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Almost eighteen months after Panama Papers leak, another massive trove of secret financial data has been leaked. It was by the International Consortium of Investigative Journalists (ICIJ). The financial data on how big corporates and ultra-rich individuals moved money to and from 19 tax havens. This was done  to evade taxes and launder money.  The news was initially obtained by German newspaper Suddeutsche Zeitung.

The leak, called the Paradise Papers, contains 13.4 Mn documents from two leading firms in offshore finance. Most of the data leak came from Appleby, a Bermuda-based legal services provider.  It facilitated setting up of offshore firms with low or zero tax rates. Singapore-based Asiaciti was the other firm that helped wealthy to move money to tax havens.

Paradise Paper leak

How are Paradise Papers different from Offshore Leaks (2013), Swiss Leaks (2015) and Panama Papers (2016)?

Like the three major global financial leaks in the past  Paradise Papers also reveal tracks of veiled offshore financial activities. It was investigated by The Indian Express. Like Mossack Fonseca (of Panama Papers, 2016), Appleby helps set up companies and bank accounts overseas. It provides nominee office-bearers, and facilitates bank loans or transfer of shares, in multiple secrecy jurisdictions.

But unlike in the previous leaks, the latest revelations are more about mega corporates than individual players.  Also, it is about how they took advantage of and, in many cases, misused offshore jurisdictions.

What do the Paradise Papers show?

They reveal offshore footprints of some of India’s major corporate players as well as of a few high-value individuals — the astounding scale of incorporating shell overseas companies to various ends. Internal communications show how a majority of these companies with offshore residency were wholly controlled from India.

Appleby itself red-flagged round tripping on occasion by questioning if offshore funds meant for investing in India were sourced from India. There are instances of assets of Indian companies being used to guarantee loans raised by offshore companies without disclosing it to Indian regulators. Changing ownership of offshore companies to actually change the ownership of shares held by them in Indian companies without paying taxes in India turns out to be another common malpractice.

Why is this news important?

The revelations shall help regulators overcome the obstacle of secrecy. After the Panama Papers, for example, regulators everywhere were able to investigate several instances of financial malpractices hidden in the records of Mossack Fonseca. Also, the sheer size of the Paradise Papers trove, and the corporate-centric leads they provide, mark a big step forward.

Laws specifying general anti-avoidance rule (GAAR) are in force in countries like the UK, Canada, Australia, New Zealand, South Africa and Hong Kong. There is FATCA in the US. In Europe, anti-tax avoidance measures in the pipeline include a blacklist of offshore tax havens and a common consolidated corporate tax base (CCCTB) for the EU. Thus, it meant to block transfer of profit to low-tax jurisdictions.

VComply

Lack of clarity and the absence of appropriate provisions has led to litigation in India. Also, it was for the statute and/or the treaty regarding the circumstances in which judicial anti-avoidance rules.  The India’s Direct Taxes Code Bill, 2010 envisages the creation of an economically efficient, effective direct tax system, proposing GAAR to prevent tax avoidance.

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