Jun 3, 2011
#Black money #HowThisWorks #Swiss accounts #Tax Havens
By R Vaidyanathan, Professor of Finance at IIM, Bangalore
Baba Ramdev wants it back, or else…. The government claims it is on the trail, but…. Anti-corruption crusader Prashant Bhushan works up a lather over it and even lambasted a former Supreme Court judge recently for upholding a law that enabled businessmen to save taxes by registering themselves with post-office addresses abroad. Business tycoons are mum on the subject.
Yes, we are talking about tax havens abroad, the place where businessmen allegedly stash away their illegal wealth.
But what are tax havens really? Why do postage-stamp countries like Liechtenstien or the Cayman Islands host them? And why do businessmen and politicians keep their slush money there instead of equally unholy – but handy – places back home? Here's a Dummy's Guide to tax havens.
What are tax havens?
Tax havens are countries or principalities or near-sovereign territories that allow you to pay little or no tax and also guarantee you secrecy about the funds you hold in their banks. They are called by other names, too, like offshore financial centres, innovative financial centres, etc, depending on your inclination. One man's innovations are another man's black money.
What is black money? How do I know if the money I get from the shopkeeper is black or white?
It's not the colour. Black money is simply income on which taxes have not been paid. If you pay your builder cash for booking a flat, you are generating black money for him. Every time you buy something without a bill, you may be facilitating black money generation.
How are tax havens defined?
Nicholas Shaxson in his book Treasure Islands suggests that a tax haven is a place "that seeks to attract business by offering politically stable facilities to help people or entities get around the rules, laws and regulations of jurisdictions elsewhere."
It is similar to the definition offered by Richard Murphy of Tax Justice Network. Shaxon also suggests that more than half of world trade passes, at least on paper, through tax havens. Over half of all banking assets and a third of foreign direct investment by multinationals corporations are routed off shore.
How many tax havens exist currently?
There are presumably more than 70 tax havens in the world. At least 40 countries/territories market themselves aggressively as tax havens
(Source: Internal Revenue Service, USA, on Abusive Offshore Tax Avoidance schemes –Talking Points, January 2008)
The well-known tax havens are Switzerland, Liechtenstein, Luxembourg, Channel Islands, and Cayman Islands, among others.
Who uses these tax havens?
Of course, tax dodgers and other assorted varieties of crooks helped by institutions and entities like banks.
Raymond W Baker, in his pioneering work on tax havens, says: "I have lost count of the number of anonymous entities existing in these jurisdictions. Several years ago, the British Virgin Islands alone reportedly had 180,000 and the Caribbean as a whole had 500,000. More were being formed at a reported rate of nearly 200,000 a year. The total is certainly well over a million by now, and some experts put the number as high as three million. According to various estimates, half of cross-border trade and investment passes through a tax haven or a secrecy jurisdiction at some point along the way".
(Capitalism's Achilles Heel: Dirty Money and how to renew the free market system, page 36, John Wiley & Sons Inc, NJ 2005I).
The US Government Accountability Office reported in 2008 that 83 of the USA's biggest 100 corporations had subsidiaries in tax havens. Tax Justice Network discovered that 99 of Europe's 100 largest companies used offshore subsidiaries. In each country the largest users by far were banks.
How much money is stored in these havens?
This is a tricky issue since we are talking about unaccounted or black money. There are estimates, but each one comes with an assumption. There are three interesting questions: How much global money is there in all these tax havens? How much Indian money is stashed away illegally here? How much Indian money is, specifically, in Swiss accounts?
First, let us look at the volume of the untaxed black money that is estimated to circulate in and dominate the global financial markets unquestioned and unsupervised. These monies, which have no declared or known owners, are laundered into the official financial markets of the world through the intervention of tax havens, which are countries that levy no tax or levy what is an apology for a tax, so as to attract capital. These tax havens are largely tiny-tots in the global geography and demography but they hold the rest of the world to ransom, as explained in detail later. These are currently called "secretive jurisdictions".
Now, let us see the latest estimate of the volume of the black money that traverses through the financial system of the world.
The International Monetary Fund (IMF) estimated in 2010 that the balance-sheets of small island financial centres alone added up to $18 trillion — a sum equivalent to about a third of world GDP (Shaxon). The IMF estimates the size of global black money — excluding Switzerland, China, Taiwan and the oil-exporting economies — at US$ $18 trillion. But that's still an underestimate, says the IMF!
