The Panama Papers Explained

The Panama Papers leak is making headlines everywhere.  It is the biggest leak in the history of the world and the size and the quantum of data revealed is even greater than what was revealed by Wikileaks. This post explains what it is all about in a series of Q&As

What are Panama Papers?

Panama papers are the over 11 million documents leaked from Mossack Fonseca’s (a law firm based in Panama) offices . These documents reveal the names of many rich people around the globe who took assistance from the firm Mossack Fonseca to incorporate shell companies in offshore tax havens.

Many current and former world leaders found mention in the list. Some of the names are Hosni Mubarak, Muammar Gaddafi, Xi Jing Ping etc.  There are over 500 Indian names in the list including that of the veteran actor Amitabh Bachchan.

Who leaked the papers?

The papers  were leaked to a German-based Newspaper named Sueddeutsche Zeitung. They shared them with the international consortium of investigative journalists of which Indian express is a member.

What is the rationale behind the incorporation of shell companies?

Shell companies are companies which do not have any significant assets or operations. They exist on paper only. They just serve as a conduit for other business transactions.

Incorporating shell companies can help in evading taxes and launder money. This is because shell companies provide anonymity and its ultimate ownership is difficult to trace.

It has to be noted that shell companies are not illegal in itself but they can be used for illegitimate business purposes.

These companies are set up in offshore tax havens like Panama, Bahamas, Seychelles, British Virgin Islands etc. This is because tax havens have low or zero taxes on income generated and also provide banking secrecy.

What is the role of Mossack Fonseca in the leaks?

The documents leaked were from the offices of the firm Mossack Fonseca.

Mossack Fonseca is specialised in setting up offshore shell companies in tax havens around the world. The firm also offered services like providing its own executives to serve as directors or shareholders, holding board meetings of the company etc.  An overseas address is provided to the company which cannot be traced to the beneficial owner.

What is the legal position of offshore companies in India?

Before 2004, Indians could not incorporate companies outside India because remittances to foreign countries were not allowed.

In 2004, RBI introduced a scheme called Liberalised remittances scheme (LRS) which permitted individuals to remit up to $25000 per year outside India. It was increased to $250000 in phases. The remittances could be for various purposes like medical, gifting, buying shares etc.  But, RBI did not allow individuals to specifically  set up a company.

There was a lot of confusion amongst the people. So, RBI came up with a notification in the year 2010 that though LRS allows for buying shares, it specifically prohibits setting up of companies abroad by individuals.

But, chartered accountants took a technical view of this notice. That, though an individual cannot incorporate a new company, it can acquire/ take over an existing company. It meant that a company incorporated by Mossack Fonseca can be bought from them off the shelf.

RBI came up with another notice in 2013, in which it allowed resident Indians to invest directly in Joint ventures and through the Overseas Direct Investment (ODI) route. So, setting up a company overseas by Indian can be considered legal only if it was done after the year 2013.

[The above explanation of the Indian legal position has been taken from this video by Indian express: What do the Papers reveal? You can watch it for more clarity]