Black money law: Beneficiaries in overseas discretionary trusts may face enquiry
MUMBAI: Indian tax authorities will ignore conventions to pierce trust structures used by most people to stash black money abroad. Persons who are named as beneficiaries in overseas discretionary trusts are likely to face enquiry even if they do not receive any money from such trusts. The taxman will look through the trust and lift the veil with the basic presumption that the fund a trust holds belongs to the beneficiaries and not some foreigners or non-resident Indians (NRIs).
Typically, nonresidents who are outside the jurisdiction of Indian tax office act as trustees and settlors to form and administer trusts in places such as Panama, Dubai, British Virgin Islands and Singapore.
Indeed, the income-tax department expects beneficiaries of undisclosed offshore trusts to come clean and declare under the black money law that they are the real beneficial owners of the trust money, said three tax professionals who participated in a recent meeting with top officials of the Central Board of Direct Taxes (CBDT) and finance ministry.
The conventional understanding, backed by Supreme Court rulings, is that unlike a specific trust where the beneficiaries are known and their entitlements are fixed, the income of a discretionary trust cannot be treated as income of the beneficiaries if there has been no distribution to the beneficiaries. Also, beneficiaries claim that they are not a party to the creation of the trust.
However, since the tax department believes that many Swiss bank account holders and owners of other undisclosed overseas assets have misused this interpretation of tax to hide behind discretionary trusts, it will go after beneficiaries of overseas trusts.
The choice, therefore, before such individuals is either to admit that the money lying with the trust is theirs and pay 60% to the government to close the matter, or argue before a court of law that the money does not belong to them but to a trust that has been created by non-residents with whom they have no links.
According to senior chartered accountant Dilip Lakhani, who also attended the meeting, “The view of the government is that any Indian who has either created a trust or formed a company outside India and deposited money into the trust or the company should disclose under the scheme as a beneficial owner of the fund even if his or her name is not there as a settlor or a shareholder.”
Lakhani expects the government to clarify the issue of discretionary trusts and beneficiaries in the FAQ (frequently asked questions) that would be published shortly.
LANDING IN TROUBLE
Beneficiaries who have received money from the trusts in the course of overseas business travel, holidays and education could, however, find it more difficult to distance themselves from the trusts. Moreover, if the tax department has evidence of such money transfers, it would look at ways to raise tax demand on them. But chances are that many beneficiaries who have not received any funds may refrain from disclosing their ownership of overseas assets and prefer to battle it out in court.
Some of the tax professionals, however, recommend a more conciliatory approach. Nihar Jambusaria, who heads the committee on international taxation of the Institute of Chartered Accountants of India ( ICAI), said, “In the case of a discretionary trust, so far as beneficiaries are concerned, where there are more than one, it is possible to argue and, in fact, it seems to be the correct legal position that the beneficiary need not disclose foreign assets belonging to the trust in his return of income. However, in view of lack of clarity in the Black Money Act and in the FAQs so far issued by CBDT, a beneficiary may disclose the assets of the trust in foreign country/countries to avoid any possible litigation.”
Meanwhile, three beneficiaries of an overseas trust having account with LGT Bank in Liechtenstein have moved high court after the Income-Tax Appellate Tribunal (ITAT), a quasi-judicial authority, last year dismissed their appeals.
The miscellaneous application filed by these individuals, aimed at highlighting the point that they are beneficiaries and not creators of the trust, was recently shot down by the appellate.