IN the year 2008, thanks mainly to the revelations made by a whistle blower, the US IRS became aware of the massive offshore tax evasion by its residents who were being systematically aided and abetted by some banking and other financial institutions of Switzerland (and other secrecy jurisdictions) to hide their assets and income offshore. This led to the famous UBS episode at the end of which the Swiss bank paid a hefty penalty and agreed to share information about some 4500 accounts of US clients to the US IRS. Having secured the names, the US government then offered an Offshore Voluntary Disclosure Program (OVDP) aimed at the individual account holder. The OVDP became a huge success at least from the point of view of the taxes recovered. However, the episode also brought to the fore the absence of any mechanism to ensure that such incidents do not occur in the future. The result was the much talked about Foreign Accounts Tax Compliance Act or FATCA.

The provisions of FATCA enacted in the year 2010 are contained in sections 1471 to 1474 of the Internal Revenue Code. These are hugely complicated provisions the essence of which is the threat to impose a withholding tax of 30% from any payment from US sources unless foreign financial institutions agree to supply to the US IRS the details of financial accounts of US persons and foreign persons with significant US ownership. In terms of the provisions, any financial institution anywhere in the world that has dealing with specified US persons is required to report to the USIRS. Since the proposed measure in FATCA was purely unilateral and was likely to be in conflict with the local laws under which the financial institutions were constituted, the US treasury came up with the concept of Inter-Governmental Agreements (IGA). Under these agreements the foreign financial institutions are required to gather information about US persons and submit the same to the local tax administration that in turn will then pass on the information to the US IRS. The problem of extra territoriality is thus avoided. In course of time, the US treasury developed a template of two models IGA1 and IGA2. IGA1 is at least in theory reciprocal in nature. Five allies of the USA were the first to sign the IGAs. These were the United Kingdom, Germany, France, Italy and Spain. Ever since, the USA has been engaging different jurisdictions to sign up to these agreements. As per the IRS website, 60 jurisdictions have already signed the IGA1 while 7 jurisdictions have signed the IGA2. There are many more with whom agreements have been reached in principle.

In the meantime, the US government had started prosecuting the tax defaulters that had used the services of UBS. According to the US IRS website, starting from 2009, 49 UBS clients were prosecuted and sentenced. The website gives the names of the taxpayers, the nature of offence and the sentences awarded. In almost all the cases, those charged pleaded guilty and also paid fines, penalties etc. All of them have been sentenced to various levels of punishment. The IRS site gives a hyperlink to each name that then takes to the Department of Justice website where one can find the details of the nature of the offence and the charges made. We take two cases just by way of example. One name is Indian sounding and the other case involves prosecution of not only the taxpayers but also of the attorney who helped device the scheme for tax evasion.

At this stage, it may be noted that under the US law, US Citizens and residents of the United States who have an interest in, or signature or other authority over, a financial account in a foreign country at any time during the relevant tax year are required to indicate the same in their Income Tax Returns by checking "Yes" or "No" in the appropriate box on Schedule B, Part III - Foreign Accounts and Trusts.  Citizens and residents of the United States are also required to report any interest and dividend income, as well as capital gain income, earned from such accounts.

Regarding the first case, it transpires that on April 20, 1989, one Rakesh Chitkara, of Marlboro, N.J he had opened an account in his own name at UBS AG in Zurich, Switzerland. Then on Jan. 13, 2000, he opened an account at UBS (Bahamas) Ltd. in the name of one GMX Industries Inc. a corporation formed under the laws of the Bahamas that was utilized to conceal his beneficial ownership in one of his two UBS accounts. On Oct. 10, 2002, he opened an account at UBS AG in Zurich, Switzerland, in the name of GMX, which was intended to be the successor account of the GMX account opened at UBS (Bahamas) Ltd. Mr. Chitkara was the sole beneficial owner of the GMX accounts at UBS (Bahamas) Ltd. and at UBS AG in Zurich. According to the DOJ website, on March 21,2013, he pleaded guilty before U.S. District Judge on the charge of making and subscribing to a 2007 federal income tax return to the IRS that he did not believe to be true.

