Pandora papers: Why are HNIs moving significant assets abroad?
The Pandora Papers raise issues that need serious introspection. Even if the wealth has been salted away legally, does it reflect a flight of capital? Do HNIs feel their wealth is not secure in India?
What is different about the Pandora Papers from the earlier Panama Papers leaks, revealed by ICIJ five years ago? Unlike the Panama papers which were leaks from a single source, a law firm called Mossack Fonseca, the Pandora Papers are sourced from 14 different providers, whose identity has been concealed. It is a much more comprehensive picture of how the wealthy shift their wealth across tax jurisdictions, possibly to evade taxes or to have a system of “more efficient tax planning”. The distinction between evasion and planning quite thin.
The International Consortium of Investigative Journalists (ICIJ) leaks (the Pandora Papers is the seventh major one, the earlier ones being Panama and Paradise) put the spotlight on the role of tax havens and the service they pro-vide to the global wealthy elite to escape taxation and scrutiny in their home country.
The data is in 11.9 million files, consisting of documents, images, emails, spreadsheets, presentations, audio and video files and even ink on paper. The work was done mostly in secrecy over nearly two years. While the records go back to the 1970s, most of the data pertains to the period from 1996 to 2020.
The G20 since the Lehman crisis has been seized of this matter, of how to prevent the base erosion and profit shifting (BEPS). The role of tax havens has been troubling because they are the cause of huge tax losses. The UK itself loses significant tax revenue due to its own Crown Territories and places like the British Virgin Islands. But despite decades of both
Labour and Conservative governments, the UK has not been able to plug the loophole, making British people wonder whether the political will is strong enough.
The Pandora Papers reveal a new avenue, names individual States within the United States, which now offer trust structures to cloak ownership in secrecy. Earlier Switzerland used to be accused of being tight-lipped about safeguarding ill-gotten wealth in Swiss banks. Now it is even sub-sovereign entities like States of USA. There is an elaborate ecosystem which enables this, with law firms and banks also being complicit.
The Pandora Papers show nearly 4000 banks have helped their clients set up the shell companies or offshore trusts to move their wealth away from the glare of regulators. The BEPS agenda of the G20 is now updated as BEPS 2.0. which consists of two pillars. The first is of fair allocation of profits and taxable income. The second is a global minimum tax on corporations, so that no matter where you go, at least the minimum tax will be applicable.
This initiative led by the US has already got the support of about 132 countries for a minimum tax rate of 15 percent. The first pillar will imply that even if the profits are booked in a tax haven, so long as they are not hidden, the home country can legitimately tax it. For decades big companies like Apple, Google, Amazon booked profits of their European and global income in the low tax haven of Ireland. That will now end.
Indeed, the European Union has imposed a fine on Ireland for such irresponsible taxation, which amounts to “stealing the taxes” of other juris-dictions.
In India too, many of the wealthy say they have moved wealth to offshore trusts and it is legal. Perhaps they are worried that the taxman will take away some wealth in the form of wealth tax? The sharply zooming stock market, and mega liquidity infusion has greatly increased wealth inequality in India and globally. Most developed countries have an inheritance or a stiff estate tax. India does not. Is there a fear of the return of estate duty?
Leaving aside the fugitives who have defrauded banks, or defaulted on large loans from public sector banks, another issue to think about is that even if the wealth has been salted away legally, does it reflect a flight of capital? Are high net worth individuals moving significant assets abroad? What is their anxiety? Do they feel their wealth is not secure in India?
If India opened up its capital account completely, will we see a massive flight of capital? The Pandora Papers raise a lot of issues that need serious introspection. However, one hopes that like the Panama and Paradise Papers, they don’t become forgotten headlines in a fortnight.
(Dr.Ajit Ranade is an economist and Senior Fellow, Takshashila Institution) (Syndicate: The Billion Press) (email: email@example.com)