EXAMINING THE RELATIONSHIP BETWEEN MONEY LAUNDERING, TAX EVASION AND TAX HAVENS: A CRITICAL ANALYSIS (By- Nikita Johri)
EXAMINING THE RELATIONSHIP
BETWEEN MONEY LAUNDERING, TAX EVASION AND TAX HAVENS: A CRITICAL ANALYSIS
Authored By- Nikita
Johri
5th year, Law student at
University of
Petroleum and Energy Studies,
Dehradun
INDEX
I.
ABSTRACT
II.
INTRODUCTION
III.
MONEY LAUNDERING- THE DARK SIDE
IV.
TAXEVASION-A COMPLICATED PROBLEM
V.
TAX HAVENS- A NATIONAL THREAT
VI.
SUGGESTIONS
VII.
CONCLUSION
VIII.
REFERENCES
I.
Abstract
Criminal organisations undermine the
rule of law and equality before the law by engaging in tax avoidance, tax
evasion, and money laundering by multinational corporations and rich
individuals. Furthermore, it magnifies social inequities and puts public services
at risk. If everyone fails to comply with their tax duties, it is an attack on
core concepts of equality, tax justice, democracy, and the rule of law. So, in
this paper I’ll be discussing the basic concepts of what amounts to as money
laundering, tax evasion and tax havens and how they are somehow
inter-connected. Also, some of the landmark cases, to have a better idea of the
problem standing before us in the corporate world. As a final point, I plan to
draw out a deduction made out of the former analysis.
II.
Introduction
Money laundering is a very complexly
vast topic, which requires a flexible and analyticalpolitical response to it.
The present paper will only deal with the relationship between moneylaundering,
tax evasion and tax havens.This is done with the tacitunderstanding that a
narrow approach to anti-money laundering can only result in a concentration of
criminal activities to those means that remain inadequately regulated. In other
words the channelsfor money laundering function as communicating vessels where
money can flow from one area toall the rest and as such only a holistic
approach to anti-money laundering can be effective.
Money laundering is a criminal
offence aimed at presenting wealth of illicit origin or the portion of wealth
that has been illegally acquired or concealed from the purview of tax and other
authorities, as legitimate, through the use of methods that obscure the
identity of the ultimate beneficiary and the source of the ill-gotten profits.[1]It
is a criminal offence whose consequences are usually detrimental to a polity's
functioning and harmful to the socioeconomic fabric, both at domestically and
overseas. Laundering money can take place in a variety of ways, including the
shrewd exploitation of a complex, interweaving web of secrecy jurisdictions
and/or tax havens, the manipulation of the concept of legal persons and legal
arrangements to concoct 'shell companies'[2]
that can act as covers for corrupt individuals, the abuse of loopholes in
existing anti-money laundering legislation, the weak implementation of these
rules, and the corruption of officials; in developed economies, this is mixed
with the profiteering culture of several established financial institutions and
market insiders. Regardless of where the money came from, whether it was
obtained through illegal activity or a criminal offence, the conduits for money
laundering are virtually the same.
III.
Money Laundering – The Dark Side
Money laundering is the illicit
technique of making significant sums of money obtained through criminal
activities, such as drug trafficking or terrorist financing, appear to have
originated from a legitimate source. The proceeds of illicit activities are
deemed "dirty," thus the process "launders" them to make
them appear clean.[3]Money
laundering is a significant financial crime committed by both white-collar and
criminals on the street.To detect and prevent money laundering, most financial
institutions have anti-money laundering (AML)[4]
policies in place.
Anti-money laundering (AML) aims to
deprive criminals of the revenues generated by their unlawful businesses,
removing the primary incentive for them to engage in such criminal activity.
Drug trafficking, people smuggling, terrorism funding, smuggling, extortion,
and fraud are all illegal and dangerous activities that put millions of people
in peril around the world and cost society a lot of money. Money laundering
legitimises the proceeds of such activities, so combating money laundering may
result in a reduction in criminal activity and thus a significant benefit to
society.
Money laundering usually consists of
three steps: placement, layering, and integration.[5]
o
The "dirty money" is secretly injected into the legitimate
financial system through placement-
The bank account is usually opened in the name of a
corporation that has been set up specifically for the aim of laundering money,
with the help (either willingly or subconsciously) of experts such as lawyers.
These corporations or businesses are referred to as "fronts" because
their respectable look hides the criminal operations that generate the
proceeds.