Gian Maria Milesi-Ferretti, an economist for the IMF in Washington, said statistical information on Luxembourg, one of the largest offshore financial centres in Europe, illustrated the extent of the problem. He said: "Luxembourg is one of the few offshore centres that disclose detailed statistics on assets and liabilities held in the financial sector, which makes it invaluable to understand cross-border money flows." (Just to recollect our school maths, one trillion is 1,000 billion and 100 crore make a billion; GDP is Gross Domestic Product, which is a nation's income in a year.)
The latest available IMF figures show portfolio assets held by foreigners in Luxembourg to be worth $1.5 trillion at the end of 2008. But looking at statistics provided by the Luxembourg government on portfolio investment liabilities for the country – the mirror image of the asset information held by the IMF – there is a big discrepancy. The investment liabilities in Luxembourg were $2.5 trillion – $1 trillion (€726 billion) more than the assets reported.
Milesi-Ferretti said: "This is a huge difference, almost 40%, and is unlikely to be entirely accounted for by the fact that some countries do not report their portfolio investments or their destination to the fund."
How much Indian money is kept abroad?
Global Financial Integrity (GFI) — a non-profit research organisation working in the area of tax havens — has estimated that the present value of illegal financial flows held abroad is nearly $500 billions. Our GDP at the time the report was made was nearly US$ 1,200 billon. This means nearly 40% of our national income is held outside the country. Baba Ramdev and Anna Hazare are on the right track, but whether a fast will get the money back is anyone's guess.
Here are some numbers in rupees: At Rs 45 to the dollar, the money stashed abroad comes to Rs 22.5 lakh crore (Rs 2,250,000 crore. At the time of the general elections in 2009, experts of the Congress party had disputed the very existence of large volumes of black Indian wealth held abroad.
But there can really be no dispute about the broad size of Indian wealth stashed away abroad. GFI says that more than two-thirds of this amount has been stashed away after the liberalisation of the Indian economy in 1990s. It means that those aspects of liberalisation which facilitated this process must be scrutinised as part of the preventive efforts needed to tackle the accumulation of Indian black wealth abroad on an ongoing basis. (Even Prashant Bhushan has a point).
Now let us look at what kind of black money from elsewhere is lodged in secret Swiss bank accounts. Nearly 1 trillion out of 2.8 trillion Swiss francs (CHR) is black money, says Konrad Hummler, Chairman of the Swiss Private Bankers Association. (See August 2009 Swiss Review, "Atlantic hurricane hits Switzerland in full force"). Julian Assange of WikiLeaks fame has told an Indian TV channel that Indians are the largest investors through Swiss banks. This means out of US$ 1 trillion (the Swiss currency is actually a bit costlier than the US dollar, but we are looking at ballpark figures here). more than half could be owned by Indians. This alone comes to US$ 500 billion. And this is only bank deposits.
Is money kept in instruments other than deposits?
There are other exotic financial products offered by Swiss banks — offshore also — where Indians are invested. Plus there are funds accumulated directly abroad through commissions in defence contracts (remember Bofors?), which is not going out of the country. It just doesn't come in.
The International Narcotics Control Strategy Report (Money Laundering and Financial Crimes, March 2009, by the US Department of State suggests that 30-40% of the inflows may be sent there by hawala (Couriers take money in rupees, convert it to dollars abroad, and then deliver it where it is needed. They also do the reverse: take dollars abroad, convert it to rupees, and being it back during election time).
During 2007-2008, according that report, formal inflows were US$ 42.6 bn (and so 40 percent of this, $18 bn, could be reflected as illegal "flows" not captured by the law). This sum could be paid for in rupees here but stored in tax havens abroad. These hawala deals are for only one year.
Hence one can conclude that GFI's estimate of US$ 500 billion is a conservative one and $1.5 trillion could be the outer limit. This means the volume of black money held abroad could be anywhere between Rs 22.5 lakh crore and Rs 67.5 lakh crore at current exchange rates of Rs 45 to the US dollar.)
That's nothing to sneeze at. We will see in our next instalment how it went and how to bring it back.
--
Action Taken by Government on Demands Raised by Baba Ramdev (Prime Minister's Office)
by Dr. Manmohan Singh on Friday, June 3, 2011 at 9:22am
http://pib.nic.in/newsite/erelease.aspx?relid=72516
Recovery of Black Money
There is a legal framework regulated by the Reserve Bank of India for the opening of bank accounts overseas by Indian residents and for outward or inward remission of funds through authorized channels.
