Pandora Papers 101

Been reading a ton about the Pandora Papers. Here's the thing - what rich people, politicians and cricketers may be doing might not be illegal.

Here's a Pandora Papers 101 ??

There are at least 380 persons of Indian nationality in the Pandora Papers. These documents relate to the ultimate ownership of assets ‘settled’ (or placed) in private offshore trusts. Corporate mumbo jumbo is cut out. This looks at who is the real owner of an asset.

1. Ugh. What's this trust you keep speaking of?

Without getting into the legal mumbo jumbo of it, a trustee (a third party) holds assets on behalf of individuals that are to benefit from it (beneficiaries).

2. What are the parties to a Trust?

a. Settlor - the person who creates the trust i.e. the person who owns the asset (aka rich person)

b. Trustee - the person who holds the assets on behalf of someone

c. Beneficiary - the final person to whom asset is to be given (aka rich kids)

3. Popular tax havens

These trusts are usually formed in tax havens such as

- Samoa, Belize, Panama, the British Virgin Islands,

- or in Singapore or New Zealand which have some tax benefits

- or even South Dakota in the US

4. So these Trusts are illegal?

Hell no. India recognizes Indian as well as offshore trusts.

5. Toh problem kya hai?

Overseas trusts can be incredibly secretive because of stringent privacy laws in the jurisdiction they operate in. The Panama investigation found that people are using Trusts for the following major reasons:

- Separate the individual and company assets

This is best illustrated through an example: A real estate promoter sets up an offshore trust, which sits on top of four offshore entities holding some assets Now, PE investors drag various entities of the real estate group to the NCLT under the bankruptcy law.

But the Pandora Papers show the promoter moved tens of millions of dollars in assets to the trust. His wealth moved to an offshore trust remains safe from creditors.

Remember that while a person's personal assets are generally off limits any way in a Company set up (limited liability and all that jazz). But at the time of giving loans, investments; promoters almost always give a personal guarantee.

This can theoretically be enforced against the promoter's personal assets. The overseas trust safeguards these personal assets (usually).

- Tax planning

HNIs having kids overseas can use a Trust to save their kids from tax burden.

The ownership of the assets rests with the trust, and the son/ daughter being only a ‘beneficiary’ is not liable to any tax on income from the trust. In many business families, children have one foot abroad, hence family patriarchs have increasingly looked at trusts to ensure a hassle-free transfer of assets into their children’s hands.

This works in some jurisdictions and doesn't work in some. The location of the assets and location of the individual all play a part here.

- Secrecy

The complex structures exist for a reason. It's really difficult for anyone to untangle the maze created.

(Fun fact - we've seen beneficiaries also struggle with untangling the maze left by their parents)

Bonus benefit - the Income-Tax Department in India can get to the ultimate beneficial owners only by requesting information with the financial investigation agency or international tax authority in offshore jurisdictions. The exchange of information can take months.

- The estate duty worry

Indians have this (irrational) fear that estate tax might be introduced soon. Advisors have advised them that a trust can save them from this duty.

How advisors know this only they knows though. Without concrete rules for estate tax, how do advisors know that this would not apply to foreign trusts as well.

Fun fact: Opening a foreign trust can be an expensive affair with good money for advisors :)

- Make remittances easier

LRS restricts resident individuals to remit only USD 250,000 every year from India. NRIs meanwhile, are allowed to remit upto USD 1 million every financial year. A lot of businessmen have become NRIs to use this limit.

Further, the tax rates in overseas jurisdictions are much lower than the 30% personal rate in India plus surcharges, including those on the super-rich (those with annual income over Rs 1 crore).

6. So rich people are evil and evading taxes?

Not really. It's a natural human thing to protect your wealth - we all do some version of this. As long as the person involved followed applicable laws and is not involved in any illegal transactions, there's no reason to call for their heads.

Obviously, there are cases where fraud/ scams happened - chase these people, bring money back to India.

For everyone else, change the regulations! Make them easier! Make people WANT to keep their money in India.

The universal minimum tax of 15% is also a good starting point. The world needs to move towards tax compliance rather than tax planning and evasion.

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