Pandora lessons multi agency investigation into tax havens is the right step global clean up should continue

Pandora lessons multi agency investigation into tax havens is the right step global clean up should continue

The latest data dump, dubbed Pandora Papers, on offshore accounts in tax havens by a consortium of journalists, has catalysed GoI to set up a multi-agency body to oversee investigations into potential tax evasion by Indians. This is the third major leak in five years of confidential data of intermediaries who organise these accounts for clients. The leaks have been used to check for possible tax evasion and the last two have resulted in detection of undisclosed income of Rs 20,352 crore, according to GoI.

For sure, all offshore accounts are not illegal. The larger issue here is the ecosystem that allows intermediaries to help clients use the banking network to conceal income in tax havens and thereby evade taxes. 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. The pushback against it came on the heels of the 2008 global financial crisis. In 2009, G20 leaders pledged to root out banking secrecy. Later, in 2013 the foundation was laid for common reporting standards that led to an automatic exchange of information between countries and information sharing on request.

The goal behind the apparatus is to ensure that beneficial owners cannot hide behind layered structures designed to conceal their identity. This goal is being pursued through multiple fora, including the FATF. Consequently, two structures used to conceal beneficial ownership, nominee shareholding and bearer shares, have been phased out in many countries. In this context, it’s relevant to note that India’s electoral bonds are bearer bonds which carry the same set of risks as they provide complete anonymity to the donor. Supreme Court should decide on their constitutionality at the earliest.

As the Pandora Papers show, there’s still a long way to go before the ecosystem that allows concealment of beneficial ownership can be dismantled. The G20 finance ministers meeting in July reiterated that the body will pursue this aim. Separately, FATF is working on a recommendation to sharpen this focus to curb money laundering and terror financing. Nudging tax havens to synchronise their laws with others requires a bigger effort from the world’s largest economy, the US. The optics here are unflattering following the leak of Pandora Papers. The US itself hosts some of the most secretive financial havens, South Dakota and Delaware. The clean-up should start there.