In another case, a California attorney Christopher M. Rusch, helped two of his clients Stephen M. Kerr and Michael Quiel, businessmen from Phoenix, hide millions of dollars in secret offshore bank accounts at UBS AG and Pictet & Cie in Switzerland. According to the evidence presented at trial, Kerr and Quiel, with the assistance of Rusch and others, established nominee foreign entities and bank accounts in Switzerland to conceal Kerr and Quiel's ownership and control of stock and income they deposited in these accounts. Rusch testified at trial, admitting that he and others caused the sale of the shares of stock through the undeclared accounts. Rusch also testified that, at Kerr and Quiel's direction, he transferred some of the money in the secret accounts back to the United States through Rusch's Interest on Lawyer's Trust Account before dispersing the money for Kerr and Quiel's benefit, including the purchase of a multi-million dollar golf course in Erie, Colo. According to court documents, with Rusch's assistance, Kerr and Quiel failed to report more than $ 4,600,000 and $2,000,000 of income, respectively, during 2007 and 2008. On Feb. 6, 2013, Rusch pleaded guilty to conspiracy to defraud the government and failing to file a Report of Foreign Bank and Financial Accounts (FBAR). Rusch was sentenced to serve 10 months in prison for helping his clients.Kerr and Quiel were sentenced in September 2013 to serve 10 months in prison after both were tried and convicted of filing false income tax returns for 2007 and 2008.

These cases demonstrate that the USA would take effective steps to tackle offshore tax evasion by its residents/citizens and after FATCA; there is no jurisdiction safe enough to hide. However, not every country has the power and pelf of the USA. It will be instructive therefore to examine the response of the government of India to the phenomenon considering the well-known fact that

Offshore tax evasion is even worse for developing countries.

The attitude of the government of India and even of the judiciary to the menace of offshore tax evasion (and avoidance) seems to be quite ambivalent. While some legislative measures have definitely been taken over the last 5 years, treaties signed for exchange of information, there is hardly any demonstrative prosecution of any sort. In the matter of rampant treaty abuse and tax avoidance through offshore jurisdictions, the Courts have been taking a view that is at cross purposes with the avowed objective of combating the menace, particularly in the context of using shell companies formed in low tax jurisdictions. The Supreme Court is now directly involved in the monitoring investigations relating primarily to offshore tax evasion through the Special Investigation Team. One hopes that the Court reconciles its views as expressed in the Vodafone case with that expressed in the Ram Jethmalani case. Some of the observations of the Supreme Court in the Ram Jethmalani case are worth noting and bring out the consequences of offshore tax evasion.

"4. The worries of this Court that arise, (…), are with respect to transfers of monies, and accumulation of monies, which are unaccounted for by many individuals and other legal entities in the country, in foreign banks. The worries of this Court relate not merely to the quantum of monies said to have been secreted away in foreign banks, but also the manner in which they may have been taken away from the country, and with the nature of activities that may have engendered the accumulation of such monies. The worries of this Court are also with regard to the nature of activities that such monies may engender, both in terms of the concentration of economic power, and also the fact that such monies may be transferred to groups and individuals who may use them for unlawful activities that are extremely dangerous to the nation, including actions against the State. The worries of this Court also relate to whether the activities of engendering such unaccounted monies, transferring them abroad, and the routing them back to India may not actually be creating a culture that extols the virtue of such cycles, and the activities that engender such cycles are viewed as desirable modes of individual and group action. The worries of this court also relate to the manner, and the extent to which such cycles are damaging to both national and international attempts to combat the extent, nature and intensity of cross-border criminal activity. Finally, the worries of this Court are also with respect to the extent of incapacities, system wide, in terms of institutional resources, skills, and knowledge, as well as about incapacities of ethical nature, in keeping an account of the monies generated by various facets of social action in the country, and thereby developing effective mechanisms of control…"

From a policy perspective therefore India needs to take steps to stem offshore tax evasion. It is with this aim in view that the government has enacted the Black Money (Undisclosed Foreign Income and Assets) Act, 2015. The Act and the rules give a window of three months to those having undeclared foreign assets to come clean by paying 60% tax thereon.

On the 9th of July 2015, India also finally signed the famous FATCA IGA1 with the USA. The news has made headlines of most newspapers in India on the ground that it will help prevent offshore tax evasion. The news takes on added salience on the ground that the compliance window of the Black Money Act is now open and the news that India will be able to access information from the USA will perhaps generate enough fear among the holders of foreign assets to come forward and take advantage of the one- time opportunity. FATCA, as we have seen earlier is a unilateral legislation by the USA to get at its offshore tax evaders. In that endeavor, it has forced financial institutions around the world to get information about US residents and US persons and pass on the same to the US IRS. The IGA1 only makes the approach reciprocal by promising to pass on information available with the USIRS about Indian tax residents. It is therefore interesting to examine the IGA1 particularly from the point of view of reciprocity.