The existing legal framework for dealing with illicitly generated funds transferred overseas and measures for the attachment and repatriation of such illegal assets to India and provision for penalties for offenders are:
A. Under the Prevention of Money Laundering Act, 2002 (PMLA), money laundered out of predicate scheduled offences can be attached and seized and individuals and other legal entities found to have indulged in money laundering can be prosecuted. PMLA provides for imprisonment of minimum of 3 years (which can be extended up to 7 years) and a fine of up to Rs.5 lakh and the tainted proceeds parked overseas can be recovered through Mutual Legal Assistance Treaties. India has such treaties with 26 countries.
B. Under the Foreign Exchange Management Act, 1999 (FEMA), cases relating to contravention in foreign exchange transactions by Indian residents can be adjudicated with penalty up to a maximum of 3 times the amount involved. Further, FEMA empowers the confiscation of the amounts lying abroad and directing their repatriation.
C. Under both statutes (FEMA and PMLA), investigation is taken up against specific persons, both natural and legal, and on the basis of specific information.
D. Section 105A of the Cr. PC provides for reciprocal arrangement and procedure for attachment and forfeiture of properties generated from the commission of an offence. Where such properties are situated overseas and treaty arrangements exist between Government of India and the other country, Letter Rogatories can be issued to a court / authority of the other country for execution of such an order.
E. Under the Income Tax Act also, income earned and not disclosed is taxable and also subject to penalty and interest, as well as prosecution. The amount recovered may even exceed the entire undisclosed income. This is in effect confiscation of such income / property.
Actions at hand
I. India has negotiated / renegotiated Double Tax Avoidance Agreements and finalized Tax Information Exchange Agreements with 44 countries so as to strengthen the exchange of information relating to tax evasion, money laundering and other criminal / illicit activities.
II. Agencies enforcing these laws have been strengthened and action is being taken in all cases where credible information is available. In the last two years, over Rs 33,000 crore of mispricing has been detected in international trade and over Rs 30,000 crore of tax evasion detected domestically.
III. Government has commissioned a study, to be completed within 18 months, by three national-level institutes to assess the extent of black money inside and outside the country and its impact on national security. The study will also indicate the sectors and mode of generation of black money and recommend measures for its prevention and control.
IV. The Direct Taxes Code Bill, as introduced in Parliament, contains provisions for mandatory declaration of assets held abroad by taxpayers in India. It also contains provisions such as General Anti Avoidance and Thin Capitalization Rules to combat illicit transfer of money and assets abroad through complex financial arrangements and instruments.
V. A Directorate of Criminal Investigation has been created in the Central Board of Direct Taxes as a dedicated unit to track financial transactions relating to illegal / criminal activities and bring such activities to justice.
VI. A High Level Committee has been constituted under the Revenue Secretary for effective sharing of information among Law Enforcement Agencies for coordinated investigation / prosecution of economic offences.
Mauritius Treaty
1. A Joint Working Group (JWG) was constituted in 2006 for the purpose of renegotiating the Direct Taxation Avoidance Convention with Mauritius and its last meeting was held in 2008. Thereafter, India has successfully used the mechanism of the Peer Review Group (PRG) of the Global Forum for Transparency and Exchange of Information for Tax Purposes – of which India is Vice Chair – to leverage arguments with the Mauritian side to be more open in furnishing tax related information to India.
2. Recently, during the visit of President of Mauritius in end-April, an indication was received that Mauritius would resume the Joint Working Group dialogue on the DTAC. Further, Foreign Minister of Mauritius has conveyed that his government will give a fresh mandate for the resumed negotiations to their experts. This position has been further confirmed by the Prime Minister of Mauritius to the Indian Minister of State for External Affairs on 16th May 2011 during her visit to Mauritius.
3. Hon'ble Supreme Court in the case of Azadi Bachao Andolan Vs Union of India (2003) endorsed the Mauritius route for investments into India for availing of the capital gains tax exemption. Hence, any change in the law relating to Mauritius can only have prospective application and can be in respect of future holdings/accounts/entities in Mauritius.