A series of individuals then make little cash deposits into
the bank account on a regular basis. The sums are always small enough to go
below the bank's declared criteria, ensuring that no additional due diligence
checks are performed. When the money is withdrawn or used to buy other assets,
it loses some of its criminal roots because it is now in a legitimate
corporation.
o
Through a sequence of transactions and bookkeeping procedures, layering
conceals the source of the money-
The second stage of the money laundering process is
"layering." The funds are transformed or shifted away from the
original source by purchasing genuine assets such as real estate. The asset is
then sold to a reputable third party who is typically unaware of the situation.
This stage is frequently repeated, with the proceeds appearing slightly more
legitimate than they really are each time.
o
The now-laundered money is removed from the real account in the final
phase, integration, and used for whatever reasons the crooks have in mind-
Some say that integration, the final stage of the money
laundering process, was the only stage of Meyer Lansky's operations that he
failed to complete. The proceeds are injected into a genuine economy at this
point. The most prevalent scenario is where the proceeds are invested in a
legal business with a high cash-based sales volume (ie, a casino). As a result,
the proceeds are eventually cleansed, and they are said to shed all traces of their
criminal origins. The original action can eventually yield a profit.
Note that this template may differ in
real-life scenarios. Money laundering may or may not involve all three
processes, or some of them may be merged or repeated multiple times.
However, some argue that no matter
how many times the three-stage method is used, "dirty" money, or
money related with illicit acts, can never lose its criminal origins. The
reason for this is that proceeds do not vanish. They simply alter their look
and form, making it more difficult to track them down. In the end, money earned
by criminal behaviour has more restrictions than "clean" money. It
can only be invested in or spent on activities that are less visible and
profitable. There's always a chance that the proceeds will bring investigators
back to the source of the crime and/or the perpetrator (s).[6]
Cryptocurrencies
In Money Laundering-
Convertible virtual currencies
(CVCs)—another word for cryptocurrencies—have risen to become the money of
choice in a wide range of online illegal operations, according to the US
Financial Crimes Enforcement Network (FinCEN) in a June 2021 report.[7]
CVCs are increasingly being used to
layer transactions and obscure the origin of money earned from criminal
activities, in addition to being the favoured method of payment for buying
ransomware tools and services, online exploitative content, drugs, and other
illegal commodities online. Criminals use a variety of money-laundering
strategies involving cryptocurrencies, including "mixers" and
"tumblers," which disrupt the link between a sending address (or
crypto "wallet") and a receiving address.
Indian
scenario of money laundering-
Certain wise banking practises exist
in India, which help to prevent the spread of money laundering activities in
the country. The following are some of these practises.
o
Identification
of prospective clients is carried out prior to the opening of a bank account by
obtaining proper introduction. This procedure partly addresses the requirement
of KYC.[8]
o
Criminal
investigation is allowed in banking transactions in India. For example, the
Income Tax Department can call for information relating to customers accounts
and transactions. Erring accounts can be frozen. This addresses the Basle
Principle on Compliance with legislation and law enforcement agencies.
o
Certain
statues such as "The Bankers Books Evidence Act, 1891" and the
"Banking Companies (Preservation of Records) Rules, 1985" require the
making available / retention of records to investigating agencies, which
addresses the Basle Principle on Record Keeping and Systems.
Cases-
o
CHIDAMBARAM VS. DIRECTORATE OF ENFORCEMENT[9]
FACTS - The case was before the High Court
of Delhi from where the Appellant filed an appeal against the judgment in Bail
Application No. 2718 of 2019 in Supreme Court by Special Leave where Section
439 of Code of Criminal Procedure, 1973 was allowed by the Supreme Court and
the judgment of Delhi High Court dated 15.11.2019 was set aside. M/s. INX Media
Private Limited wanted permission of Foreign Investment Promotion Board (FIPB)
for issuing by way of preferential interest, non-cumulative, equitable and
convertible for engaging in business for operating, creating of bouquet of
television channels. Further, the company also required permission for making
downstream investment to the limit of 26% as well as the outstanding equity
capital of M/s. INX News Private Limited. FIPB suggested for consideration and
permission of Finance Minister. The Board did not approve the downstream
investment. FIPB unit issued a press release dated 30.05.2007 which included
the details of proposals which was approved in the meeting, in which it showed
that the NRI inflow against M/s. INX media was Rs. 4.62 crores. Disagreeing
with the permission of FIPB the company intentionally made downstream
investment which was to the extent of 26% capital of INX News as well as made
more Rs. 305 crores Foreign Direct Investment in INX Media Ltd. against the
allowed foreign inflow of Rs. 4.62 is the accusation. Further FIPB unit letter
dated 26.05.2008 required detailed clarifications from the company. The company
in order to prevent penal action entered into conspiracy with Mr. Karti
Chidambaram (Son of Appellant). Allegations which was put on him was that he
exercised his influence over the FIPB unit which to undue favour to the
company. Thereafter covering the investment received M/s. INX News Pvt. Ltd.
