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Hello Buddies, so the whole world is hit by the word "Panama Papers". We have analysed the topic and presented in FAQs. Hope you will get all your answers.1. What are the 'Panama Papers'?The 'Panama Papers' are a set of confidential documents leaked from one of the biggest law firms of Panama - 'Mossack Fonseca'. The Panama Papers provide information about thousands of offshore entities, identities of their shareholders and directors. It listed various world leaders, public officials, billionaires, celebrities, sports stars and politicians.2. How much data has been leaked and by whom?a) The leaked data consists of 11.5 Million Documents in around 2,600 GB taken from the Mossack Fonseca's internal database by one of its employees.b) These documents were obtained by Sueddeutsche Zeitung, a daily newspaper headquartered in Munich, Germany. Sueddeutsche shared the Panama Papers with the Washington-based International Consortium of Investigative Journalists (ICIJ) and other news outlets, including the BBC, the Guardian and the Indian Express.c) Sueddeutsche mentioned that an employee at the law firm had leaked the data, telling the newspaper that he had risked his life in doing so.3. What does the Panama Papers reveal?a) The Panama Papers contain information on 2.15 lakhs offshore entities connected to people from more than 200 countries.b) The leaked data covers nearly 40 years period from 1977 through the end of 2015.c) It reveals the database of individuals who have set-up offshore entities through the Panama law firm.d) These individuals are either holding direct ownership or indirect ownership (beneficial ownership) in the offshore entities.e) Some of the Indians have also floated offshore entities at a time when foreign exchanges laws of India did not allow them to do so.4. What is the authenticity of documents leaked?Ramon Fonseca, one of the co-founder of the Mossack Fonseca, confirmed the authenticity of the papers being used in articles published by more than 100 news organizations around the world. He told to one of the Panama's news channel that the documents are real and were obtained illegally through a hacking method.5. Who is 'Mossack Fonseca' and what is its role in this entire controversy?a) Mossack Fonseca & Co. is a law firm and corporate service provider based in Panama with more than 40 offices worldwide.b) It specializes in commercial law, trust services, investor advisory and international structures.c) It provides services like incorporating companies in offshore jurisdictions, wealth management, private banking, accounting services, etc.d) This law firm is one of the seven firms that collectively represent more than half of the companies incorporated in Panama.e) It also provides assistance in transferring funds, buying property, setting-up trusts or signing agreements with entities.f) Mossack Fonseca plays a crucial role in incorporating entities in tax havens. It had incorporated 14,658 active companies in Panama till August, 2013 out of which 4,646 companies were incorporated without providing any information about their shareholders.6. How entities incorporated in Panama provide secrecy about the beneficial owners?a) Panama offers the most favorable and most flexible company incorporation laws available in the world. Private Interest Foundations are also available, and are one of the most widely used estate planning structures in the world today.b) Panama is the registered domicile for over 400,000 corporations & foundations, making it one of the most popular jurisdictions in the world to incorporate.c) Panama does not impose any reporting requirements for non-resident Panamanian corporations.d) Panama does not allow "piercing the corporate veil".e) Panamanian corporations share certificates can be issued in Nominative or Bearer form (anonymous form of ownership), with or without par value.f) Panamanian Companies can have directors, officers and shareholders of any nationality and resident of any country.g) The offshore entity in Panama need not appoint natural persons as directors or have individuals as shareholders.h) Neither the directors nor the officers of Panamanian corporations need to be shareholders. Meetings of directors, officers, and shareholders may be held in any country and accounting books may be kept in any country.i) It is not necessary for the interested parties to be present in Panama for the purpose of establishing a corporation. Corporations conducting business outside of Panama do not require a commercial license for offshore business activities.j) Registered Panamanian Agents offers its own executives to serve as shareholders or directors. Sometimes an intermediary law firm or a bank acts as a director or a nominee shareholder. So the real beneficiary remains hidden.k) The registered agent provides an official overseas address, a mail box, etc., none of which traces back the entity to the beneficial owner.7. What are the key advantages of incorporating a Panamanian Company?a) The incorporation process is fast and can be achieved