White-Collar Black-Money Secrets – How the Tax Havens are used by The HNIs & Corporates  to hide Wealth & Income – Part 1

The last trip undertaken by Karti Chidambaram (as per the court submissions) was September 20-30^th. If you look back over the past few years, this “entrepreneur” has been regularly making visits to England and other countries; sometimes tweeting out pictures of the airstrip he is landing at, challenging Twitterati to identify the place. On top of that the boast that countries have no barriers for High Net-worth Individuals (HNI) like him! So what exactly does he do, when he is abroad? Here is a plausible explanation. But before we jump headlong, we need to understand how the laws of various countries work.

Thanks to globalization, the money stays in countries that give it the maximum leverage – and these happen to be Tax Havens, mostly British colonies such as Cayman Islands, Bermuda, British Virgin Islands and others such as Mauritius, Cyprus[1]. All these British colonies accept British jurisdiction so London provides a one-stop shop for HNIs. In London, an HNI can slice and dice, move titles around, create/ close shell companies, create layers of obfuscation and satisfied that new opaque walls are created, return to their country.

What are the goals of HNIs/MNCs

1. Evade taxes
2. Read Rule #1!
3. To accomplish 1 above gets laws with loopholes enacted in their country
4. If #3 is not enough, bend the spirit (but not the letter) of the laws…

How Does This Harm India?

India’s tax base is not widespread, like in the United States or the West. Farmers don’t pay taxes, nor do Corporates, who use every trick in the book to avoid paying taxes – this goes by the euphemism “Tax Planning” (but really is tax evasion). This leaves the salaried middle class, for whom the tax gets deducted at source. Add to this the raging disparity between the rich and the middle class. When the rich (HNI/ Corporates) do not pay their fair share of taxes, it leads to dramatically lower tax collections, results in lack of funds for the government to spend on must-have projects (e. g. water, health, education, infrastructure etc.) and adversely impact India’s development. Remember that Tax is not some charity that citizens do; it is the cost of civilization. Hence tax evasion is not just a ‘civil wrong’ but a heinous crime.

Tax evasion And Money laundering Go Hand in Hand?

The type of tax evasion that we will expose in this series involves amounts which are several orders of magnitude bigger than that was targeted by demonetization (cash-based domestic tax evasion). This is achieved through complex offshore structures, and there is a well-organized industry of highly paid accountants, lawyers, and bankers who enable that. These structures are usually in jurisdictions that provide secrecy in addition to low or zero taxes. These structures not only enable hiding of income and wealth but also their source and owners. Thus these structures not only help in evade taxes but also launder money. After all, a lot of the wealth of the HNIs which is the subject of this series has illegitimate antecedents such as kickbacks, proceeds of crime and falsified sales.

Think of taxation as a game that HNIs/ Corporates (H-C) and the Government play. Government (like Tom Cat in the Tom and Jerry comics) is always just missing to catch Jerry Mouse. Over the years, the government has been plugging loopholes that are exploited to evade taxes, which has now forced H-Cs to resort to methods other than the normal banking channels to salt their money away. Enter the Hawala operator, who can take an HNI’s Rupees and give an equivalent Dollar amount (after commissions) in a country like Dubai where few, if any questions are asked on the source of income. The Hawala route is pretty well known in India – at least most of us have heard the term and believe it to be nefarious. So are the Swiss bank accounts (which are popular is the folklore but have been on the decline in the last few years). In this series, we will cover far more sophisticated mechanisms which are commodities in the offshore tax evasion industry but still are esoteric for the masses (the taxpayers). We hope to demystify this white-collar black-money through some real examples.

Profit Shifting – Over-invoicing and Under-invoicing

Take the instance when India decided to import Coal from Indonesia. Even though the ships directly land in India from Indonesia, the bills were routed through ’artificial’ and benami firms(shell companies) in Singapore, Hong Kong and Dubai before landing in India. Using the benami shell companies, mostly secretly owned by the importing Indian Corporates, a killing was made by selling coal at inflated prices, which ultimately ends up with common man by paying extra cost to the electricity consumed.

Similarly it is alleged that even today, there is under-invoicing being done for refined oil exports from India. Let us do a back-of-the-envelope calculation of Refined Petrol price per liter. One barrel of crude yields about 21 gallons (80 liters of petrol). The breakdown from crude to finished products is shown below[3] in Figure 2.

Assuming Crude oil costs $70 per barrel (there are 44 gallons in it) one can expect 21 gallons of petrol or 21*3.78 = 80 liters of petrol. At an exchange rate of Rs.73 to a dollar, this works out to 70 * 73 / 80 = Rs.63 per liter. Add refining cost (we are trying to arrive at the bare bones export price for a liter of petroleum here) of say Rs.1 per liter, the cost should be Rs.64. But according to Congress, in their Press Conference[4] on the day BJP announced a cut of Rs.2.5 per liter at the Center (some states matched it), some refiners were exporting petrol at Rs.34 per liter. Exported items do not pay GST so there is a fortune of Rs.30 per liter to be made by under-invoicing the petrol price!

Continued…

References:

[1] Money in Tax Havens – You can run but your cannot hide! Nov 29, 2015, PGurus.com

[2] Why Petrol at the pump should be costing a lot less – Oct 7, 2018, PGurus.com

[3] How much does it cost to refine a barrel of crude oil? Quora.com

[4] AICC Press Briefing By Randeep Singh Surjewala at Congress HQ on Fuel Price Cut – Oct 4, 2018, YouTube