Context: The latest leak of offshore financial records has shown that the elites are finding ingenious new ways to ring-fence (protect) their assets from scrutiny at home.

• It is reshaping the secrecy industry in international finance after regulators worldwide have begun cracking down on global money flows.

Pandora Papers

• Pandora papers are 11.9 million leaked files from 14 global corporate services firms.
• These firms set up about 29,000 off-the-shelf companies and private trusts for worldwide clients base in both 
• Obscure tax jurisdictions (also known as tax havens) such as Samoa, Belize, Panama, and the British Virgin Islands and
• Countries that offer relative tax advantages such as Singapore, New Zealand, and the United States.
• Pandora Documents hint at the ultimate ownership of assets ‘settled’ (or placed) in private offshore trusts and the investments held by the offshore entities.

Indians included in these

• There are at least 380 persons of Indian nationality in the Pandora Papers.
• There are almost 60 prominent individuals and companies including the most decorated cricketer of India.

Pandora’s Box

• It is an artefact in Greek mythology connected with the myth of Pandora in Hesiod's Works and Days.

It represents two things

• the evils of the world and 
• temptations that we can't resist because of curiosity.

The present-day usage of the phrase means ‘a process that once begun generates many complicated problems.
Revelation by the Pandora Papers
The Pandora Papers reveal how the rich, the famous and the notorious set up complex multi-layered trust structures for estate planning in jurisdictions that offer

• loosely regulated tax structure and
• air-tight secrecy laws.

The purposes for which trusts are set up are many, and some are genuine too.

• But a scrutiny of the papers also shows how the objective of many is two-fold: 
• To hide their real identities and distance themselves from the offshore entities. 
• This ensures that the tax authorities can not reach them.
• To safeguard investments like cash, shareholdings, real estate, art, aircraft, and yachts, from creditors and law enforcers.

How is Pandora different from Panama Papers and Paradise Papers?

• Panama and Paradise Papers dealt largely with offshore entities set up by individuals and corporates respectively.
• Pandora Papers investigation shows how businesses have created a new normal after countries were forced to tighten laws on offshore entities with rising concerns of money laundering, terrorism funding, and tax evasion.
• Pandora Papers reveal how trusts are set up, together with offshore companies for the sole purpose of holding investments.

What is a Trust?

• A trust can be described as an arrangement where a third party (or trustee) holds assets on behalf of individuals or organisations that are to benefit from it.
• It is generally used for estate planning purposes and succession planning. It helps large business families to consolidate their assets — financial investments, shareholding, and real estate property.

A trust comprises three key parties

1. Settlor — one who sets up, creates, or authors a trust
2. Trustee — one who holds the assets for the benefit of a set of people named by the ‘settlor’
3. Beneficiaries — to whom the benefits of assets are passed on.

Laws relating Trusts in India

• The Indian Trusts Act, 1882, gives legal basis to the concept of trusts.
• While Indian laws do not see trusts as a legal person/ entity, they recognise trust as an obligation of trustee to manage and use assets settled in the trust for the benefit of beneficiaries.
• India also recognises offshore trusts i.e., trusts set up in other tax jurisdictions.
• There are legitimate reasons for setting up trusts — and many set them up for genuine estate planning.
• A businessperson can set conditions for ‘beneficiaries’ to draw income being distributed by the trustee or inherit assets after her/ his demise.
• But trusts are also used as secret vehicles to park illegal money, hide incomes to evade taxes, protect wealth from law enforcers, insulate it from creditors to whom huge moneys are due, and for criminal activities.

Why are overseas trusts set up?

• Overseas trusts offer remarkable secrecy because of stringent privacy laws in the jurisdiction they operate in.

Can offshore Trusts be seen as resident Indian for tax purposes?

• After the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, resident Indians — if they are ‘settlors’, ‘trustees’, or ‘beneficiaries’ — have to report their foreign financial interests and assets.
• NRIs are not required to do so — even though, the Income Tax Department has been sending notices to NRIs in certain cases.
• The I-T Department may consider an offshore trust to be a resident of India for taxation purposes if the trustee is an Indian resident.
• In cases where the trustee is an offshore entity or an NRI, if the tax department establishes the trustee is taking instructions from a resident Indian, then too the trust may be considered a resident of India for taxation purposes.

Reasons why trusts are set up
i) Maintain a degree of separation

• Businesspersons set up private offshore trusts to project a degree of separation from their personal assets.
• A ‘settlor’ (one who sets up/ creates/ authors) of a trust no longer owns the assets he places or ‘settles’ in the trust. Hence, he insulates these assets from creditors.

ii) Hunt for enhanced secrecy

• Offshore trusts offer enhanced secrecy to businesspersons, given their complex structures.
• Income-Tax Department in India can get the information only by requesting information with the financial investigation agency or international tax authority in offshore jurisdictions, which can take months.

iii) Avoid tax in the guise of planning

• Businesspersons avoid their NRI children being taxed on income from their assets by transferring all the assets to a trust.
• The ownership of the assets rests with the trust, and the son/ daughter being only a ‘beneficiary’ is not liable to any tax on income from the trust.

iv) Prepare for estate duty

• It is feared that the estate duty, which was abolished in 1985 will likely be re-introduced soon.
• Setting up trusts in advance, business families have been advised, will protect the next generation from paying the death/ inheritance tax, which was as high as 85% then.
• India does not have a wealth tax now, most developed countries including the US, UK, France, Canada, and Japan have such an inheritance tax.

v) Flexibility in a capital-controlled economy

• India is a capital-controlled economy. Individuals can invest only $250,000 a year under the Reserve Bank of India’s Liberalised Remittance Scheme (LRS).
• To get over this, businesspersons become NRIs, and under FEMA, NRIs can remit $1 million a year in addition to their current annual income, outside India.
• Further, tax rates in overseas jurisdictions are much lower than the 30% personal I-T rate in India plus surcharges.