The 'Panama Papers' puts the spotlight on how companies should manage the legal and regulatory issues around their foreign money

Companies often need to open foreign currency accounts with banks outside India to make remittances for the purpose of business operations; mergers & acquisitions; and buying / selling real estate and financial assets abroad, among others. According to the Foreign Exchange Management (Foreign Currency Accounts by a person resident in India) Regulations, 2015, companies can remit up to 25 per cent of their net worth to meet specified business expenses. Further, Indian companies are allowed to hold and maintain foreign currency accounts abroad to make direct investment into foreign a joint venture, or a wholly-owned subsidiary on the condition that the amount received by way of dividend or any other entitlement from the subsidiary is repatriated to India within 30 days from the date of credit.

However, a company set up by an individual, under the Liberalised Remittance Scheme window (whereby $250,000 can be remitted into the account in any financial year), cannot be a special purpose vehicle.

"It needs to engage in operating business activity," says Radhika Jain, director, Grant Thornton Advisory.

Indian companies can set up investment vehicles under the Overseas Direct Investment norms that permit remittances of up to 400 per cent of the last audited net worth under the automatic route, adds Jain.

However, these foreign entities cannot undertake real estate business, or engage in buying or selling of properties. But, they are allowed to undertake construction development or other bona-fide business activities. The regulations for setting up an overseas subsidiary or joint venture to undertake financial services business are more stringent. Among other conditions, one requires a track record of three years in the financial services business to apply for one.

Tax experts say it is not unusual for overseas entities - particularly investment companies - to be housed in offshore tax havens to make use of double-tax avoidance treaties. Often, for ease of operations, institutional trust companies act as directors and in other fiduciary capacities on these offshore companies, instead of the directors or promoters of the parent company. This is done so that the effective management of these companies is not considered to be in the home jurisdiction - India - under the Place of Effective Management rules. They, accordingly, avoid getting taxed in India.

From a financial reporting perspective, the treatment of overseas investment or holding companies is no different from that of domestic companies. Their audited financials get consolidated into the Indian parent if 'controlled' by that Indian parent. This generally kicks in if more than 50 per cent of the share capital is owned by the Indian company. Tax and audit experts say there are no specific disclosure requirements for offshore accounts, other than separately stating details of repatriation in respect of cash and bank balances.

According to Overseas Direct Investment norms, if there is no mandatory audit requirement in the foreign country concerned, where the account has been opened, the annual performance report required to be submitted by the Indian parent company can be based on unaudited financial of the foreign company. This, however, has to be ratified by the board of the Indian parent, and certified by its auditors.

EXPERT TAKE: DOS AND DON’TS WHILE MANAGING OFFSHORE ACCOUNTS
Bank with a reputed financial institution that rigorously enforces KYC norms, even if that means more hassle in setting up the account
Send all money through normal banking channels, and maintain the paper trail
Do not fail to furnish details of foreign assets and income in the income-tax returns
Check the applicable laws of the country in which the account is to be opened
Appoint trustworthy signatories after necessary due diligence, and always have more than one signatory
Close the account if you don’t need it, rather than leave it idle for future use
Never get into non-transparent trust structures

Auditors and tax experts say that companies need to remain mindful of the general principle under the exchange control laws that offshore accounts can be established only for specified purposes and situations. "The source of credits to the accounts should always be explainable. The key here is end-use of the money," says Girish Vanvari, partner and national head of tax at KPMG in India.

Adds Harsh Pais, partner, Trilegal: "There needs to be a clear nexus between the account, where it is established, and how much money is funded, and the purposes for which it is intended to be used."

Companies must assume that they will need to disclose and explain such purpose transparently, and justify the requirement for accounts on that basis, Pais adds.

Any non-compliance on legal and regulatory front on overseas accounts and assets could attract penalties up to three times the sum involved under the Foreign Exchange Management Act. The black money law - Undisclosed Foreign Income and Assets (Imposition of Tax) Act, 2015 - has several provisions to deal with hidden foreign income and assets. "The penalty for non-disclosure of foreign income or assets could be three times the payable tax," says Ramesh Vaidyanathan, managing partner at Advaya Legal.

Non-disclosure or inaccurate disclosure in income-tax returns of such overseas assets could also attract a penalty of Rs 10 lakh, he adds.

Given the spotlight on offshore accounts and assets, it makes business sense for companies to manage them well.