Article 2 of the agreement lays down the obligations of each of the parties. The relative obligations of the two States are as given in the table:

It is clear from the table that the reporting requirements of the two States are not identical and India obviously has to report much more. Thus Indian Financial Institutions will have to collect information on all income earned by the US persons through the financial accounts, the gross amounts paid or credited in the accounts and the balance in these accounts. On the other hand, USA will collect information only in respect of US sourced dividends and interest. There is also no requirement on the part of the USA to report the balance in these accounts. Moreover, the US reporting is to the extent the IRS is authorised to collect the information under the US laws. Indian Financial Institutions not only have to report about US persons holding accounts but as the language of the provision indicates, they have also to apply due diligence to identify the controlling US persons in case of a non-US entity. There is no corresponding obligation on the part of the USA to identify the controlling persons (beneficial owners) from India.

The MOU of the IGA is a 50 page document. Pages 18-50 relate to due diligence required by the Indian Financial Institutions (Annexure 1) and a description of certain exempt entities under specific conditions (Annexure 2). There are separate procedures for preexisting individual accounts, new individual accounts, preexisting entity accounts and new entity accounts. There is no reporting requirement for accounts having a balance of USD 50,000 or less as on 30th June, 2014. In case of insurance contracts, such limit is USD 250000. Very broadly speaking, it seems that the due diligence is restricted to electronic search alone in case of low value accounts (balance below 100000 dollars) while in respect of higher value accounts, there is need for paper search also for identification of the US accounts and the related reporting requirements. The agreement does not contain any due diligence stipulation on the part of the US entities.

It is thus clear that the IGA is an unequal agreement. All that India gets in return is the following article relating to reciprocity:

Article 6: "1.The Government of the United States acknowledges the need to achieve equivalent levels of reciprocal automatic information exchange with India. The Government of the United States is committed to further improve transparency and enhance the exchange relationship with India by pursuing the adoption of regulations and advocating and supporting relevant legislation to achieve such equivalent levels of reciprocal automatic information exchange."

Then there is a promise of most favoured nation treatment to India in the following paragraph of Article 7: "India shall be granted the benefit of any more favorable terms under Article 4 or Annex I of this Agreement relating to the application of FATCA to Indian Financial Institutions afforded to another Partner Jurisdiction under a signed bilateral agreement pursuant to which the other Partner Jurisdiction commits to undertake the same obligations as India described in Articles 2 and 3 of this Agreement, and subject to the same terms and conditions as described therein and in Articles 5 through 9 of this Agreement."

Reports however indicate that the US is unlikely to enter into fully reciprocal agreements any time soon. (See for example, "U.S can't deliver on FATCA promises" available at http://www.compasscayman.com/cfr/2014/08/08/U-S--can%E2%80%99t-deliver-on-FATCA-promises/). On the positive side, of course, is the fact that information about bank interest payments of Indian residents in the USA may be available. The definition section of the IGA states: "The term "Indian Reportable Account" means a Financial Account maintained by a Reporting U.S. Financial Institution if: (i) in the case of a Depository Account, the account is held by an individual resident in India and more than $10 of interest is paid to such account in any given calendar year; or (ii) in the case of a Financial Account other than a Depository Account, the Account Holder is a resident of India, including an Entity that certifies that it is resident in India for tax purposes, with respect to which U.S. source income that is subject to reporting under chapter 3 of subtitle A or chapter 61 of subtitle F of the U.S. Internal Revenue Code is paid or credited"

Although this information in itself is useful, the really big fish will use Delaware. There may be a debate as to whether Delaware can be called a tax haven but according to a New York Times article 'How Delaware Thrives as a Corporate Tax Haven' it is ridiculously easy to set up a company in Delaware and Delaware had more corporate entities, private and public than people. And according to a Tax Justice Network report, the number of companies housed at 1209 Orange Street in Wilmington, Delaware was 217000.As an article in Thomson Reuters point out: "No one in the U.S. seems to be in a hurry to turn over account information of Latin American clients banking in Miami or even to rein in Delaware's laws that allow corporations and others to minimise tax burdens." (http://fatca.thomsonreuters.com/wp-content/uploads/2013/03/USA-U.S.-tax-information-sharing-unlikely-to-be-fully-reciprocal.pdf). Thus those indulging in big ticket tax evasion will do so through different layers of holding and subsidiary companies in Delaware or Nevada, Wyoming or Oregon and in the absence of a mechanism to determine the beneficial owners, it is unlikely that any cases of significant tax evasion by Indian residents will come to the fore as a result of FATCA.