Proposed Action
In order to strengthen existing laws relating to black money, the government has constituted a Committee to consult all stakeholders and submit its report within a period of six months. The Committee will examine the measures to strengthen the existing legal and administrative framework to deal with the menace of generation of black money through illegal means including, inter alia,
a) Declaring wealth generated illegally as national asset;
b) Enacting / amending laws to confiscate and recover such assets; and
c) Providing for exemplary punishment against its perpetrators.
Any further suggestions in this regard will be duly considered.
Collection of details regarding people who go frequently to 'tax havens'.
Government proposes to expand its Immigration/Emigration databases and build a database of Indians going frequently to foreign countries considered to be tax havens and returning to India.
Lok Pal Bill
A Joint Drafting Committee, consisting of Government and civil society representatives is already looking into the provisions of the Bill. Government is committed to the widest possible consultation on the Lok Pal Bill before its introduction in Parliament and subsequently until the passage of the Bill. As a first step, State Governments and political parties are being consulted. Further consultations with the public will follow.
Stronger punishment for the corrupt
This is also under consideration of the Joint Drafting Committee. The maximum punishment for cases of corruption would be increased substantially. It may be noted that money secured through corrupt modes can now be confiscated under the Prevention of Money Laundering Act and some cases have already been taken up under these provisions. Besides, the Department of Personnel is also considering the inclusion of a chapter in the Prevention of Corruption Act to provide for confiscation of ill-gotten wealth.
Special Courts for dealing with corruption cases
Government has already decided to set up 71 new special courts for trial of CBI cases. The number of public prosecutors, inspectors, head constables and stenographers for additional special courts has been increased. Government is open to the idea of more special courts to speed up trial of corruption cases.
Public Services Delivery Act
Various initiatives have already been taken by Government, including Citizens' Charters, Sevottam and the recently introduced performance management & evaluation system. The Central Government is prepared to introduce a Public Services Delivery Bill in Parliament at the earliest and to prepare a Model Bill for adoption by State Governments. The Central Government will encourage State Governments to adopt the Model Bill to improve the quality and timeliness of public service delivery.
Technical Education in Indian Languages
The Commission for Scientific and Technical Terminology has been set up with a mandate of providing more regional language material in technical subjects. The Commission's work will be strengthened and speeded up. The National Translation Mission under the Central Institute of Indian Languages, Mysore will also be strengthened. It may be noted that the Civil Services Examination is now held in Hindi as well as in regional languages. Similarly, Hindi is a medium for writing the IIT-JEE examination. The All India Engineering Entrance Examination, in which more than 11 lakh students appear each year, also offers Hindi as a medium. NCERT provides text books in Hindi and Urdu. In Tamil Nadu, Tamil is a medium of instructional examination for degree courses for technical education. Similarly, in the States of Rajasthan, Uttar Pradesh, Haryana, Bihar and Madhya Pradesh, the regional language is a medium of instruction and for examination in diploma level courses in technical education.
In addition to all these initiatives, the Ministry of Human Resource Development has asked AICTE, which is charged with the duty of determining and maintaining standards of technical education in the country to constitute a Committee of Experts to draw up a concrete plan for measures to be taken to increase the use of Indian languages in technical education. This Committee will submit its report in 3 months.
Land Acquisition Act
The Act is in the process of amendment and any suggestions regarding its provisions can be considered for inclusion. Government is committed to wide public consultation on the amendments to the Land Acquisition Act.
Agriculture
Government has already initiated several projects for promotion of organic farming and the use of bio-pesticides and bio-fertilizers. This includes the National Project on Organic Farming, National Horticulture Mission and the Rashtriya Krishi Vikas Yojana. As a result, organic farming which only covered 42000 hectares in 2004-05, now covers 10.8 lakh hectares. Nine States have drafted organic farming policies. There has been substantial increase in production of compost, bio-fertilizers and development of vermiculture. To sustain agricultural productivity in the long run and to address soil health issues, Government is giving special thrust to organic farming under the National Mission on Sustainable Agriculture and is promoting farming practices like green manuring, biological pest control and so on. These measures will be further strengthened and outlays increased.
Minimum support prices are even now based on cost calculations. Elaborate studies are conducted by the Commission on Agricultural Costs & Prices each year before Government finalizes the minimum support prices. These cost studies form the basis of the minimum support prices that are announced. The labour put in by the farmers is also part of the costs. Government will facilitate explanation of the methodology followed by the Commission at the technical level.
No comments:
Post a Comment