‘Remove incentive to keep money in tax havens'

As India debates the black money issue, Washington-based think tank, Global Financial Integrity (GFI) has, in a recent report, estimated the value of illicit financial flows out of the country since Independence at $462 billion . Business Line caught up with the Director of GFI, Mr Raymond W. Baker, during his recent trip to India to find out why illegal wealth is going out of India and what the Government can do about it. Mr Baker says it will be difficult for India to retrieve the money, but adds that the ongoing outflow can be curtailed through greater transparency in the Indian and global financial systems.

Excerpts from the interview:

How is this money being taken out of India, and who are the people and the corporations involved?

The components of illicit money are corruption, including bribery and theft by Government officials; criminal activities such as drug trafficking; and commercial tax evasion.

Bulk of the black money is from commercial tax evasion by individuals and corporations. Ours is a macro economic analysis. We did not attempt to break it down between individuals and corporations that commit such crimes because we don't have such sensitive information.

Can you explain the report's finding that in the post-reform period of 1991-2008, deregulation and trade liberalisation accelerated the outflow of illicit money from India?

The fundamental misconception on outflow of illegal money is that people think it is about tax evasion or about escaping inflation or fear of confiscation. The major reason for the outflow is the need to get rich secretly.

That is why this money will flow into a Swiss Bank account that pays a very low rate of interest. Those involved are not trying to maximise returns.

They only don't want you to know that they took it out of the country illegally. They want the secrecy provided by tax havens such as Switzerland or Mauritius.

Some of that money comes back through Mauritius as Foreign Direct Investment into the Indian economy where it is earning big returns on real estate, etc. But don't forget that FDI tends to go abroad again in the form of dividends or repayment of loans.

Trade mispricing (under/over-invoicing of exports/imports) moves more money out of India than any other mechanism because only that gives near complete secrecy of transactions.

All it takes is two parties agreeing to misprice the transaction, say, by 30 per cent, and when the transaction is settled, that 30 per cent goes into a party's secret bank account. Nobody else would know about it.

Are you saying exporters and importers are indulging in illegal transactions?

Yes. There are two kinds of transactions. One is between related parties, which is mostly done by Indian or foreign multinational corporations. They have tax planning departments to figure out how to manipulate taxes and duties through the pricing mechanism of what they are selling back and forth through their different entities. I think this is also done frequently by unrelated parties in India.

Around 60 per cent of world trade is intra-company trade and this is the way MNCs do international business by manipulation.

What should the Government do to retrieve this illegal money?

I think it is very difficult to get the money back because there is no set international procedure to recoup the money. But the ongoing outflow can be curtailed through greater transparency in the Indian and global financial system.

The elements of transparency include knowing who you are dealing with; not permitting disguised entities to exist or to do business with India; requiring country-by-country reporting of sales, profits and taxes paid by MNCs.

We would also like to see India play a leading role in G20 to encourage greater transparency in the global financial system.

Is the proposal to declare illegally generated money as national asset, feasible?

But what happens after you declare it as national asset? The other country will shrug its shoulders and say ‘so what, what do you want us to do? Just bundle up all the Indian money and send it back to you? There is no law that tells us we have to do that.'

So, I don't see that as a viable solution. I think putting pressure on foreign countries to pay tax to India on the interest earned by Indian citizens on foreign deposits may be helpful.

Taxing at source would require India to take a bold position with major foreign countries.

India should watch what is going on. For instance, Switzerland, following recent bilateral negotiations, is expected to pay the UK the tax that should be payable on interest earned by UK citizens on deposits in Switzerland.

It is not returning the money to the UK and it is not identifying the bank account holders, but it is paying the tax equivalent on that amount to the UK. That is a step in the right direction as it will remove the incentive for people to keep money in tax havens.

What kind of an agreement would work with Mauritius, especially because it is the biggest source of FDI into India?

There should be pressure on Mauritius to identify who owns those accounts there. This is not difficult. If the Reserve Bank of India chooses, it can give a directive to commercial banks that they can receive investment money, not trade money, from Mauritius only if they are informed about the natural persons owning that account in Mauritius.

What if the names on which these accounts are opened are not the real faces behind the money?

That is right, you may be lied to sometimes. But when you find out that you have been lied to, you take further steps regarding the false declaration.

It would be a step in the right direction and I think Mauritius would cooperate. India should consider putting some pressure on Mauritius now that you are revisiting the Double Taxation Avoidance Agreement.

Mauritius would resist certainly, but India is a big country and can put pressure.

What is the progress on the fight against black money at the global level?

It is moving forward. The issue is now being addressed by the OECD, the US, the EU and G20 and so on.

The financial crisis helped put this problem on the global map. As long as this whole phenomenon of moving money from the poor to the richer countries was happening, the rich nations were happy with it.

It is only when people began to move money from rich countries into tax havens that they became serious about it.

I hope we don't need another recession or financial crisis to solve this problem.

But if that is the only way to get this issue addressed, then so be it.

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