An article by Sugata Ghosh ET Mar 14, 2017, 06.31 AM IST
MUMBAI: Many Indians are making a last-ditch
attempt to hide their undeclared wealth stashed abroad, with Dubai — often the
last resort for many — no longer remaining as friendly a tax haven as it once
was.
They hope to mask their wealth behind financial
structures and special arrangements with professional service providers before
January 2018 when the United Arab Emirates (UAE) begins to share information
with India on bank accounts.
As
banks in the UAE turn more demanding, many rich Indians who have not come clean
on their secret foreign bank accounts, are using 'insurance wrappers' and the
time-tested services of nominee directors to escape tax, penalty, and possible
prosecution.
For
opening accounts of companies, banks in Dubai are insisting on tax ID of the
home country, copies of passport, and, occasionally, the presence of Indian
shareholders of these entities. Banks, according to an expert in foreign
currency regulations, are taking more than a month to open accounts compared to
3-4 days before.
The
modus operandi to park undisclosed funds entails buying shares of existing
shell companies by using the RBI sanctioned liberalised remittance route —
which allows a resident individual to invest up to $2,50,000 a year in
properties and securities abroad — and later using the company’s bank account
to hold un taxed money.
According to three senior finance professionals
ET spoke to, more and more nominee directors are being used to camouflage the
true ownership of such companies.
“You buy a company
remitting say $1,00,000. Later, you transfer funds lying in other destination
like Switzerland and Jersey to the bank account of a Dubai company.
Now, if you are holding 90% shares in such a
company, it may be more difficult for you to wriggle out when questioned by the
Indian IT department, which collects information from the UAE authorities. But
if you are holding just 10% shares of the company and do not occupy any board
seat, you can claim that the funds are business income and belongs to the
company and not you. Here, nominee directors hold shares on behalf of you
against a nominee shareholding agreement, which may not be disclosed to banks,”
said one of them.
The other possible structure that is being tried
out are insurance wrappers — life insurance policies similar to trusts but that
can be formed and dismantled easily. “The arrangement is simple. The nominee or
the 'technical owner' invests in insurance wrappers and the ultimate real owner
is the beneficiary. The beneficiary then receives the amounts after a certain
time period, say five years, as endowment; or, the family gets the benefit in
the event of death or if they find themselves in unforeseen circumstances,”
said another person.
“Traditionally, Dubai
has been used by Indians and NRIs to park their unaccounted money through
different structures. But, now, banks are more agile and enquiring about the
ultimate beneficial owners. This is possibly forcing many to think of
innovative structures,” said senior chartered accountant Dilip Lakhani.
Since early 2016, banks are looking into remittances to and
from entities in the UAE Free Trade Zone, while the UAE central bank is
questioning so-called pass through transactions. Banks and regulatory
authorities are being extra vigilant when they come across Indian names.
According to Mitil Chokshi, senior partner at
Chokshi and Chokshi, and a cross-border business advisor, “Common reporting
standards, or CRS, will have different deadlines of participating countries
from Sept 2017to Sept 2018… one will see modifications in bank application forms,
several procedures are being changed even in countries like Mauritius where
they require tax ID of Indians, Chinese, etc. An individual is becoming one
transparent entity whose data and information is linked to home country tax ID.
This will enhance reporting and compliance. The credit goes to the US as the
CRS follows the FATCA.”
But, Chokshi and others interviewed by ET
believe that while clever structures can help buy time, it will not hold back
IT and ED from questioning transactions and the source of funds.
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