Monday, October 2, 2023

India must take the lead on G20 proposal to track cross-border property deals

Wealthy Indians will find it much harder to invest their hidden wealth in properties in London, Dubai and other tax havens through shell companies with complex structures and escape tax scrutiny if a proposal in the G20 New Delhi Declaration becomes a reality.

India, as chair of the G20, has sensibly pressed for finding ways to enhance international tax transparency in real estate. The outcome is the Organisation for Economic Cooperation and Development (OECD) outlining a robust framework to track tax evaders using real estate deals to hide their undeclared incomes. The framework involves jurisdictions (countries) capturing electronic records on property ownership, creating registries to identify the beneficial owner, and sharing real-time information on overseas real estate deals.

The G20 New Delhi Leaders Declaration on Saturday noted the OECD’s latest work. The diplomatic term ‘noted’ indicates there isn’t consensus on the matter yet. And since the G20 does not have any implementation mechanism, a lot depends on what countries do. Still, a follow-up by subsequent presidencies would make sense as real estate continues to be a sink for black money, discouraging transparency on wealth and income. That this needs to change cannot be contested.

Globally coordinated media investigations, the Pandora and Paradise Papers, for example, revealed many powerful elites, including Indians, use offshore companies and trusts in tax havens to hold their wealth. A substantial amount of investment also went into real estate through offshore companies. While every action is not mala fide, some certainly are.

The OECD report says there has been a significant increase in cross-border ownership of real estate over the past decade, though there are no comprehensive statistics on such ownership. It attributes the increase to a shift from financial assets to real estate following the announcement of the Common Reporting Standards — in which jurisdictions collect information from their financial institutions with respect to account-holders residing abroad and automatically exchange this information in their jurisdictions of residence. But the scope for automatic exchanges of information on real estate is limited at present. The other problem is that cross-border real estate holdings are also underreported, resulting in tax evasion.

A recent survey of 18 European Union Member State tax administrations, featured in the OECD report, reveals some common elements in real estate tax fraud cases. These include complex ownership structures that don’t reveal the beneficial owner of the property, and a mismatch between the declared income and wealth of the buyer of the property and its value. There is also the use of complex loans to reduce tax, manipulation of the appraisal or valuation of the real estate property, and non-declaration of the purchase or sale or ownership. Similar surveys can be done across jurisdictions, including India.

The Financial Action Task Force has also said that many of the techniques used in tax fraud (such as complex ownership structures to hide identities and false or no declarations of relevant assets) are also used to launder money. So, the information collected by tax authorities could be used to fight other kinds of cross-border financial crimes in the real estate sector.

Information on real estate can come from multiple sources, such as third-parties (real estate agents and attorneys), tax returns, and real estate registers. In fact, many countries have land registers that document and record ownership and other relevant information. Some jurisdictions have centralised registers in which all transactions within a jurisdiction are recorded. When these centralised registers are digitised and can be queried, tax officials can access the information and match it with other data held about taxpayers, improving their ability to analyse such information for tax compliance.

Such a system could work elsewhere, too. Many states in India already capture electronic records of land ownership. This raises transparency. India should also consider moving to the Torrens system of directly registering titles in a central registry, which is used in the UK and Australia. The state guarantees ownership and becomes the keeper of all titles and records, and the title becomes the certificate of lawful ownership. This would increase transparency domestic tax compliance.

Many wealthy Indians also use complex shell companies to invest in real estate overseas and hide undeclared income from tax authorities. Listing the actual beneficial owner of any trust or company, as in the UK, thus makes eminent sense for India, too. Every individual holder of financial securities, whether people or juridical entities, should have a unique identifier so that the ultimate beneficiary can be traced.

The UK and Germany recently implemented registers listing the beneficial owners of foreign legal entities owning local real estate. The OECD report says that such registers could enhance transparency.

India should take the lead on implementing OECD’s framework. New Delhi joined the global fight against tax evasion over a decade ago. The government has also been an early adopter of the automatic exchange of information for tax purposes, which now works seamlessly. The G20 must now set a deadline for tax havens to provide information on legal owners.

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