The operationalisation of the Automatic Exchange of Information (AEI) between India
may potentially be a boon for all Indian account holders in various Swiss banks. The implementation of this agreement is fraught with loopholes that allow Indian account holders to move to other tax havens across the world before the Indian government even begins to get their information.
The agreement between India
will only involve sharing of information about bank account holders from 2018 onwards. This leaves Indian Swiss bank
account holders with almost a year to relocate money to other tax havens to avoid their information being shared with the Indian government. India
is to start getting the information only in 2019.
Also, this effectively means the Indian government will get an unreal picture of undeclared wealth siphoned off by wealthy Indians in Switzerland.
For instance, if a person has $200 million stashed in her Swiss bank
account as of date, she could reduce the balance in the account to just $1 before 2018 by moving the deposit to, say, Cayman Islands or Panama. So, although she had $200 million worth of undeclared wealth in her account, the Swiss would tell the Indians she has $1 in her account.
The agreement doesn’t obligate the Swiss government to disclose to New Delhi any transactions before 2018. This agreement, therefore, has provided a window for Indian Swiss bank
account holders to relocate elsewhere, without their actual information being accessed by the Indian government.
This could be problematic for a few reasons. The loophole undermines the very nature of the Automatic Exchange of Information (AEI) route. This AEI is a child of two-decade-long deliberations among the member-nations of the Organisation of Economic Cooperation and Development (OECD) to improve tax transparency by evolving standard reporting procedures. Across the world, 101 nations, including India, have committed to it. According to OECD guidelines, banks in all 101 countries will identify individuals of other nations and forward their details to their domestic tax authorities. This information will then be shared annually with other nations that are part of the process.
Information that will be shared automatically from others include the account number of an individual, account balance details, income received in the account and all identity-related information of the account holder. Identity information includes the name, address and tax identification number (known as Personal Account Number, or PAN, in India).
Nations that are part of this arrangement are grouped in two categories – Wave 1 and Wave 2 nations. Wave 1 nations are those that will start exchanging information by 2017, while Wave 2 nations will start exchanging information by 2018. This is where the India-Switzerland
AEI agreement is not as effective as it looks. While India
is a Wave 1 country, Switzerland
is a Wave 2 country.
The loophole gets bigger when one looks at other Wave 2 nations, which are required to exchange account information pertaining to 2018 and subsequent years. These include nations like Panama, Bahamas, Costa Rica, Monaco, Saint Kitts and Nevis, Mauritius, Singapore and Hong Kong, among others. Some of these nations are known to be tax havens, where the rich often flock with undeclared wealth parked in companies with labyrinthine holding structures.
has an AEI with Switzerland, it is yet to have one with some of the other nations. A finance ministry official confirmed that India
would have to sign bilateral agreements with each nation for automatically getting this information. India
has an AEI with nations like Cyprus and Mauritius. The official confirmed that another AEI with Singapore is in the pipeline. Additionally, India
has also signed to collaborate in the Foreign Account Tax Compliance Act (FATCA) with the US. This allows both countries to share bank account and tax information about each other’s citizens residing in either country.
would have to sign a bilateral agreement with each country committed to OECD’s programme, to ensure availability of information about foreign bank holders. By the time Switzerland
starts sharing information with India, many account holders would have moved their money elsewhere.
For instance, if a person moves her money to Panama before 2018, India
would have to wait till it has an agreement with Panama to get her information for any chance of taxing her money. By the time India
formalises a pact with Panama, she might relocate the money to Marshall Islands, with which India
doesn’t have an agreement.
While this means good business for wealth managers across the world, it could literally send Indian authorities on a wild goose chase across the world. Even then, they would stand a remote chance of ever getting details of those with money stashed in tax havens.
A list of around 1,200 Indians with HSBC Swiss accounts reported by the International Consortium of Investigative Journalists (ICIJ) in 2015 showed that over $20 billion was parked in these accounts. The recent Panama leaks, with some prominent names on the list, further reinforced the fact that many more Indians might have parked undeclared wealth abroad to escape taxes.
agreement has given all offshore account holders an advance warning about things to come with adequate time to prepare an escape plan.
“I see this as a stock and flow problem. With a surprise demonetisation move, the government has managed to stem the stock of black money
domestically to a large extent. But now the government won’t be able to tackle the flow of black money
abroad or bring some of it back because people have all the time in the world to keep moving their money to other tax havens” said Lekha Chakrabarty of the Indian Institute of Finance and Public Policy.