The Panama Papers singes celebrities…


A British Prime Minister is embattled and a Polish premier had to give up his job.

The Panama that Indians who grew up in 1980s knew was the popular cigarette brand. In the exchange of used packets, Panama enjoyed a premium while Charminar sold at a discount!

‘Panama’ is in news once again. This time it is Panama, the country and not the brand, which is the center of attraction. The new fiscal year opened to startling news from the Latin American Island.

The news had the same old script of a whistleblower and an ever-willing media. An illegally hacked database landed on the lap of journalists who then performed data-analytics that singed world leaders and global celebrities alike. This included several Indians.

The Polish Prime Minister was named and he promptly resigned from his job. The British premier’s father too was on the list but Cameroon for now stays in his job. A number of Indians, including actor Amitabh Bachan, and lawyer Harish Salve make the roll-call but a mere presence there does not mean they have illegal money.

Mossack Fonseca leaks 11.5Mn documents

At the heart of the leak was Panama’s top law firm, Mossack Fonseca. The firm has forty offices worldwide, and provides services like incorporating entities in tax havens. It had incorporated 14,658 active companies in Panama till August 2013. 
No mean achievement indeed.

The story ripped the veil off transactions routed through the Panama islands. The ‘Panama Papers’, as they are now called, are confidential documents leaked from Mossack Fonseca. These provide information about offshore entities and identities of their shareholders and directors, till now held as a global secret.

Ramon Fonseca, co-founder of the firm, confirmed that the papers are genuine.

The leaked data has 11.5Mn documents shaved off Fonseca’s internal database by one of its employees. 
Call him a thief, a whistle blower, or whatever you please, he handed it to a German newspaper, which in turn shared it with the International Consortium of Investigative Journalists (ICIJ)

The Papers contain information on 2.15 lakh offshore entities cutting across two hundred countries. The leaked data covers over 40 years and dates back to 1977. It lists individuals who have offshore entities in Panama that give them either direct or indirect ownership in these companies. The list includes Indians who floated such companies when forex laws of India prohibited such transactions.

Why is Panama important

But why does someone want to take the Panama route? Here are a few reasons.

Like, you can incorporate a company in just 72-hours. 
Your identity and those of other shareholders and directors is kept a secret. Bearer shares are allowed which means anyone who is holding on to the certificates, like anyone holding a 100-rupee note, is the owner! 
Share transfer is therefore both easy and confidential. Further, shareholders, directors, and officers can be citizens or residents of any country. Meetings can be held anywhere and accounts need not be held in Panama. Finally, Panama’s circulating currency is the dollar, and Panama has no currency restrictions. So money is fungible.

In Panama privacy is protected by the Constitution. Revealing banking information is a crime. Panama has no mutual assistance treaties for sharing of banking information with other nations. It does not recognize court rulings of other countries. 
Things can’t get better for someone who wishes to hide. Today, it is home to the second largest international banking center, next to Switzerland.

There are other reasons why people establish shell companies in tax havens. Shell Companies have no independent operations, assets or employees. 
Such companies are used to hide the real identity of the creators or buyers of assets. In other words, these are established not to pursue a legitimate business but to obscure the identity of owners.

So, the two big attractions of offshore entities in jurisdictions are secrecy of information relating to the ultimate beneficiary owner, and zero tax on income generated.

Can Indians incorporate overseas companies?

A person resident in India is free to hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India. 
 Further, a resident individual can also acquire property and other assets overseas under the LERS.

RBI has permitted resident individuals to remit up to USD 250,000 per year abroad for any purpose under the Liberalized Remittance Scheme (LRS). In the year 2010, RBI clarified that the LRS scheme only allows residents to purchase shares outside India and it does not allow setting-up a company abroad. Thus, companies incorporated abroad during this period were considered as having violated FEMA. From 2013, RBI allowed a resident individual to make overseas direct investment in equity shares of a Joint Venture or Wholly Owned Subsidiary outside India.

Panama Papers and Black-Money

Black money may reside abroad but they originate from India. In May 2014 there was a lot of talk about bringing black money back to India.

The Anti-Black Money Act came into force with effect from 01-07-2015. I t was enacted to tax the foreign income and assets of a resident individual, which were not declared earlier to the tax authorities. 
If the Panama Papers provide evidence that Indian residents hid foreign income or foreign assets either in their return of income or under Voluntary Disclosure Scheme they will be taxed at a flat rate of 30%. The penalty for such suppression shall be thrice the amount of tax payable thereon. Further, there shall be rigorous imprisonment ranging from 3 years to 10 years for such tax evasion.

India has had a history of cover-ups. Politicians sing one tune during elections and a completely different tune when in power. Will they work on a windfall call Panama Papers or will they cover themselves behind banalities. Time will tell.

Is hacking any the less illegal than tax evasion?

In this Panama war, even the innocent is going to get killed. Remember, not every rupee that goes through Panama is tax evasion. There are perfectly justifiable and legal reasons to place money in the islands. Such men have the right to be considered innocent until proven guilty. They have the right to privacy.

The media has spoiled the fair image of those who have been named. It would be very hard to reverse that image. It’s a collateral damage. Sad but true given that the twelve million documents is only the tip of the iceberg.

By the way, if you have any documents that make you uncomfortable, seek professional help. Review all of your structures. Do not act impulsively. Do not pull down structures if these have valid justifications. The clean up time is “NOW.”




About Pattabhi Ram

A chartered accountant by profession, a writer by passion and a teacher by accidental choice.
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