THE HINDU | Article | The Panama paper trail | APRIL 07

As the ramifications of the leak of about 11 million secret documents from the Panama-based law firm, Mossack Fonseca, play themselves out, a clear articulation of what the “Panama Papers” hold for the state of global finance today came from U.S. President Barack Obama. Following the joint investigation by the International Consortium of Investigative Journalists and the German newspaper Süddeutsche Zeitung into the leaked papers, Mr. Obama described global tax avoidance as a huge problem. Today, it is perfectly legal in many countries to park money in various kinds of shadowy companies in tax havens. This holds true in India as well, where a lack of clarity persists about the legality of buying offshore companies, a service that is expressly provided by Mossack Fonseca. The lack of clarity exists despite the Reserve Bank of India’s evolving guidelines on offshore remittances and investments since 2004. 

While the guidelines, such as those of the Liberalised Remittance Scheme, are specific to remittances utilised by residents to service various overseas requirements such as medical treatment and education, they have been modified over time to permit the setting up of 100 per cent subsidiaries and joint ventures within the limit of $250,000 a year. One of the few stipulations is that money cannot be sent to countries identified as “non-cooperative” by the global Financial Action Task Force. (The FATF identified Panama as having taken significant steps to comply with standards related to anti-money laundering and combating the financing of terrorism, in February 2016.) The RBI guidelines have largely been a reactive measure to address flows to tax havens. The investigation into the Panama Papers and the scrutiny of the accounts of Indians named in them should pave the way for yet another tightening of the norms.

The global investigation has revealed large-scale possible tax avoidance and parking of income in shell companies, possibly earned through graft and cronyism by powerful political and governmental actors. The fallout has already begun, with the resignation of one Prime Minister (of Iceland), and a shadow of doubt on the political leadership in countries such as Russia and China. This could be the tip of the iceberg; the leaks relate to just one offshore law firm, even if it is the fourth largest in the world. A global tax avoidance problem requires a coordinated response, and the papers point to the urgent need for much more transparency in the movement of global finance capital. The NDA government has passed the Undisclosed Foreign Income and Assets (Imposition of Tax) Act, 2015 and provided a one-time compliance window to declare foreign assets and income. So far, these steps have yielded little by way of repatriation of transferred assets. The problem of black money stashed overseas has to be dealt with both at the multilateral level, through tightened capital flow norms, and domestically, through a zero tolerance approach to illegal transfers.