and M/s. INX News (P) Ltd. come up to FIPB and asked for approval to downstream
investment which was positively considered and approved by Finance Minister. It
was further stated Mr. Karti Chidambaram for the services which was done to
M/s. INX Group, had received the payments for it and invoices of around 3.05
crores was raised in favour of M/s. INX Group in which Mr. Karti Chidambaram
was having interests. The then Finance Minister name was not there in the FIR.
From the above FIR, the Respondent i.e. Directorate of Enforcement registered a
case under Section 3[17] of Prevention of Money Laundering Act, 2002[10]
which is punishable under Section 4[18] of the Act against the accused. On
23.07.2018 he was arrested by the Respondent, during that time the Appellant
filed an anticipatory bail in ECIR case which was dismissed because the
Appellant can obstruct in the investigation and such case is not a fit case. On
21.08.2019 Appellant was arrested in CBI case and he was in custody from that
time and on 16.10.2019 by the Respondents stating that an amount was paid of
around 3 crores at his instance to companies which were controlled by his son.
After Appellant’s bail was dismissed by the court he made an application dated
05.09.2019 praying for surrendering before the trial court which was also
rejected.
JUDGMENT- Court is not much inclined in
opening sealed cover even though such materials were received by Respondent.
The Appellant’s name was not there in the case but allegations was made against
him by the co-accused. Since the anticipatory bail was declined previously the
Appellant was available for interrogation for more than forty five days.
Further, if the Respondents required for further investigation he is bound to
be present. Noticing the situation as well as considering the duration he was
in custody the Appellant is entitled to grant bail. Further execution of bail
bonds for a sum of Rs. 2 lakhs with two sureties of the like sum produced and
also the passport to be deposited. Further he won’t be tampering any evidence.
FACTS- This case was brought before the
Bombay High Court from where the Appellant filed an appeal against the judgment
as well as order in Cr. Bail Application No. 994 of 2011 in Supreme Court by
Special Leave and the judgment of Bombay High Court dated 12.08.2011 was set
aside. The allegations made against the Respondents as well as the others are
that they committed offence which is punishable under Section 4[20] of the
Prevention of Money Laundering Act, 2002. The case is registered by the Deputy
Director, Enforcement Directorate, Ministry of Finance and Government of India
on 08/01/2007 on Directorate report on documents which was received by the
Income Tax Department. Further the department made a search in the premises of
Respondent No. 1 and found a sum of Rs. 88,05,000 in Peddar Road, Mumbai which
was seized. There was various imported watches and jewellery was also found and
seized. Thereafter, he purchased an expensive car which was worth Rs. 60,00,000
from one Anil Shankar and paid till then sum of Rs. 46,00,000 towards that
purchase. He also transferred various amount to different persons from accounts
which was held by him outside India. After further investigation Income Tax
Department assessed his total income previous years came to Rs. 110,412,68,85,303/-.
He was further issued show cause notice under the Foreign Exchange Management
Act, 1999 for violation of Section 3[21]
and 3A[22] of the Act for dealing and holding foreign exchange of US$ 80,004,53,000
approximately Rs. 36,000 crores in Union Bank of Switzerland and various
accounts in Zurich. After making inquiries it was found that Respondent No. 1
was holding three passports by submitting false documents. He also sold a
diamond from collection of Nizam of Hyderabad and through sale proceeds in his
account in Basel, Switzerland to the Barclays Bank situated in United Kingdom.
