

Despite initiatives to improve tax transparency, these leaks testify to the persistence of these opaque structures. These range from golden passports that allow economic fugitives to flee, to the use of financial structures, legally designed to avoid fiscal and regulatory oversight. Over the years, to discourage countries from offering such offers to taxpayers, tentative attempts have been made to gray-list countries, often resulting in no penalties.

The scale of offshore leaks reaffirms the feeling of inequality in taxation. In response, the CBDT, as in the past, ordered an interagency investigation. While such inquiries may allay public resentment, in order to truly reform the existing tax system, socially unacceptable tax avoidance must be prohibited by law.

This column first appeared in the paper edition on October 11, 2021 under the title “Fixing tax leakage”. The writer is assistant professor, NIPFP


Leave A Reply