MANY countries in the Western world have in the recent years come up with offshore voluntary disclosure schemes coupled with tough regulations and a flurry of activities relating to putting in place exchange of information agreements. Reports suggest that most of these programs have met with considerable success with the UK reporting additional revenue of GBP 82 million, Germany USD 4 billion and Italy USD 4.75 billion. The most powerful of all tax administrations, the Internal Revenue Service of the USA has, in fact, come up with two schemes within in a short span of two years, once in 2009 and once again in 2011. The 2009 Offshore Voluntary disclosure Program (OVDP) was so successful that as against the expectation of the IRS to have about a thousand taxpayers availing of the program, there was in fact 15,000 tax payers who came forward before the program closed on October15, 2009. The average recovery is reported to be a whopping USD 200,000 per tax payer.

The essential characteristics of such successful schemes is that the law is made tough and the taxpayers are given sufficient warning that there will be no escape route available to them and unless they come clean voluntarily, the Government will go after them.

Recently, OECD has done a survey of offshore voluntary disclosures schemes of 39 OECD member and non-member countries and found some common features. Some of these are that the taxpayers must pay the tax that they would have owed in the absence of the disclosure schemes; they are required to pay interest on the tax evaded; and in such event, the monetary penalties are reduced to nil following a full disclosure.

According to the OECD, a successful program should be clear about its aims and its terms; it should place the short-term boost to revenues in the context of improving compliance across the taxpayer population as a whole by complementing it with measures that improve compliance in the medium term. The most important caveat put out by the OECD and which is relevant in the Indian context is that a successful programme presupposes that there are adequate and credible enforcement measures in place to detect and deter evaders, including those who might otherwise choose not to participate in the programme, and those who might otherwise be tempted to slip back into non-compliance in the future. Depending on the applicable legal framework and country circumstances, this might include exemplary prosecution of those who defraud the programme.

In India, voluntary disclosure schemes of the past have not been much of a success. Considering the attributes of a successful scheme as detailed by the OECD and the practical working of the tax administration and the judiciary in India, it is unlikely that we will have such features in any near future. Not to talk of exemplary punishment, nobody in India has ever heard of a tax offender being sentenced to imprisonment by the courts. That apart, there seems to be a public revulsion against a disclosure scheme since in popular perception such schemes discriminate against honest taxpayers. It is also generally believed that the Government had earlier promised to the Supreme Court at the time of the last VDIS to the effect that it will no longer come out with any such scheme. That may be the reason why the government did not go along with the introduction of an amnesty scheme despite there being so many examples to go by.

Nevertheless, there is a provision in the Budget 2011, which if not properly monitored, may yet turn out to be a mini voluntary disclosure scheme. This is the provision relating to bringing in dividends from foreign subsidiaries of Indian companies. When money is invested abroad by Indian companies for opening a subsidiary in a foreign country, there is some monitoring by the Reserve Bank of India. It is not known if the RBI subsequently monitors the extent of the profits earned by such subsidiaries. The definition of a foreign subsidiary as given in the original Finance Bill was that the Indian parent must holdat least half of the nominal shares of the foreign company.

There have been representations earlier also from trade and industry bodies to the effect that while only dividend distribution tax is levied when Indian subsidiaries distribute dividends, dividends from foreign subsidiaries, if declared and distributed and brought to India will suffer tax at the maximum marginal rate, thereby disincetivising such repatriation. Such requests used to be turned down principally on the ground that it is not possible to monitor as to whether what is being brought in really represents dividends, particularly in view of the fact that information from abroad was difficult to come by.

However, this time the government seems to have a change of mind and the Finance Bill proposed to tax foreign dividends @ 15% in the hands of the parent company. That would theoretically put dividends received from Indian subsidiaries and foreign subsidiaries at par. While the move seems logical, much will depend on the actual implementation. What is interesting to note, however, is that this window has been kept open only for one year. The Government has, therefore, to ensure that this scheme does not degenerate into a VDIS through backdoor without the safeguards as recommended by the OECD. The fact that CFC legislation kicks in from April 2012, coupled with the fact that the Government is entering into TIEAs at break-neck speed, also lends credence to such a theory.

It is true that the scheme is available only to Indian companies having subsidiaries abroad. It is however curious that the Government having introduced the scheme in the Finance Bill, obviously after due deliberation, has immediately made a change in the definition of ‘subsidiary' through a Government amendment. An Indian company holding 26% of the share capital of a foreign company as against 50% as proposed in the original Finance Bill, will now be deemed to have a foreign subsidiary. The ostensible reason given is that it will help the JV companies to avail of the facility.

