Graft and slush funds

Mohan R. Lavi | Updated on June 24, 2011


The OECD standard does not permit ‘fishing expeditions' seeking information on the basis of conjectures, guess-work and false trails.

During the fasts of both Anna Hazare and Baba Ramdev, the focus of certain sections seemed to be more on the personalities fasting and their backgrounds/lifestyles than on the purpose — a Bill to tackle corruption and a call to import untaxed funds held abroad. Just like the sequence of the fasts, it appears that high-end corruption generates the slush funds which are then parked abroad.

With the Right to Information Act, all-encompassing tax deduction at source norms and furtive whistle-blowers, it would be almost impossible to bank slush funds in India. Hoarding large amounts of cash is passe. I

f high-end corruption is minimised, slush funds are minimized. Instead of asking for funds parked abroad to be brought into India, an alternative solution could be to minimise the funds being sent abroad.

The proposed lifting of the banking secrecy laws would be prospective and hence one would probably never get to know details of past transactions.

Qualified Intermediary

The Internal Revenue Service (IRS) United States had a brush with a Swiss Bank a couple of years back. The IRS has a concept called Qualified Intermediary (QI). Any foreign intermediary can enter into a QI agreement with the IRS.

The QI assumes primary withholding responsibility or primary reporting through a Form and backup withholding responsibility for a payment.

In case withholding taxes were not deducted, data had to be maintained in specified forms for US and non-US tax-payers.

The Swiss Bank used to solicit clients in the US and since withholding taxes were not deducted, they filed the forms for US tax-payers stating that they were non-US.

The bank reached a settlement with the US government in which it admitted having enabled clients to evade taxes, agreed to pay $780m in fines and turn over client names to the US.

The Organisation for Economic Cooperation and Development (OECD) has been attempting to make exchange of information amongst tax jurisdictions legal.

Multilateral framework

The Global Forum on Transparency and Exchange of Information for Tax Purposes is the multilateral framework within which work in the area of tax transparency and exchange of information is carried out by over 100 jurisdictions which participate in the work of the Global Forum on an equal footing. The standards provide for international exchange on request of foreseeably relevant information for the administration or enforcement of the domestic tax laws of a requesting party. All relevant information must be provided, including bank information and information held by fiduciaries, regardless of the existence of a domestic tax interest or the application of a dual criminality standard.

The OECD states that Switzerland's approach to exchange of information for tax purposes has changed significantly over the past two years. It has made rapid progress to implement its commitment to the internationally agreed standard.

However, the report notes that in a few areas it still falls short of the standard:  bearer savings books are to be phased out but still exist. In addition, only a limited number of Switzerland's exchange of information agreements meets the standard.

The Isle of Man — a marquee tax haven — has agreed to exchange information. The OECD standard is unequivocal in stating that “fishing expeditions” would not be permitted. Fishing expeditions are efforts to seek information on the basis of conjectures, guess-work and false trails. Singapore has stated that it would not encourage and provide data only when the request for information is specific, detailed and relevant to the tax affairs of the tax payer in question.

Bribes and taxes

In 2009, the OECD issued a Bribery Awareness Handbook for tax examiners which serves as a dossier on the various forms of bribes and how they could escape the eye of the taxman. The Handbook states that a number of methods of concealment may be used to conceal bribes-transactions not in the usual course of business, transactions surrounded by secrecy, false entries in books of transferor or transferee, use of secret bank accounts for income, deposits into bank accounts under nominee names and conduct of business transactions in false names.

Most of these strategies are known to tax sleuths and can be unravelled during a follow-up based on information received. Obtaining reliable information is the hurdle which the OECD is attempting to cross.

(The author is a Bangalore-based chartered accountant.)

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Published on June 18, 2011

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