One-time Amnesty for Swiss Stash

Times of India
By

Sudhir Kapadia
National Tax Leader
Ernst & Young

Of late, the tale of the elusive Swiss accounts has resurfaced with the proposed treaty between the UK and Swiss governments, where Switzerland has agreed to repatriate to the UK an anonymous tax amount calculated on the aggregate income of UK tax residents, in their Swiss bank accounts. The tradeoff is that the names of the individual UK taxpayers shall not be revealed by the Swiss government in return for this lump sum munificence.

The UK government is obviously motivated by the opportunity to shore up its treasury by the one-time payment, and for the Swiss government, it may come as a pressure to avoid yet another instance of further diluting its much-vaunted banking secrecy. From an EU and tax policy perspective, this may not be the most optimal result as it goes against the grain of ensuring transparency and naming and shaming of tax evaders.

This approach adopted by the UK government is in sharp contrast to the one favoured by the US government, where the US government extracted the names of US tax residents illegally holding bank accounts in UBS, for example, and a simultaneous announcement of tax amnesty for US tax residents under which payment of evaded taxes and reduced penalty would ensure closure of all other proceedings against US tax residents. This, of course, was accompanied by a shrill campaign by the US Internal Revenue Service to warn the tax citizenry at large about more dire consequences, including prosecution, if US tax residents do not come forth to declare their secret deposits in offshore accounts.

In the light of the continuous debate in India about the methodology by which the country should endeavour to recover the lost billions in tax revenues due to alleged siphoning of Indian money to offshore locations, a question arises for Indian policymakers to ponder over the approach that should be taken, vis--vis the Swiss government in the light of the above international developments, vis-vis the US and the UK.

At one level, it can be argued that there is no need for any incentive mechanism to coax reluctant Indian taxpayers to declare their undisclosed income as recent initiatives such as sharing of information including on bank accounts maintained with Swiss banks should enable Indian government, in specific instances, to ask for the relevant information from the Swiss authorities and take further action based on that information. In other words, it can be argued that time has come for the Indian government to start utilising tools such as exchange of information, agreements that have been entered into with various offshore countries and sharpen the revenue knife to cut into the undisclosed wealth outside India and get its fair pound of flesh.

This, of course, is easier said than done as it will be a long and arduous process that Indian authorities will have to go through, before they get to the much-coveted and highly-fancied offshore bank deposits and other wealth. It is also a moot point how legally successful Indian tax authorities will emerge in tracing the alleged undisclosed wealth outside India to Indian beneficiaries. Viewed from this angle, the pact like the one UK has entered into with Switzerland would look attractive. It immediately garners an entire one-time revenue payment that can fund the societal obligations for the Indian government and, hopefully, make a clean slate going forward to deter tax evaders from similar action in future.

However,in this approach, Indian government may have to rely on the Swiss governments definition of money belonging to Indian tax residents based on which they will calculate India’s share of taxes. For example, there may be a maze of intermediary companies or trusts or other such entities, where the final beneficiary may not be immediately visible and the Swiss government may choose to keep out of this formula of any interest paid to such account holders from Swiss bank accounts. Against this, the US approach seems superior in as much as it compels US tax residents to come forth and declare their undisclosed offshore income under the amnesty and, thereby, collect much-needed revenue and, at the same time, instill enough fear in the minds of US taxpayers, that going forward, the deterrent measures will be so strong against tax evaders that they would be ill-advised to continue the practice of non-disclosure of offshore income.

On balance, therefore, the Indian government may want to consider a combination of effectively utilising the recent agreement for exchange of information including bank accounts, as well as a onetime window for Indian taxpayers to come forth and anonymously declare their offshore accounts, on which taxes as well as penalties can be imposed as a one-time revenue-raising measure; and also to serve as a deterrent for potential future tax evaders.

Of course, any such initiative will have to be carefully planned and executed in a way that it remains legally tenable and practically implementable. More importantly, appropriate communication strategy should be adopted to make taxpayers aware about the serious repercussions that will befall them for any such tax evasive action by them in future.

The author’s views are personal.