AuthorS Ravi (The author is a practising chartered accountant. He serves on the boards of various listed companies, and is a part time director on the board of a public sector bank.)

The term ‘tax haven,’ as well as the practice of using such ‘tax havens,’ is nothing new, it has widely been in place and practice since the early 1950s. So-called tax havens now span the globe, and in modern times organized broadly in three groups. First and still by far the largest is made up of UK-based or British Empire-based havens like Channel Islands, the Isle of Man, Cayman Islands, the British Virgin Islands et al, not to mention the recently-independent British Imperial colonies of Hong Kong, Singapore, etc. Second come the European havens – more specialized as HQ centres, financial affiliates and private banking. These will include Belgium, Netherlands, Luxembourg, Ireland, and of course Switzerland and Liechtenstein. The third is a disparate group – Panama, Uruguay, Dubai, or new havens from the transition economies and Africa. NRI Achievers brings you an insightful piece on whether the existence of such havens is warranted …

Numerous governments use their sovereign right to enact law in order to help successful sectors within their economies to compete in the world economy or, alternatively, to spur the development of new competitive sectors by offering a package of fiscal subsidies, reductions in taxation and removal of ‘red tape’ to attract or retain mobile monies and attract foreign capital. The primary uses of tax haven could be to:

The “Panama Papers,” a set of 11.5 million leaked documents containing a total of some 2.6 TeraBytes of data detailing attorney-client information for more than 214,000 offshore companies associated with the Panamanian law firm and corporate service provider, Mossack Fonseca, has resulted in drawing public ire and flak towards the financial systems in place, as the leak has opened a veritable Pandora’s box of some political, state or government leaders, celebrities, criminals, businessmen as well as business houses globally, stashing their wealth by legal or illegal means, away from public scrutiny through the use of companies, trusts, foundations and funds incorporated in 21 tax havens, from Hong Kong to Nevada in the United States of America.

While the use of offshore business entities is not illegal in the jurisdictions in which they are registered and often not illegal at all, reporters found that some of the shell corporations seem to have been used for illegal purposes including fraud, kleptocracy, tax evasion and evading international sanctions. One has to agree with US president Barack Obama’s statement that “a lot of it is legal, but that’s exactly the problem. It’s not that they’re breaking the laws, it’s that the laws are so poorly designed.”

The investigation has exposed the role of big banks in facilitating secrecy and tax evasion and avoidance, as well as how companies and individuals blacklisted in the US and elsewhere for their links to terrorism, drug trafficking and other crimes were able to conduct business through offshore jurisdictions. Since its release, the Panama Papers investigation has led to high profile resignations such as that of the Prime Minister of Iceland and acting Minister of Industry, Energy and Tourism; triggered official inquiries in multiple countries including France, Italy, Norway, Sweden; and put pressure on world leaders and other politicians, like Britain’s Prime Minister David Cameron, to explain their connections to offshore companies on account of good governance and disclosure requirements.

The Panama Papers leak has not left India unscathed. The current exposé led in India by the Indian Express, has 500 names which include many prominent politicians, business houses & families, a few celebs and NRIs, all of whom have denied any wrong-doing and are cooperating with the law. Some of them have stated on record that they have made full disclosures to the relevant authorities and not contravened any laws. India has in place regulations regarding foreign exchange transactions, viz., the Foreign Exchange Management Act, the Prevention of Money Laundering Act, the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, the Prevention of Corruption Act and the Income-Tax Act. NRIs, apart from the aforesaid Indian regulation, would also have to contend with local laws of the countries of their residence.

The Indian government has ordered an investigation by a consortium consisting of federal investigators, tax authorities and the central bank (RBI) to check compliances with the various regulations in place. The challenge before the investigating agencies is that all these companies/trusts need not necessarily be illegal and purposes could be multi-fold. There could be bona-fide reasons for forming such companies to avoid trade barriers, ensure ease of doing business and lowering cost of operations. Many might have even taken local regulatory permissions and could have made adequate disclosures.


On May 9th 2016, The International Consortium of Investigative Journalists (ICIJ) is expected to release the Panama Papers database, which will likely be the largest ever release of data on secret offshore companies and the people behind them. This interactive database will also include information about more than 100,000 additional companies that were part of the 2013 ICIJ Offshore Leaks investigation. Though the database opens up a world that has never been revealed on such a massive scale, the question arises whether the very existence of these offshore finance centres is justified.

The Tax havens involved could argue that the problem lies with high rates of tax elsewhere, which encourage firms to legitimately seek out lower tax jurisdictions. And if they keep a greater share of profits they can reinvest them and hire more people in the countries where they operate — who in turn pay taxes, national insurance contributions and sales/service tax on the goods and services they consume. Further, they offer security against volatile regimes. The existence of these havens has also led to many developed countries reducing their own corporate tax rates while closing many of their tax loopholes.

To conclude, the thin line between tax avoidance and tax evasion is increasingly blurred. The investigative agencies across the globe would find it challenging to distinguish between a genuine & legal transaction vis-à-vis an illegal one. The perception in the minds of the public is being reinforced that there is one rule for the big and powerful, and another for the smaller players because of the paper leaks. The exposure contained in the Panama Papers of the ways in which the tax system can be exploited by corrupt nations and officials will have far-reaching implications in terms of governance, disclosures, corporate social responsibility and global tax regulation. A new OECD rule book for international taxation law might add more scrutiny which wants to reduce what it terms “base erosion and profit shifting” that involves moving business into other lower tax territories and hence saving on the tax a firm pays. However the effectiveness of the OECD’s role could itself be questioned, considering that its members themselves provide shelters to the tax havens.

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