Based on the above facts, Directorate of Enforcement arrested him on 7th March,
2011 and was produced before Special Judge, PMLA in Mumbai and was remanded in
custody. Further in the order dated 11th March, 2011 the Special Judge rejected
the prayer of Directorate of Enforcement and released him on bail. Since Public
Interest Litigation was going on in Court and status report was required to be
filed by the Directorate of Enforcement of this, when the Court was brought
into notice that the Respondent No. 1 is released on bail then this court
stayed the operation of bail and ordered to detain him in custody initially for
four days. A bail was further prayed by Respondent No. 1 but the same was
dismissed by the Special Judge. Challenging the order of Special Judge the
Respondent filed Bail Application before the Bombay High Court and after
hearing he was granted bail by the order dated 12th August, 2011. Further the Learned
Additional Solicitor General referred the provision of Section 45[23] of the
Prevention of Money Laundering Act, 2002 which states about the offences which
make cognizable and non-bailable and provides that no person can be released on
bail whose offence is punishable for a term of more than three years under Part
A of the Act and the exceptions are a person whose age is below 16 years or
woman or a person who is sick.
JUDGMENT-The High Court proceeded by the
attempt which was linked by the prosecution of different passports with the
functioning of the foreign bank accounts is not acceptable and failed to focus
on other parts of the case. Further the total income of Rs. 110,412,68,85,303
which was been by Income Tax Department in Section 24[24] of the Act the
Respondent no. 1 was not able to establish the same neither untainted property.
Lastly, the way Respondent No. 1 obtained three passports in his name even
after the original passport was directed to be deposited brings question that
if released on bail the Respondent No. 1 will escape. Therefore, Appeal allowed
and the judgment of Bombay High Court is set side and the bail is cancelled
which was granted to Respondent No. 1.
IV.
TAX EVASION- A COMPLICATED PROBLEM
Tax evasion is a criminal offence in which
a person or company knowingly avoids paying their true tax liability. Those who
are detected avoiding taxes are usually charged criminally and face severe
fines.[12]
For a variety of reasons, tax evasion
must be successfully tackled. Initially, it prevents states from earning enough
revenue, limiting them from enacting social, economic, environmental, cultural,
and other initiatives. Tax evasion undercuts the government's attempts to
promote welfare and social cohesion; it inhibits it from fulfilling its social
role. Furthermore, it damages individuals' belief in the methods and objectives
of a legitimate, democratic government by undermining the credibility of
democratic institutions. In a nutshell, it can foster feelings that lead to
anti-social and anti-democratic attitude.[13]Perhaps
the most significant negative impact is on equity. A manufacturing worker who
earns a wage is subject to taxation. For tax purposes, a restaurant worker who
earns the same amount but receives a portion of his salary in tips does not
report it. As a result, one bluecollar worker benefits while the other suffers.
This is referred to as horizontal imbalance. A salaried employee in the
organised corporate sector earns the same amount of money stated because their
earnings appear to be the same for tax purposes. The upshot might be an
increase in tax rates or the application of distortive levies, setting off a
vicious cycle of inefficiency and unfairness. The development of black money,
which is a societal evil, is a major consequence of tax evasion on the
government. The increasing growth of illicit money in our economy has serious
and terrible repercussions.
Measures
Taken Beforehand To Identify Beneficial Ownership And Prevent Tax Evasion-
The Indian government has taken
several initiatives to combat tax evasion, as listed below. Tax evasion is
considered a crime in India. The government imposes prosecution and penalties
under various acts. The Income Tax Department has implemented a tax evasion
reward scheme, which compensates those who report tax evasion. India and the
United States recently signed an agreement to prevent Americans from evading
taxes through Indian financial institutions. Persons in possession of black
money can invest in special bonds under the Special Bearer Bond Scheme
(Immunities and Exemptions Act, 1981). Another was the Voluntary Compliance
Scheme (Amnesty Scheme).[14]
The government raised the tax
bracket, lowered the deduction rate, and tightened lawful tax avoidance
techniques. The Government has established the Tax Administration Reform
Commission to undertake fundamental reforms to tax concerns in order to
simplify and streamline tax procedures. Previously, India established a number
of committees, including the Taxation Enquiry Committee, the Indian Tax Reforms
Committee, and the Direct Taxes Enquiry Committees, among others. The Finance
Bill introduced the Transfer Pricing Audit to audit concealed transactions in
order to combat tax avoidance.
