The Income Tax (IT) department has issued an internal circular explaining the shareholding structure of companies set up by Indians in the British Virgin Islands (BVI) and the process for obtaining information of such companies under the tax information exchange agreement (TIEA) with the BVI.
The department anticipates an increase in requests by its officers in connection with the probe into The Panama Papers, published by The Indian Express after an eight-month investigation in collaboration with the International Consortium of Investigative Journalists (ICIJ).
The May 12 circular of the IT department directs its officers to avoid “vague questions” about BVI companies as the TIEA between India and the BVI does not allow “fishing expeditions”. The circular also directs principal commissioners to review all cases by May 31 where requests have been made to BVI authorities.
This move by the tax department comes after it found “several deficiencies” in the exchange of information (EOI) request placed by its field officers with the BVI.
“It has been observed that a large numbers of questions which are vague and not foreseeably relevant are being asked in our EOI requests. Even in some cases, there are more than 40 questions in the EOI request. Field authorities are advised that a more focused approach may be considered while formulating an EOI request. Further, request for voluminous information should be avoided as it may become counterproductive,” the circular states.
Explaining the shareholding of BVI companies, the circular states that tax officers should request details of beneficial ownership of BVI companies under TIEA as most firms keep shares registered in the name of the nominee and not in the name of the actual owner for maintaining confidentiality.
“For example, Indian resident X having a company ABC in the BVI can make person Y and Z as the shareholders of the company ABC. Person Y and Z can either be individual or corporate entity. There are few companies who provide these types of shareholders services. Some subsidiary companies of Portcullis TrustNet (BVI) Limited which provide shareholding and directorship services are Execorp Limited, Shrecorp Limited etc. In such cases, there may be an agreement/correspondence between actual owner/beneficial owner and nominee shareholders. Therefore, while making an EOI request, it may be essential to seek information about beneficial ownerships with underlying documents,” the circular states.
More than 11 million documents from the secret files of Panamanian law firm Mossack Fonseca have revealed a list of individuals who paid the firm to set up offshore entities in tax havens around the world.
Over 500 Indians figure on the firm’s list of offshore companies, foundations and trusts. The Indian Express investigation has shown there are also 234 Indian passports (handed over by clients as part of the incorporation process).
“In view of the widespread investigation initiated pursuant to Panama Papers, these guidelines will surely help the field officer understand the structuring of BVI companies, ask the right questions and thereby making the EoI request more efficient and effective,” Rakesh Nangia, Managing Partner of chartered accountancy firm Nangia & Co, said.
After The Indian Express published the list of names, the IT department sent queries to several individuals as a part of its investigation.
Along with the standard queries sent nationwide, the tax authority sent a set of specific questions, seeking details of declarations and permissions (obtained to float offshore firms). In some cases, the tax department conducted surveys of businesses of certain individuals who had incorporated offshore companies through Mossack Fonseca.