in 3 days.b) The identity of the shareholders is not publicly available.c) Nominee and bearer shares are allowed.d) There are no currency restrictions although the US dollar is regularly used.e) The transfer of shares can be done freely, which facilitates the transmission of assets in a confidential manner.f) The shareholders, directors and officers can be of any nationality and residents of any country.g) Meetings can be held in Panama or in any jurisdiction, subject to tax advice.h) Accounts do not need to be held in Panama.8. What are Panama foreign exchange rules?a) Panama's circulating currency is the US Dollar, and Panama has no currency exchange controls or currency restrictions, so funds can flow in and out of the country freely.b) Panama uses the U.S. dollar as its legal currency, instilling tremendous fiscal and monetary discipline while keeping inflation very low - under 2 percent for the last 40 years.c) Panama has no restrictions on monetary remittances abroad, including dividends, interests, branch profits and royalties. No restrictions on funds flowing in or out of the country.d) A dollar economy insulates Panama from global economic shocks. During the Asian monetary crisis of 1998, Panama became one of the healthiest economies in Latin America.9. How secure is banking infrastructure of Panama?a) Panama is one of the most secure offshore financial center - where privacy and confidentiality is vigorously protected by constitutional law.b) Panama offers the best bank secrecy and corporate book secrecy laws in the world.c) Panama has no provision for "piercing the corporate veil".d) Revealing banking information to third parties is a crime, punishable by prison.e) Panama has no mutual legal assistance treaties (MLAT's) for sharing of banking information with any other nation and does not recognize court rulings from other countries.f) Panama City is home to the second largest international banking center in the world next to Switzerland. Panama has the most modern and successful international banking center in Latin America, with more than 150 banks from 35 different countries.g) Approximately 150 international banks are located in Panama. Total assets in Panamanian banks are over US$150 billion.h) Some of the banks present in Panama's banking center are: Citibank, HSBC, Dresdner Bank, Bank of Tokyo, Bank of Boston, Banco Nacional de Paris, International Commercial Bank of China, Societe Generale, Banque Sudameris, BBVA, Banco Uno, Banco General, PriBanco, Banco del Istmo, Global Bank, MultiCredit Bank, PanaBank, ABN Amro, Banco Aliado, Banco Continental, BancoLat, BIPAN, Lloyds TLB Bank, Bank of Nova Scotia BIPAN, Bank of Nova Scotia, and much more.10. Why an offshore company is incorporated in Panama or other tax havens?a) Shell Companies are non-operational companies. These are legal entities having no independent operations, significant assets or employees.b) It is not time consuming or expensive to establish anonymous shell corporation. Agents charge fees of $800 to $6,000 as upfront cost and an annual charge for formation of companies and other additional services such as nominee director arrangement or annual documentation.c) The two big draws that offshore entities in jurisdictions such as British Virgin Islands, Bahamas, Seychelles or Panama offer are: secrecy of information relating to the ultimate beneficiary owner and zero tax on income generated.d) In fact, in Panama individuals can ask for bearer shares, where the owner's name is not mentioned anywhere. Besides, it costs little or nothing to set-up an entity abroad.e) The Registered Agent charges a few hundred dollars to incorporate an entity. It doesn't take much time to incorporate one either. Companies are available off-the-shelf and can be registered in a couple of days.11. What is the purpose of creating "Shell Companies"?Generally, Shell Companies are used to hide the real identity behind creators or buyers of assets. These are not established to pursue a legitimate business but to obscure the identity of beneficial owners.By utilizing an offshore company, it may be possible to secure a number of advantages. The motivations for individuals and corporations to utilize offshore planning and offshore companies include following:a) Have low tax in the country of residenceb) Anonymity of the shareholders or directors so as to shield private assets from third parties.c) The compliance reporting requirements for offshore companies are limited, as most offshore shell companies are not required to file annual reports and accounts in the jurisdiction of the company formation.d) Registering an offshore company requires minimal capital, usually less than what is required for an onshore registration. In certain jurisdictions there is, in fact, no capital needed for registration.e) Offshore companies are regularly utilized to own property and real estate. In addition to confidentiality, the benefits and advantages they offer include exemption from certain types of taxes.f) Offshore companies are very often used for share or foreign exchange transactions. The