Banks play a critical part in a
country's economic development. They serve as pillars in finding tax evaders,
disseminating information, and collecting taxes. They serve as a mediator, thus
the Income Tax Department assigns responsibilities and liabilities to banks in
order to combat tax evasion. The government is currently highly active in
formulating policies and taking steps to ensure that they are carried out
smoothly.[15] From
legal tender currencies to cash deposits in banks to faceless assessments and
appeals, a lot has changed. The government is pushing toward digitalisation and
ensuring that corruption is reduced at all levels.
Recent
Cases Of Tax Evasion In India-
In the fiscal year 2018-19,
the Goods and Service Tax (GST) department registered around 1,470 cases
of tax evasion and recovered over Rs 360 crore in Gujarat.
In connection with its tax evasion
and benami assets investigation of Haryana Congress politician Kuldeep Bishnoi,
the Income Tax Department has seized paintings worth Rs 30 crore.[16]
The raids to uncover the major tax
evasion nexus were carried out in the first week of November on 42 locations
across Delhi, Mumbai, Hyderabad, Pune, Agra, and Goa on a group of persons who
were creating phoney bills and conducting Hawala transactions. Hawala is a term
that refers to money transactions that take place outside of regular banking
channels.
The Fight
Against Money Laundering And Tax Evasion Has Societal Implications-
Civil society, in general, and in
particular those groups or sectors, such as journalists, NGOs, and academia,
which all perform the benign duty of balancing, analysing, and checking
authority, must provide an additional line of defence or examination.
Social partners should be rewarded
for monitoring the application of all norms and detecting any violations, as
well as receiving complete protection from censorship and politically motivated
prosecution. Investigative journalism is critical in this sense, as it serves
to not only expose existing crime or wrongdoing, but also to avert future
crime.Investigative journalists' sources should always be kept confidential in
order to avoid jeopardising ongoing investigations and discouraging future
ones.
In contemporary times of
technological and economic transition, proactive support for investigative
journalism should be seen as a positive outcome, especially in terms of
reducing crime and corruption. Furthermore, whistleblowers or non-governmental
organisations (NGOs) working to expose bribery and corruption, government
incompetence, and/or private-sector malpractices should be afforded the necessary
protection and support at all times.
Money
laundering and tax evasion-
Taxes play an important role in
ensuring social equality. When it comes to the order of public services and
social justice concerns in the country, paying taxes is a must. Failure to pay
taxes is a defiance of fundamental concepts such as equality and democracy. On
compelled institutions, tax evasion, tax avoidance, and money laundering issues
are rarely addressed thoughtfully. Furthermore, collaboration between law
enforcement and anti-money laundering organisations is ineffective. As a
result, the system becomes vulnerable.[17]
Money laundering is the most common
method of evading taxes by concealing the source and amount of income. Money
laundering is the practise of disguising illegal income from organised crime as
legitimate income or erasing all proof of income. Money laundering routes serve
as communication channels for money to migrate from one area to another, hence
only a comprehensive approach to combatting money laundering is feasible. Money
laundering is a criminal offence that aims to properly display some of the
income that has been illegally acquired or hidden from tax and other
authorities by utilising tactics that mask the identity of the eventual
beneficiary.
By comparing the definitions of tax
evasion and money laundering, the following similarities were discovered: both
are illegal actions; both require breaking the law; both include deliberate
conduct; and both conceal or disguise the money received. Because it has been
commonly maintained that the proceeds of tax evasion are different from the
proceeds of conservative criminality, it was important to examine the
definition of tax evasion in terms of a crime.[18]
Examining the reasons why criminals
launder money is another technique to demonstrate a link between tax evasion
and money laundering. They are attempting to conceal wealth; they are
attempting to cheat taxes in order to boost profits; they are attempting to
legitimate the money; and they are attempting to avoid prosecution.
To establish the link between money
laundering and tax evasion, consider some of the repercussions of money
laundering. To begin with, money laundering undermines financial systems by
increasing the portion of a country's economic activity that comes from sources
that are lawful or illegal and fall outside of the country's commerce norms and
regulations. Second, it encourages crime by allowing criminals to effectively
use and deploy illegal funds. Finally, money laundering diminishes income and control
by reducing government tax revenue and eroding government control over the
economy, resulting in 'damage' to the general people.
V.
Tax Havens- A National Threat
Tax havens aren't always free of
taxes. They normally levy a tax rate that is far lower than that of other
countries. They frequently make up for the revenue loss through other means,
such as raising import taxes, customs, and other fees. They may also demand
large, even recurrent costs for company registration and other fees, such as licence
fees. The government normally compensates for the revenue lost as a result of
lower tax rates by doing so.[19]
Tax havens have been dubbed
"global black holes," where the wealthy and powerful hide their
wealth. When tax havens are portrayed this way, they appear to be completely
illegal institutions meant to please the wealthy rather than foster growth,
which is one of the primary goals of tax collection. This isn't fully accurate,
though.
