tax havens
DESCRIPTION
We have prepared this document using only secondary data. The data has been collected from internet and books.This Document is Prepared by:Kiran GuptaVenkatVineeshVishal GuptaTRANSCRIPT
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TAX HAVENS
Prepared By:
Kiran
Vineesh
Venkat
Vishal
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TAX HAVENS
CHAPTER 1
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TAX HAVENS
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CHAPTER 1
INTRODUCTION
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INTRODUCTION:
A tax haven state is a state where certain taxes are levied at a very low rate or are not levied
at all from international tax perspective.
In view of such extremely lower rate or nil taxation individuals and/or corporate firms finds it
very attractive to shift themselves to such states. This also refers to a scenario wherein the
governments compete on the basis of the tax structure of the state. In a way then different
jurisdiction tend to become havens for different types of taxes. Following definitions sums up
and attempt to provide clarity on subject matter:
What. Identifies an area as an tax haven is the existence of a composite tax structure
Established deliberately to take advantage of, and exploit, a worldwide demand for
opportunities to engage in tax avoidance. (Source- The Economist)
As per this definition a number of jurisdiction traditionally thought of as tax havens can
actually be excluded. Some other school of thoughts tends to suggest that any country that
amends/changes or modifies its tax laws solely with an aim to attract foreign capital could be
considered a tax haven. However as generally appreciated the main feature of a tax haven is
that has the tax laws and that can be used to avoid the tax laws or regulations of other tax
jurisdiction.
Following are commonly regarded as indicative of a tax haven:
1. Nil or nominal taxes
2. Lack of effective exchange of tax information with tax authorities of other
jurisdiction.
3. Lack of transparency in the operation of legislative, legal or administrative provisions.
Tax treaties and tax havens:
An important feature of the tax havens is their use of tax treaties. A network of
bilateral tax treaties between the tax havens and other countries regulates which of
them should have the right to tax different tax objects. These agreements regulate.
The federal government loses both individual and corporate income tax revenue from
the shifting of profits and income into low-tax countries. The revenue losses from this
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tax avoidance and evasion are difficult to estimate, but some have suggested that the
annual cost of offshore tax abuses may be around $100 billion per year. International
tax avoidance can arise from wealthy individual investors and from large
multinational corporations; it can reflect both legal and illegal actions. Tax avoidance
is sometimes used to refer to a legal reduction in taxes, whereas evasion refers to tax
reductions that are illegal. Both types are discussed in this report, although the
dividing line is not entirely clear. A multinational firm that constructs a factory in a
low-tax jurisdiction rather than in the United States to take advantage of low foreign
corporate tax rates is engaged in avoidance, whereas a U.S. citizen who sets up a
secret bank account in the Caribbean and does not report the interest income is
engaged in evasion. There are, however, many activities, particularly by corporations,
that are often referred to as avoidance but could be classified as evasion. One example
is transfer pricing, where firms charge low prices for sales to low-tax affiliates but pay
high prices for purchases from them. If these prices, which are supposed to be at
arms-length, are set at an artificial level, then this activity might be viewed by some
as evasion, even if such pricing is not overturned in court because evidence to
establish pricing is not available. Most of the international tax reduction of individuals
reflects evasion, and this amount has been estimated to range from about $40 billion
to about $70 billion a year. This evasion occurs in part because the United States does
not withhold tax on many types of passive income (such as interest) paid to foreign
entities; if U.S. individuals can channel their investments through a foreign entity and
do not report the holdings of these assets on their tax returns, they evade a tax that
they are legally required to pay. In addition, individuals investing in foreign assets
may not report income from them. Corporate tax reductions arising from profit
shifting have also been estimated. As discussed below, estimates of the revenue losses
from corporate profit shifting vary substantially, ranging from about $10 billion to
about $90 billion. In addition to differentiating between individual and corporate
activities, and evasion and avoidance, there are also variations in the features used to
characterize tax havens. Some restrictive definitions would limit tax havens to those
countries that, in addition to having low or non-existent tax rates on some types of
income, also have such other characteristics as the lack of transparency, bank secrecy
and the lack of information sharing, and requiring little or no economic activity for an
entity to obtain legal status. A definition incorporating compounding factors such as
these was used by the Organization for Economic Development and Cooperation
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(OECD) in their tax shelter initiative. Others, particularly economists, might
characterize as a tax haven any low-tax country with a goal of attracting capital, or
simply any country that has low or non-existent taxes. This report addresses tax
havens in their broader sense as well as in their narrower sense. Although
international tax avoidance can be differentiated by whether it is associated with
individuals or corporations, whether it is illegal evasion or legal avoidance, and
whether it arises in a tax haven narrowly defined or broadly defined, it can also be
characterized by what measures might be taken to reduce this loss. In general, revenue
losses from individual taxes are more likely to be associated with evasion and more
likely to be associated with narrowly defined tax havens, while corporate tax
avoidance occurs in both narrowly and broadly defined tax havens and can arise from
either legal avoidance or illegal evasion. Evasion is often a problem of lack of
information, and remedies may include resources for enforcement, along with
incentives and sanctions designed to increase information sharing, and possibly a
move towards greater withholding. Avoidance may be more likely to be remedied
with changes in the tax code. Several legislative proposals have been advanced that
address international tax issues. President Obama has proposed several international
corporate tax revisions which relate to multinational corporations, including profit
shifting, as well as individual tax evasion. Some of the provisions relating to
multinationals had earlier been included in a bill introduced in the 110th Congress by
Chairman Rangel of the Ways and Means Committee (H.R. 3970). Major revisions to
corporate international tax rules are also included in S. 3018, a general tax reform act
introduced by Senators Wyden and Gregg in the 111th Congress, and a similar bill, S.