main reasons being the anonymous nature of the transaction (the account can be opened under a company name) and little or no tax levied on profits made.g) Capital gains arising from the disposal of particular investments can be made without taxation. In the case of dividend payments, lower withholding taxes can be achieved through the use of a company incorporated in a zero or low tax jurisdiction that has double tax agreements with the contracting state.h) Companies wishing to invest in countries where a double tax agreement does not exist between both countries can establish an intermediary company in a jurisdiction where there is a suitable treaty.i) Intellectual property including patents, trademarks and copyrights can be owned by, or assigned to an offshore company upon acquisition of the rights. The rights can then be franchised to companies around the world and the resultant income can be accumulated offshore.j) Individuals who provide professional services, such as consultants, entertainers, aviators, film executives, etc., can realize considerable savings by accumulating fees in offshore entities.k) Internet traders can use an offshore company to maintain a domain name and to manage internet sites.12. Is incorporating an overseas company allowed?RBI has permitted resident individuals to remit up to US$ 2, 50,000 abroad per year for any purpose under the Liberalised Remittance Scheme (LRS). Under LRS, Indian residents were permitted to acquire immovable properties or shares or any other asset outside India.In the year 2010, RBI clarified that the LRS scheme only allows residents to purchase shares outside India and it does not allow setting-up a company abroad. Thus, companies incorporated abroad during this period were considered as having violated FEMA.From 2013 onwards, RBI allowed a resident individual (single or in association with another resident individual or with an 'Indian Party') satisfying the prescribed criteria, to make overseas direct investment in the equity shares and compulsorily convertible preference shares of a Joint Venture (JV) or Wholly Owned Subsidiary (WOS) outside India.13. What is Liberalised Remittance Scheme?Under the Liberalised Remittance Scheme all resident individuals, including minors are allowed to freely remit up to USD 2,50,000 per financial year (April – March) for any permissible current or capital account transaction or a combination of both. If an individual remits any amount under LRS in a financial year, then the applicable limit for such individual would be reduced from USD 250,000 by the amount so remitted.Limit under LRS schemeYearLimit[2004] $25,000[2006] $ 25,000 to $50,000[2007] May $50,000 to $ 1,00,000[2007] September $100,000 to $ 2,00,000[2013] $ 2,00,000 to 75000[2013] $75000 to $125000[2015] $125000 to $ 2,50,000There are no restrictions on the frequency of remittances under LRS. However, the total amount of foreign exchange purchased from or remitted through all sources in India during a financial year should be within the cumulative limit of USD 2,50,000.Once a remittance is made for an amount up to USD 2,50,000 during the financial year, a resident individual would not be eligible to make any further remittance under this scheme, even if the proceeds of the investments have been brought back into the country.14. What are the prohibited items under the LRS Scheme?The remittance facility under the Scheme is not available for the following purposes:a) Remittance for any purpose specifically prohibited under Schedule I (i.e., purchase of lottery tickets, prohibited magazines, etc.) or any item restricted under Schedule II of FEM (Current Account Transactions) Rules, 2000.b) Remittance from India for margins or margin calls to overseas exchanges/overseas counterparty.c) Remittances for purchase of FCCBs issued by Indian companies in the overseas secondary market.d) Remittance for trading in foreign exchange abroad.e) Capital account remittances, directly or indirectly to countries identified by the Financial Action Task Force (FATF) as "non- cooperative countries and territories", from time to time.f) Remittances directly or indirectly to those individuals and entities identified as posing significant risk of committing acts of terrorism as advised separately by the Reserve Bank to the banks.15. Can a person resident in India hold assets outside India?a) A person resident in India is free to hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India.b) Further, a resident individual can also acquire property and other assets overseas under the Liberalised Remittance Scheme.16. Is it illegal to invest in foreign countries or acquire foreign assets?Rule 3 of the FEM (Acquisition and Transfer of Immovable Property outside India) Regulations, 2000 restricts acquisition or transfer of immovable property outside India without general or special permission of the Reserve Bank.17. In which circumstances a person is allowed to invest in foreign companies or acquire foreign assets?An individual person resident in India may acquire immovable property outside India or invest in