The principle of
"Sovereignty" is the cornerstone of Public International Law. This
implies that each sovereign nation has sole authority over its internal affairs
and legal system. This means that a nation's decision on whether or not to
charge tax, as well as the amount of tax it will levy, is solely its own. Thus,
this system of creating a tax haven is not illegal by itself.
However, in this day of
globalisation, it is quite easy to set up offshore shell firms, and many
organisations utilise them to shift their earnings to tax havens for the sole
purpose of dodging taxes, as seen in the example above. Such behaviour is
illegal since it depletes the country's tax base, which is something that every
responsible resident of that country is liable for.To combat this dilemma,
numerous governments have signed treaties and Multilateral Instruments with tax
havens to prevent illegal activities.
Tax Haven
Criteria-
When determining whether a
jurisdiction is a tax haven, the Organization for Economic Co-operation and
Development (OECD) lists four important elements. The first is that no or only
nominal taxes are levied by the jurisdiction. The absence of or nominal
taxation is insufficient in and of itself to qualify a country as a tax haven.[20]
The OECD recognises that each jurisdiction has the freedom to decide whether or
not to levy direct taxes and, if so, at what rate. For a jurisdiction to be
designated a tax haven, an examination of the other crucial elements is
required. The following are the three additional elements to consider:
ü Whether
there is a lack of transparency-
There is usually more to a tax haven than meets the eye. A
tax haven's legislative, legal, and administrative apparatus is opaque. There's
always the possibility of behind-closed-doors secret judgements or negotiated
tax rates failing the transparency requirement.
ü Whether
there are laws or administrative practices that prevent the effective exchange
of information for tax purposes with other governments on taxpayers benefiting
from the no or nominal taxation.-
Personal financial information is fiercely protected in tax
havens. The majority of tax havens have official legislation or administrative
policies in place to protect them from international tax authorities. There is
no or limited information sharing with foreign tax authorities.
ü Whether
there is an absence of a requirement that the activity be substantial-
Outside entities are often not required to have a significant
local presence in tax havens. A concession like this could lead to some
fascinating circumstances. In the Cayman Islands, for example, one building
held 18,857 largely overseas entities, according to a 2008 Government
Accountability Office audit.[21]
This implies that by simply hanging your nameplate in a tax
haven, you can claim tax benefits. Within the country's borders, there is no
need to produce goods or services, or to conduct trade or commerce. Tax evaders
can, for all intents and purposes, continue to do business in Florida while
claiming to be Bahamas citizens when it comes to paying taxes.
Shell company explained-
A shell corporation is a legal entity
set up in a tax haven to avoid paying taxes. Shell corporations usually only
exist on paper, with no full-time staff and no physical location. Although the
rules vary, many shell companies'true owners are not disclosed in their
incorporation forms. Some people confuse the terms "shell company"
and "offshore company."[22]
Various questions comes to our mind when we hear the word
‘shell companies’ like why are they called ‘shell’ companies? the basic answer
to it is Because, like an empty shell, there is nothing inside. A shell company
exists, legally, only on paper. Secondly, what are these shell companies used
for? There basic purposes are both legal and illegal. Shell companies can hold
money, luxury homes, intellectual property, businesses and other assets. They
also play a vital role in facilitating the flow of illicit money around the
globe.
Luxembourg
: A Tax Haven For India-
Luxembourg is regarded as one of the
world's biggest tax havens, as it draws a large amount of foreign direct investment.
Luxembourg is the ideal destination to avoid paying taxes because of its low
tax and inflation rates, thriving market economy, and focus on financial
confidentiality.[23]
The Tax Justice Network has
Luxembourg placed sixth as one of the world's top enablers of financial
secrecy. Luxembourg, on the other hand, no longer appears to be a paradise for
tax evaders.
The DTAA between India and Luxembourg
was updated in October 2019 to align with the OECD's BEPS Action Plan,
significantly limiting the potential of tax evasion through foreign investment
in Luxembourg. The "Principal Objective Test," as defined in Article
7 of the Treaty, examines the primary purpose of foreign investment or the
formation of a company in another country for taxation purposes.
