In this blogpost, KomalRastogi, Student, Nirma University, Ahmedabad, writes about the offshore investments and tax evasions, reasons for the offshore investment, and also about the increasing risks to tax evasion through offshore investments.
Offshore investments have become a great source of investment and have spread all across the world. India is no exception to this. Offshore investment is an investment housed in a country other than one’s own country of residence. Offshore investment is a means of reducing taxes levied on the investors either large or small scale investors. This leads to moral and legal questions regarding tax evasion or tax avoidance. These investments are popular among those investors who try to hide their money from being taxed heavily.
Payment of less tax is the most important reason for the increase in offshore activity. Due to these offshore investments, investors are able to have a more profitable business. Generally, taxes levied in the country create less profit to the business. But by using offshore mechanisms an investor can reduce the amount of tax that he or she has to pay.
The other reason as to why offshore investments are more preferred than to onshore investments is because the former is less regulated and the behavior of any of the offshore investors is unrestricted than that of an  onshore investor.
Reasons for the offshore investment
- Confidentiality: Along with the investments, the offshore authority provides a complimentary benefit of trade confidentiality to the company. The countries which allow offshore investments have separate laws for the banking and corporate confidentiality. This helps them to manage their taxes on incomes, capital gains, etc. If the confidentiality is breached, then there will be severe consequences for the other party. The secrecy or confidentiality doesn’t mean that they are hiding something or they are criminals. But if there is any issue of drug trafficking or money laundering then the offshore laws would allow disclosing the identity in that case. In the case of the high-profile investors, the secrets they want to keep is for their business profits so that they are not forced to share their market share and ultimately give up their share in profit.
- Tax reduction: The countries who want to attract foreign investors offers them tax incentives. The favourable tax conditions are provided by the offshore countries to promote healthy investment environment. Offshore investment arises when any investor forms a corporation in other than one’s country of residence. The corporation tax trend gets lower from 51% to 32% only to attract foreign investors. US markets provide tax-free status to many foreign investors. But in recent years, due to their tax exemption policy, US market has suffered huge revenue loss towards its offshore investors. US has a policy according to which it levies taxes on the investors residing in the territory of USA on the basis of their worldwide income. This will prosecute the investors who evade the country’s capital gain through tax evasion.
- Variation in investment: Investing in foreign markets will help in diversifying the assets. This will help offshore investors to have truly diversified investment portfolio. Risks can be controlled by investments among a wide range of options that are accessible for onshore investments.
- Diversification in assets: Investment in foreign countries can help in expanding the business and would lead to diversification of their assets. This diversification can help at the time of downturn of the economy.
Due to these offshore investments, investors found a new way to escape from the taxes which can be levied on them. The investors either rich or middle class, invest their money in other countries as to avoid their taxes.
Tax evasion
Tax evasion is a process where a corporation or persons illegally attempt to minimize their tax payments or avoid tax through fraudulent techniques. Tax invasion activities include: underreporting income, hiding money, hiding interest in offshore accounts, or inflating deductions or expenses.[1] Tax evasion can lead to corruption, increase in the price of houses, etc. The direct impact of tax evasion is an increase in inflation and the loss of revenue.
 Increasing menace of tax evasion by offshore investments
In India, tax evasion is a civil offence as of now, and tax evaders are punished under Income Tax Act. The act only provides penalties for the crime of tax evasion and one year jail in some cases. Nowadays Tax Evasion related to the holding of illegal foreign assets is categorized under anti-money laundering laws which make the crime of hiding money through offshore investments as a criminal offence. With the offence of concealing the money and tax evasion with respect to offshore investment makes it a crime punishable under Prevention of Money laundering Act. Few countries in the world have made this tax evasion a criminal offence. According to the circumstances prevailing in India, slowly and gradually it will also join the group of those few countries.
The offences which are covered under Income Tax Act will be the 15th Scheduled Offence and would be dealing with predicate offences. Scheduled offences are the offence which are listed in the schedule to Prevention of Money Laundering Act, 2002. The laws which are listed in the Scheduled Offence includes Indian Penal Code, 1860; NDPS Act, 1985; Unlawful Activities (Prevention) Act, 1967; Prevention of Corruption Act, 1988; Customs Act, 1962; SEBI Act, 1992; Copyright Act, 1957; Trade Marks Act, 1999; Information Technology Act, 2000; Explosive Substances Act, 1908; Wild Life (Protection) Act, 1972; Passport Act, 1967; Environment Protection Act, 1986, and the Arms Act, 1959. The IT Act will be the 15th Scheduled Offence which makes tax evasion through offshore investment a criminal offence. As IT act will be covered under Scheduled Offences, it can be investigated by CBI, SEBI, Police or Narcotics Control Bureau which can further register any crime as a criminal offence. The violation of tax laws with offshore investment is categorized under the predicate offence and will be treated under civil IT laws.
“Major international economies readily cooperate with a foreign country on tax information exchange matters if the case in question is registered under criminal laws like PMLA or Narcotic Drugs and Psychotropic Substances Act.”[2] Now, the organizations can prosecute huge tax evasion crimes under Indian Penal Code and Anti-Money Laundering Act. For Example the list of account holders in HSBC bank couldn’t be prosecuted under Prevention of Money Laundering Act despite indications of money laundering by the accused but was sued under civil foreign exchange laws.
Recently, India has decided to have an amendment in the tax pact with Mauritius. This step is taken to prevent tax evasion by the taxpayers. India might levy the capital tax in Mauritius. The reasons why India is looking for the amendments is because of round tripping and other treaty criticisms. After a long conversation, “Mauritius has agreed to include a clause which shares the benefit with India and is similar to the treaty that India has with Singapore.”[3]
[1] Retrieved on http://legaldictionary.net/tax-evasion/
[2] Retrieved on http://articles.economictimes.indiatimes.com/2015-03-02/news/59684142_1_criminal-offence-tax-evasion-predicate-offence
[3] Retrieved on https://www.bankbazaar.com/tax/tax-evasion.html
