FDI from Cayman Island (Tax Haven and Rountripping)

Subject: Economy

Context:

According to the Department for Promotion of Industry and Internal Trade (DPIIT), Cayman Islands has emerged as the fifth largest investor in India, with foreign direct investment from the nation increasing over three-fold to USD 3.7 billion in 2019-20

Concept:

• India had received FDI worth USD one billion in 2018-19 and USD 1.23 billion in 2017-18 from Cayman Islands, which is UK Overseas Territory.
• Similarly, FDI from Cyprus too increased by about three-times to USD 879 million in the last financial year.
• Cayman Islands has become one of the most preferred jurisdictions for routing investments due to the absence of direct taxes costs.
• Additionally, this new trend caused wary among regulators as investments from tax havens do carry a comparatively higher perceived risk of laundered money, round tripping issues etc

Tax Haven

• A tax haven is generally an offshore country that offers foreign individuals and businesses little or no tax liability in a politically and economically static environment.
• Tax havens also share limited or no financial information with foreign tax authorities.
• Tax havens do not typically require residency or business presence for individuals and businesses to benefit from their tax policies.

Round tripping

• In the context of black money, it leaves the country through various channels such as inflated invoices, payments to shell companies overseas, the hawala route and so on.
• After cooling its heels overseas for a while, this money returns in a freshly laundered form; thus completing a round-trip.
• This route is far from simple or straightforward. Those indulging in this game are past masters who make the money flow through multiple layers consisting of many entities and companies.
• The money could be returned by investment in offshore funds that in turn invest in Indian assets. The Global Depository Receipts (GDR) and Participatory Notes (P-Notes) are some of the other routes that have been used in the past.