companies outside India:a) by way of gift or inheritance from prescribed personsb) by way of purchase out of foreign exchange held in Resident Foreign Currency (RFC) account maintained in accordance with the FEM (Foreign Currency Accounts by a Person Resident in India) Regulations, 2000.A company incorporated in India having overseas offices may acquire immovable property outside India for its business and for residential purposes of its staff in accordance with the direction issued by the Reserve Bank of India from time-to-time.As per Sec. 186 of the Companies Act, 2013, a company can't make investment through more than two layers of investment companies. However, a company can acquire any other company incorporated in a country outside India if such other company has investment subsidiaries beyond two layers as per the laws of such country.18. What are offshore accounts?a) Offshore bank accounts are located outside a person's country of resident, usually in a 'tax haven' because of financial and legal advantages.b) Companies or trusts can be set-up in offshore locations for legitimate uses such as business finance, amalgamation or merger and tax planning.c) However, these accounts are being used to avoid tax. The secrecy they provide make them attractive to corporates and high-income earning individuals who wish to conceal the sources of their funds or to evade payment of taxes.19. Will regulators be interested in Panama Papers?a) Non-disclosure of an overseas assets by resident individuals or companies or other legal entities will be of interest to Indian authorities and regulators.b) Floating these companies could also violate following laws, individually or jointly:■ Foreign Exchange Management Act■ Prevention of Money Laundering Act■ Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act■ Prevention of Corruption Act■ Income-tax Act■ SEBI Act■ Companies Act20. How Panama Papers will be relevant under Anti-Black Money Act?a) With increased globalisation and economic liberalisation, there has been manifold increase in cross-border transactions. This has also resulted in increased opportunities for avoiding tax though use of tax havens. The main objective of the Anti-Black Money Act is to tax the undisclosed foreign income or asset of a person resident in India.b) The Anti-Black Money Act came into force with effect from 01-07-2015. This Act is applicable to all persons resident in India (not being 'not ordinarily resident'). This Act has been enacted to tax the foreign income and assets (including financial interest in any entity located outside India) of a resident individual which were not declared earlier to the tax authorities.c) If information leaked in the Panama Papers provides evidence that Indian residents did not declare their foreign income or foreign assets in their return of income or under Voluntary Disclosure Scheme, they shall be taxed at a flat rate of 30%. The penalty for such suppression of income or asset shall be equal to 3 times of the amount of tax payable thereon. Further, there shall be rigorous imprisonment from 3 years to 10 years for such tax evasion.21. What action can CBDT take on basis of these leaked documents against persons involved?If the persons named in the leaked documents have not disclosed their financial interest, income or assets in overseas entities, CBDT can take following action against them under Income-tax Act:a) A notice can be issued under Section 147 or Section 143(2).b) Survey under Section 133Ac) Search and seizure under Section 132d) Can call for information under Section 133e) Imprisonment of minimum 6 months which can be extended to 7 years with fine.f) Penalty of 100% to 300% of tax evaded.g) Transfer pricing provisions can be invoked in case of under-invoicing or over-invoicing, etc.22. When income or asset shall be deemed to be un-disclosed one?All ordinary residents filing return of income for the financial year 2011-2012 and subsequent years were required to disclose their foreign assets and income earned outside India, even though they were not liable to file their returns. If resident individuals have not disclosed the following information in their returns of income, it shall be deemed to be un-disclosed:a) Details of income earned outside Indiab) Details of Foreign bank accounts and peak balance of that account.c) Details of foreign interest in any entity with total investment in rupeesd) Details of immovable property with total investmente) Details of concerns in which the person have signing authorityf) Details of any other overseas assetg) Details of trust in which individual is a trustee23. Requirement to disclose the foreign assets to the RBI?Annual return on Foreign Liabilities and Assets ('FLA') has been notified under FEMA 1999. It is mandatory to submit the returns by all the Indian companies which have received FDI and/or made overseas investment. Non-filing of the returns before due date will be treated as a violation of FEMA and penalty may be invoked for such violation.Website: www.taxmann.comPS: FAQs are in context of Indian rules and regulations