The Pandora Papers is a leak of almost 12 million documents from 14 global corporate services firms that set up off-shore accounts for their clients to help hide their wealth, avoid tax and in some cases, money laundering.
The International Consortium of Investigative Journalists (ICIJ), along with 140 media organisations, worked on exposing the culprits in what they call "its biggest ever global investigation." According to Indian Express, there are at least 380 Indians in the Pandora Papers, including Indian cricketing legend Sachin Tendulkar. But are all of them guilty of a crime just because they set up an off-shore account?
The Bridge Chronicle talked to Sonam Chandwani, a finance lawyer at KS Legal and Associates to clear these queries and some misconceptions.
What are offshore accounts?
Off-shore accounts are bank accounts in the banks of a foreign jurisdiction in order to avail their banking services. An Offshore Banking account is useful for any Offshore Investments and/or placing overseas deposits. It can also be undertaken by individuals who are no longer residing in their home country but wish to continue banking there.
Why do the rich set up off-shore accounts?
Taxation optimization is the top priority of most companies going offshore. High tax burden makes people hesitate to open a bank account in their home country. By contrast, opening an offshore bank account in tax havens allows account holders to be entitled to a favorable tax rate – either a lower tax rate or even no tax rate at all. Another reason people or businesses hold money out of their home countries is to protect their assets. In many countries, the banking system has fairly feeble and unsound protection to account holders’ wealth and assets (In Global Finance's 29th annual ranking of the World’s Top 50 Safest Banks, no Indian banks are mentioned). Fortunately, an offshore bank account can offer safety to assets, especially when foreign account is opened highly transparent and regulated jurisdiction with a strong privacy law such as Swiss offshore banks.
Furthermore, offshore accounts also provide security and privacy to rich people. It provides security from the changing economic climate of their own country. Many offshore banking jurisdictions have enacted serval laws of strict corporate and banking confidentiality. These highly emphasize anonymity for account holders, allowing accounts’ information to be kept safe and undisclosed.
Is it a misconception that offshore accounts are illegal? If it is not, when does it become an illegal activity?
Offshore accounts are 100 percent legal in India. The Special Economic Zone Act authorises the opening of an offshore banking unit which shall be governed by the RBI rules.
Reserve Bank of India (RBI) permits Indians to open and maintain a bank account overseas. Under the Liberalized Remittance Scheme of the RBI, sending money to an account overseas is a legitimate purpose. RBI revised the LRS purpose code S0023 to ‘Opening of foreign currency account abroad with a bank’ in Feb 2016. Foreign Exchange Management Act (FEMA) also authorises the same.
Offshore accounts become an illegal activity when they are made for the purpose of evading taxes in one’s home country. If the account in a foreign bank has income undisclosed to income tax authorities or has funds from illegal sources, the account can be declared illegal, under the FEMA.
If it is legal, why is there an investigation going on?
Yes, offshore accounts are legal. The current investigation is going on because of suspicion of evasion of taxes by stashing money in offshore accounts. Tax havens are characterised by negligible or zero tax rates and a system of secrecy that conceals a firm’s beneficial owner, or the natural person behind a legal or tax arrangement. It’s the secrecy that causes problems for other countries. Evasion of taxes is illegal. As per Section 271(C) of the Income Tax Act of 1961, in case of hiding or understating your income, the penalty can be anywhere between 10% and 200% of the amount of tax that was due but not paid.