Corporates, however, are still whining about the fact that they cannot book any expenses since the tax rate on such dividends will be a flat one and it is specifically provided in the newly introduced Section 115BBD(2) that no deduction in in respect of any expenditure or allowance shall be allowed in computing the dividend. That apart, in terms of section 115O (1A), the dividend distribution tax to be paid by an Indian company is to be reduced by the dividend distribution tax paid by the subsidiary company. Here, since the subsidiary will be a foreign company, question of paying dividend distribution tax will not arise and hence no credit will be available to the holding company in respect of the taxes paid, if any, by the foreign subsidiary when the Indian holding company, in its turn, distributes dividends to its shareholders from out of such dividends repatriated by the foreign subsidiary.

As for the quality of the money coming in, it is true that the RBI keeps some account of the investment by the Indian companies. But, it does not seem that the RBI may have any idea of the income earned from such investments. However, the Companies Act specifies in section 212 that the Indian companies are required to attach copies of the balance sheet of the subsidiaries along with the annual financial account. It is, therefore, possible for the tax authorities to question the provenance of the money.

It is probable that some of the foreign subsidiaries of Indian companies indeed have accumulated profits. It will be possible for them to declare dividends from out of the accumulated reserves as also from out of the current year's profits. The question that arises is whether any planning is possible with the scheme. If the subsidiary happens to be in a jurisdiction with which India does not have a tax treaty or a TIEA, and there are plenty of them, it is quite possible for moneys to be shown as dividends. After all, many Indian companies had shown more than 100% profitability whenever there have been exemptions and deductions. Many of the erstwhile 80HHC companies and many of the 10A, 10B companies have brought in money as export proceeds. There is nothing to presume that they will have a change of heart merely because of Anna Hazare's movement and will not resort to such shenanigans. And, the tax department's success in unearthing such scams has been very limited. The only constraint for the planners seems to be to have a subsidiary company abroad for which some sort of permission form RBI may be necessary. The next stage of generation of profit is rather easy in a foreign jurisdiction, particularly if it is a complicit one. Then the money stashed abroad that we hear about can easily be brought in as dividends by paying only 15% tax unlike in the case of VDIS in which at least the full rate of tax is charged along with a small amount by way of penalty/interest.

It may, however, be noted that Section 212 of the Companies Act provides that the Indian holding company shall in respect of each of its subsidiary attach the balance sheet, profit and loss account, report of the Board of directors and the report of the auditors for the subsidiaries. This is applicable both for the domestic and overseas subsidiaries. There is a provision for getting exemption from the requirement of furnishing such details from the company law authorities in terms of section 212(8). With the process of liberalization in India, a lot of subsidiaries have been created and it seems that the company law authorities were receiving a number of applications to dispense with the requirement of furnishing of all the particulars on a case-by-case basis. Therefore, through circular No 2 of 2011, of the Ministry of corporate Affairs, a general exemption has been given subject to the fulfillment of certain conditions and provided there is consolidation of the accounts in accordance with the relevant accounting standard. One of the conditions which is relevant in the context of our discussion is the following condition no (iv) of the circular which states that: “the company shall disclose in the consolidated balance sheet the following information in aggregate for each subsidiary including subsidiaries of subsidiaries: (a) capital (b) reserves (c) total assets (d) total liabilities (e) details of investment( except in case of investment in the subsidiaries) (f) turnover (g) profit before taxation (h) provision for taxation (i) profit after taxation,(j) proposed dividend .”

The moot point is that if the circular is followed, all the relevant information regarding reserves and proposed dividend should be available in the holding company's annual accounts. It is another matter that in many of the consolidated accounts of Indian companies such information is not actually available.

As for keeping the window of opportunity open for only one year, we find a parallel in the provisions of the American jobs creation Act enacted in end, 2004. Passed before the second term of President Bush, the Act provided for a temporary 85% dividend received on certain foreign earnings repatriated during a one-year period. This resulted in an effective tax rate of only 5.25% federal tax on the repatriated earnings. There was however other conditionalities involved. To qualify, the earnings were to be reinvested in the USA in terms of a reinvestment plan approved by the Board of directors. There were certain other conditions as well. It has however been reported that although American companies repatriated close to 500 million dollars, there were no surge in job creation, which was the main objective of the scheme. It is also reported that the provisions amounted to a refund of roughly 100 billion to such companies. This, therefore, might not have been a good precedent to follow.

For those Indian companies that were perspicacious enough to have subsidiaries in appropriate jurisdictions, dividends may just be pouring in this year. For others, tax planners will be readying schemes. In any event, civil society, which is apparently screaming hoarse about black money, will do well to keep a tab on at least the quantum of money coming in this year as dividends from foreign subsidiaries to ensure that the scheme brought in does not degenerate into another VDIS without appropriate safeguards.