Pandora Papers and Role of Trusts in Tax Evasion


    In News

    • The latest leak of offshore financial records has shown that the elites are finding ingenious new ways to ring-fence (protect) their assets from scrutiny at home.
      • It is reshaping the secrecy industry in international finance after regulators worldwide have begun cracking down on global money flows.

    Pandora Papers

    • Pandora papers are 11.9 million leaked files from 14 global corporate services firms.
      • These firms set up about 29,000 off-the-shelf companies and private trusts for worldwide clients base in both 
        • Obscure tax jurisdictions (also known as tax havens) such as Samoa, Belize, Panama, and the British Virgin Islands and
        • Countries that offer relative tax advantages such as Singapore, New Zealand, and the United States.
    • Pandora Documents hint at the ultimate ownership of assets ‘settled’ (or placed) in private offshore trusts and the investments held by the offshore entities.
      • There are at least 380 Indian citizens in the Pandora Papers.

    Pandora’s Box

    • Pandora’s box is an artefact in Greek mythology connected with the myth of Pandora in Hesiod’s Works and Days.
    • It represents two things:
      • the evils of the world and 
      • temptations that we can’t resist because of curiosity.
    • The present-day usage of the phrase means ‘a process that once begun generates many complicated problems.

    Revelation by the Pandora Papers

    • The Pandora Papers reveal how the rich, the famous and the notorious set up complex multi-layered trust structures for estate planning in jurisdictions that offer
      • loosely regulated tax structure and
      • air-tight secrecy laws.
    • The purposes for which trusts are set up are many, and some are genuine too.
    • But a scrutiny of the papers also shows how the objective of many is two-fold: 
      • To hide their real identities and distance themselves from the offshore entities. 
        • This ensures that the tax authorities can not reach them.
      • To safeguard investments like cash, shareholdings, real estate, art, aircraft, and yachts, from creditors and law enforcers.

    Pandora Papers v/s Panama Papers and Paradise Papers

    Panama Papers and Paradise Papers

    Pandora Papers

    • These papers dealt largely with offshore entities set up by individuals and corporations.


    • It had a narrow approach regarding modus operandi and underlying reasons.
    • It shows how businesses have created a new normal after the tightened regulatory framework with rising concerns of money laundering, terrorism funding, and tax evasion.
    • It pierces the corporate veil and reveals 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.


    Trust and Related Legal Provisions

    • 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 like financial investments, shareholding, and real estate property.
    • A trust comprises three key parties: 
      • ‘Settlor’: one who sets up, creates, or authors a trust; 
      • ‘Trustee’: one who holds the assets for the benefit of a set of people named by the ‘settlor’; and 
      • ‘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.
    • The Indian Trusts Act, 1882
      • It gives legal basis to the concept of trusts. 
      • While Indian laws do not see trusts as a legal person/ entity.
        • But 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.

    Why are Trusts Set up?

    Legitimate Reasons

    • 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.
      • E.g., while allotting shares in the company to say, 4 siblings,
        •  the father promoter set conditions that a sibling can get the dividend from the shares and claim ownership of the shares, 
        • but not sell it without offering the first right of refusal to the other three siblings.
      • This could be to ensure ownership of the enterprise within the family.

    Illegitimate Reasons

    • Secret vehicles to park ill-gotten money, 
    • Hide incomes to evade taxes, 
    • Protect wealth from law enforcers, 
    • Insulate it from creditors to whom huge money is due, and 
    • To use it for criminal activities.

    Key tacit reasons behind setting up of trusts highlighted from the media investigation

    • Maintain a degree of separation: 
      • To insulate the assets from creditors, businesspersons set up private offshore trusts from their personal assets. 
      • A ‘settlor’ of trust no longer owns the assets he places or ‘settles’ in the trust.
    • Hunt for enhanced secrecy from Offshore Trusts: 
      • The Income-Tax Department in India can get to the ultimate beneficial owners only by requesting information from the financial investigation agency or international tax authority in offshore jurisdictions.
      • The exchange of information can take months.
    • 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.
      • The ownership of the assets rests with the trust.
        • Thus, the son/ daughter is only a ‘beneficiary’, is not liable to any tax on income from the trust.
    • Prepare for estate duty eventuality:
      • There is a pervasive fear that estate duty, which was abolished back in 1985 will likely be re-introduced soon.
      • Setting up trusts in advance will protect the next generation from paying the death/ inheritance tax.
        • It was as high as 85 per cent in the more than three decades after its enactment (The Estate Duty Act, 1953).
      • Although India does not have a wealth tax now, most developed countries including the US, UK, France, Canada, and Japan have such an inheritance tax.
    • Flexibility in a capital-controlled economy like India: 
      • 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 to NRIs. 
        • Under FEMA, NRIs can remit $1 million a year in addition to their current annual income, outside India.
      • Further, the tax rates in overseas jurisdictions are much lower than the 30% personal IT rate in India plus surcharges.
    • The NRI angle: 
      • Offshore trusts are recognised under Indian laws, but legally, it is the trustees 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.
      • Of late, NRIs are under greater scrutiny of the IT Department to prove their non-resident status of past years.

    Offshore Trusts to be seen as resident Indian for tax purposes: A Grey Area

    • There are certain grey areas of taxation where the Income-Tax Department is in the contest with offshore trusts.
      • After The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, came into existence, resident Indians have to report their foreign financial interests and assets.
      • NRIs are not required to do so- even though, as mentioned above, the I-T Department has been sending notices to NRIs in certain cases.
    • The IT 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.

    Conclusion and Way ahead

    • No Retrospective Taxation
      • India learning from Vodafone and Cairn India cases should not impose retrospective taxation.
    • Thorough Investigation and amendment of Rules
      • Investigations must be thoroughly undertaken and modus operandi must be understood.
      • New rules for plugging leakages must be rolled out.

    Source: IE