The Global War On Cash: Target India – Part 2

Global Crackdown On Black Money

Since the crisis the US has been opening up various avenues for revenue flow into the system. One such was Foreign Account Tax Compliance Act or FATCA implemented in 2010. It required firms around the world to report accounts held by US citizens to the Internal Revenue Service or else face being frozen out of the U.S. financial system. But on the other hand it does not share information about what happens in the United States with other countries, effectively making it an attractive tax haven. Some are calling it the new Switzerland and the Rothschild & Co. are at the forefront in this money laundering business. So now you don’t need to go to the infamous Panama or Switzerland to launder your dirty money, you could just visit your nearby Rothschild office where they have a system in place that could make it happen in the US itself. The Panama Papers and the Swiss Leaks couldn’t have come at a better time.

Europe on their part is working with their own version called the Common Consolidated Corporate Tax Base (CCTB). The program would force multinationals to pay taxes where their physical assets (including human capital) are located, and where their business transactions take place. Apple alone would be forced to pay $14.5 billion dollars (plus interest) in back taxes to Ireland. In line is Pfizer, Facebook and others. A new study reveals Fortune 500 companies are holding nearly $2.5 trillion in accumulated profits offshore to pay less tax. Top on the list is Apple which since 2009 funneled $214.9 billion to tax havens and would owe $65.4 billion if the profits returned to the US. There is an ongoing crackdown on the global tax havens as a way to recover revenue and mitigate the crisis.

India’s Informal Economy

There is a big contrast in how the foreign countries are dealing with their black money compared to what the Indian govt. is doing. The Indian government’s move to eradicate black money is based on a premise that “black money” consists of hoards of cash which are held in trunks or pillowcases or buried under the earth which though duly shared by the layman as well, is not the only case. From a geo-economic perspective black money could be roughly classified into two forms, the money that is:

• within the country aka informal economy
• laundered to tax-havens

It is India’s this informal economy, the pervasive use of “black money” – illegal cash, hidden from the tax authorities – that created a bulwark against the 2008 crisis in the banking sector.

In most of the world the price you pay for a property is pretty much the price listed in the window of the local realtor or estate agent. Not in India. Here a significant part of almost all house purchases are made in cash. That cash payment is what Indians refer to as “black money”. Home-buyers will almost always have to pay part of the property price in cash. What it also means is that Indians tend to have much smaller mortgages compared to the real value of their properties than elsewhere in the world.

At the peak of the property boom in the US and the UK it was common for lenders to offer mortgages worth 100% of the value of the property. Some would even offer 110% mortgages, allowing buyers to roll in the cost of finance and furnishing their new home. That’s why when the crash came, the balance sheets of the big banks collapsed along with property prices.

So when prices fell in India – and they did fall in 2008 and 2009 – most bank loans were still comfortably within the value of the property. That’s why India managed to avoid the subprime crisis that did so much damage elsewhere. It is this dirty money that forms the informal economy that saved India from the financial crisis that engulfed the rest of the world.

In contrast the money that is generated through corruption by the politicians and private corporations is the actual black money which is laundered to the safe heavens like Mauritius and Cayman Islands. While the Govt. was trying to curb the black money menace at home most of the Black Money was already being routed into India from the tax-havens and legally invested into the country through FDI.

This is called Round Tripping. One of the leading puzzles related to cross border flow of investment is the phenomenon of ‘Round Tripping FDI’. Here, money from a country (eg. India) flows to a foreign country (Mauritius) and comes back as foreign direct investment to India. Round tripping of FDI refers to the capital belonging to a country, which leaves the country and then is reinvested in the form of FDI. Why the biggest sources of FDI are tax-havens? While the western countries cracked down on the actual sources of black money – the foreign tax havens, in contrast the Indian govt. waged a war within on the informal economy that saved the country during the worst economic crisis of 2008.

Source: GGI.