If it is determined that the primary
objective of such investments and transactions is to escape taxes, the Treaty's
benefits will be forfeited, and the investor's income will be taxed in India
according to Indian law, therefore prohibiting tax evasion.
Government’s
Earning Through Tax Havens-
Tax havens aren't fully free of
taxes. They have a lower tax rate than the rest of the world. To compensate for
the loss of tax revenue, low-tax states typically levy hefty customs or import
taxes.
Tax havens may levy a fee for new
company registrations, as well as annual renewal fees. Additional fees, such as
licence fees, may be imposed. For tax havens, such fees and charges would add
up to a periodic fixed income.[24]
Even if they are only charged a
modest tax rate, luring foreign persons or firms might result in the government
earning significantly more tax money than it would otherwise. Furthermore,
corporate investments in company operations that provide jobs for the country's
citizens may benefit the government.
Money Laundering
Using Tax Havens-
Money laundering is the act of
converting criminal and corrupt gains into allegedly 'legal' assets, as well as
the concealment of income and wealth from governments in order to avoid
taxation.
Money laundering is a widespread practise
that involves depositing 'dirty' money in a service company, layering it with
legitimate income, and then integrating it into the flow of funds. Money earned
by some crimes, such as extortion, insider trading, drug trafficking, and
illicit gambling, is 'dirty,' and must be 'cleaned,' so that banks and other
financial institutions will not suspect it.[25]
Money laundering through tax havens
usually takes the following forms:
o
Smuggling
large amounts of cash to another country and depositing it in an offshore bank
is known as bulk cash smuggling. The Bahamas, for example, are only 293
kilometres from Miami and may be reached by boat.
o
Trusts
and shell companies: The true owner of the money is hidden via trusts and shell
businesses.
o
Round-tripping:
Money is put in a tax haven with few records retained, then sent back as a
tax-free overseas investment.
o
Use
of a digital currency conversion service to convert dollars into a digital
currency that may be anonymously transferred and received. For a nominal cost,
the receiver can convert the currency back to cash.
VI.
Suggestions
o
It
can be seen that because the activities involved in money laundering are
international in nature, it is necessary to have a strong impact and that all
countries enact strict and, if possible, uniform laws, because there will be no
place left for money launderers to target for laundering their crime due to a
lack of jurisdiction. There must also be procedures in place to ensure adequate
cooperation between the state and the federal government. The conflict between
the two must be resolved.Money laundering appears to be a victimless crime to
the majority of people. Because of the negative consequences, it is now more
important than ever to educate people about the crime and to be aware of money
laundering cases. People will be able to notice the problem, which will help to
better law enforcement because it will be open to public scrutiny. As a result,
it is necessary to think nationally, globally, and regionally in order to have
an effective anti-money laundering system.
o
High
tax rates, corruption in public sector units, multiple tax rates and
inefficient tax authorities are the main causes of tax evasion. It suggested
that reduction in tax rates, simplifications of tax laws, remove loopholes in
the tax system and some extent proper processing of information available the
under the annual information return can be best tool for improving Indian tax
compliance.Therefore there is a need for creating transparent, friendlier and
less discriminatory administrative system. Further there is also a need to
educate the people about Indian Tax law and create such an environment in which
they pay their due taxes, do not evade the tax and feel proud in discharging
their duty to pay.
o
VII.
Conclusion
Tax havens are small countries with
affluent populations and well-developed governing systems. While all of these
traits are linked to one another to some level, it is worth noting that poorly
managed countries, of which there are many around the world, almost never
emerge as tax havens. Their absence cannot readily be attributed to a desire on
the part of badly governed countries to comply with international tax rules,
because these countries aren't known for their compliance, and international
tax norms aren't well established in the first place. Instead, the most
plausible explanation is that tax havens fail in the absence of good
governance, and because of this, poorly governed nations avoid attempting to
become tax havens in the first place.
The study's conclusion is that, in
addition to investigating money laundering, legal authorities should explore
examining tax evasion. Although evidence from court cases suggests that the
authorities may already be doing so, it may be more suitable to make it a
formal part of their policy.
The significance of this study is
that it establishes a link between the crimes of money laundering and tax
evasion. Although the evidence discovered in this study supports this
assertion, it should be noted that nearly no literature linking money
laundering to tax evasion could be uncovered.
VIII. REFRENCES