The secret deals and hidden assets of some of the world’s richest and most powerful people have been revealed in the biggest trove of leaked offshore data in history.

• Branded the Pandora papers, the cache includes 11.9m files from companies hired by wealthy clients to create offshore structures and trusts in tax havens such as Panama, Dubai, Monaco, Switzerland and the Cayman Islands.
• There are at least 380 persons of Indian nationality in the Pandora Papers.

What are the Pandora Papers?

The Pandora Papers investigation is the world’s largest-ever journalistic collaboration, involving more than 600 journalists from 150 media outlets in 117 countries.

• The investigation is based on a leak of confidential records of 14 offshore service providers.
• These services providers gave professional services to wealthy individuals and corporations seeking to incorporate shell companies, trusts, foundations and other entities in low- or no-tax jurisdictions. 
• The entities enable owners to conceal their identities from the public and sometimes from regulators.
• Often, the providers help them open bank accounts in countries with light financial regulation.

What do the Pandora Papers reveal?

The Pandora Papers reveal how the rich, the famous and the notorious personalities set up complex multi-layered trust structures for estate planning, in jurisdictions which are loosely regulated for tax purposes, but characterised by air-tight secrecy laws.

The purposes for which trusts are set up are many, and some genuine too.

But a scrutiny of the papers also shows how the objective of many is two-fold:

1. To hide their real identities and distance themselves from the offshore entities so that it becomes near impossible for the tax authorities to reach them and, 
2. To safeguard investments — cash, shareholdings, real estate, art, aircraft, and yachts — from creditors and law enforcers.

How is Pandora different from the Panama Papers and Paradise Papers?

The Panama and Paradise Papers dealt largely with offshore entities set up by individuals and corporates respectively. 

The Pandora Papers investigation shows how businesses have created a new normal after countries have been forced to tighten the screws on such offshore entities with rising concerns of money laundering, terrorism funding, and tax evasion.

• The Pandora Papers reveal how trusts are prolifically used as a vehicle in conjunction with offshore companies set up for the sole purpose of holding investments and other assets by business families and ultra-rich individuals. 
• The trusts can be set up in known tax havens such Samoa, Belize, Panama, and the British Virgin Islands, or in Singapore or New Zealand which offer relative tax advantages, or even South Dakota in the US, the biggest economy.

What is a trust?

A trust can be described as a fiduciary arrangement where a third party, referred to as the trustee, holds assets on behalf of individuals or organisations that are to benefit from it. 

• It is generally used for estate planning purposes and succession planning. 
• It helps large business families to consolidate their assets — financial investments, shareholding, and real estate property.

A trust comprises three key parties: 

1. Settlor — one who sets up, creates, or authors a trust; 
2. Trustee — one who holds the assets for the benefit of a set of people named by the ‘settlor’; and
3. Beneficiaries — to whom the benefits of the assets are bequeathed.

A trust is not a separate legal entity, but its legal nature comes from the ‘trustee’. 

At times, the ‘settlor’ appoints a ‘protector’, who has the powers to supervise the trustee, and even remove the trustee and appoint a new one.

Is setting up a trust in India, or one offshore/ outside the country, illegal?

The Indian Trusts Act, 1882, gives legal basis to the concept of trusts. So its not illegal.

• While Indian laws do not see trusts as a legal person/ entity, they do recognise the trust as an obligation of the trustee to manage and use the assets settled in the trust for the benefit of ‘beneficiaries’.
• India also recognises offshore trusts i.e., trusts set up in other tax jurisdictions.

If it’s legal, what’s the investigation about?

There are legitimate reasons for setting up trusts — and many set them up for genuine estate planning. 

• A businessperson can set conditions for ‘beneficiaries’ to draw income being distributed by the trustee or inherit assets after her/ his demise.
• But trusts are also used by some as secret vehicles to park ill-gotten money, hide incomes to evade taxes, protect wealth from law enforcers, insulate it from creditors to whom huge moneys are due, and at times to use it for criminal activities. 

Why are overseas trusts set up? 

• Overseas trusts offer remarkable secrecy because of stringent privacy laws in the jurisdiction they operate in. 
• A lot depends on the intention behind setting up an offshore trust — and if the taxman can provide evidence that suggests mala fide intent by the trust, then the courts tend to back the tax department in their attempt to recover the taxes due.

Some key tacit reasons why people set up trusts are:

1. Maintain a degree of separation: Businesspersons set up private offshore trusts to project a degree of separation from their personal assets. This way, he insulates these assets from creditors.
2. Hunt for enhanced secrecy: Offshore trusts offer enhanced secrecy to businesspersons, given their complex structures. 
3. Avoid tax in the guise of planning: Businesspersons avoid their NRI children being taxed on income from their assets by transferring all the assets to a trust. 
4. Prepare for estate duty eventuality: There is pervasive fear that estate duty, which was abolished back in 1985, will likely be re-introduced soon. Setting up trusts in advance, business families have been advised, will protect the next generation from paying the death/ inheritance tax.
5. Flexibility in a capital-controlled economy: India is a capital-controlled economy. Individuals can invest only $250,000 a year under the Reserve Bank of India’s Liberalised Remittance Scheme (LRS). To get over this, businesspersons have turned NRIs, and under FEMA, NRIs can remit $1 million a year in addition to their current annual income, outside India. 
6. The NRI angle: Offshore trusts are recognised under Indian laws, but legally, it is the trustees — not the ‘settlor’ or the ‘beneficiaries’ — who are the owners of the properties and income of the trust. An NRI trustee or offshore trustee taking instructions from another overseas ‘protector’ ensures they are taxed in India only on their total income from India.

Can offshore Trusts be seen as resident Indian for tax purposes?

There are certain grey areas of taxation where the Income-Tax Department is in contestation with offshore trusts. 

• The I-T Department may consider an offshore trust to be a resident of India for taxation purposes if the trustee is an Indian resident.
• In cases where the trustee is an offshore entity or an NRI, if the tax department establishes the trustee is taking instructions from a resident Indian, then too the trust may be considered a resident of India for taxation purposes. 

Source: Indian Express