727, introduced by Senators Wyden and Coats in the 112th Congress.3 This bill has
provisions to tax foreign source income currently, which could limit the benefits from
corporate profit shifting. Ways and Means Chairman Dave Camp has proposed a
lower corporate rate combined with a move to a territorial tax system (which would
exempt foreign source income). Because a territorial tax could increase the scope for
profit shifting, the proposal contains detailed provisions to address these issues. A
territorial tax proposal has also been introduced by Senator Enzi (S. 2091). The
Senate Permanent Subcommittee on Investigations has been engaged in international
tax investigations since 2001, holding hearings proposing legislation.5 In the 111th
Congress, the Stop Tax Haven Abuse Act, S. 506, was introduced by the chairman of
that committee, Senator Levin, with a companion bill, H.R. 1265, introduced by
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Representative Doggett. The Senate Finance Committee also has circulated draft
proposals addressing individual tax evasion issues. A number of these anti-evasion
provisions (including provisions in President Obamas budget outline) have been
adopted in the Hiring Incentives to Restore Employment (HIRE) Act, P.L. 111-147.
In the 112th Congress, a revised version of the Stop Tax Haven Abuse Act (H.R. 2669
and S. 1346) was introduced. On the 111th Congress, S. 386, introduced by Chairman
Leahy of the Senate Judiciary Committee, would have expanded the money-
laundering provisions to include tax evasion and provide additional funding for the
tax division of the Justice Department. These tax-related provisions were not included
in the final law, P.L. 111-21. S. 569, also introduced by Chairman Levin, would
impose requirements on the states for determination of beneficial owners of
corporations formed under their laws. This proposal has implications for the potential
use of incorporation in certain states as a part of an international tax haven plan. The
Permanent Subcommittee also released a study of profit-shifting by multinationals in
preparation for a hearing on September 20, 2012.6, the first section of this report
reviews what countries might be considered tax havens, including a discussion of the
Organization for Economic Development and Cooperation (OECD) initiatives and
lists. The next two sections discuss, in turn, the corporate profit-shifting mechanisms
and evidence on the existence and magnitude of profit shifting activity. The following
two sections provide the same analysis for individual tax evasion. The report
concludes with overviews of alternative policy options and a summary of specific
legislative proposals.
Characteristics:
The term "tax haven" has been loosely defined to include any country having a low or
zero rate of tax on all or certain categories of income, and offering a certain level of
banking or commercial secrecy. Applied literally, however, this definition would
sweep in many industrialized countries not generally considered tax havens, including
the United states (the U.S. does not tax interest on bank deposits of foreigners).The
term "tax haven" may also be defined by a "smell" or reputation test: a country is a tax
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haven if it looks like one and if it is considered to be one by those who care. Many
publications identify jurisdictions as tax havens, and the same jurisdictions generally
appear on all of the lists. Most jurisdictions which are considered tax havens have
at least some of the characteristics described below. All, however, offer low or no
taxes on some category of income, as well as a high level of confidentiality to banking
transactions Many countries having tax haven characteristics are often bases for
minimizing taxation on various types of perfectly legal income and activities. These
same countries provide anonymity sought by persons evading tax laws. Accordingly,
there is a problem when looking at tax havens of combining legitimate and
illegitimate activities and confusing the former with the latter. Care should be taken to
avoid this.
1. Low Tax:
Many of the jurisdictions that are considered tax havens do impose taxes. All,
however, either impose no income tax on all or certain categories of income, or
impose a tax which is low when compared to the tax imposed by the countries whose
resident taxpayers use them.
Some jurisdictions do not impose income taxes, or impose very low rates of tax. In
the Caribbean, the Bahamas, Bermuda, the Cayman Islands, and the Turks and Caicos
do not impose any income or wealth taxes. In some cases the tax situation may be part
of a policy to attract banking, trust or corporation business. In other cases it may exist
because the country never found the need to impose tax. Often, low tax rates are
considered an evil. However, many tax havens are small less-developed countries
whose residents are generally poor. In many cases, the small population of the country
makes an income tax system impractical. Instead, the country will establish a license
or fee system
for generating revenue. Instead of imposing an income tax, fees can be charged for
bank licenses, commercial charters, and the like. Administration costs of collecting
those revenues are kept to a minimum. Often jurisdictions, while imposing significant
domestic taxes, impose low rates on certain income from foreign sources, a tax
system used by a number of developed high tax countries (such as France) as well as
by some tax havens. Panama is an example. Accordingly, a local corporation can be
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formed and managed in the tax haven with no tax being paid to the tax haven on its
income from other jurisdictions. Some tax havens impose low rates of tax on income
from specific types of business. Some jurisdictions, for example, offer special tax
regimes to holding companies, making them especially useful as financial centers or
sites for holding some tax havens combine their tax system with a treaty network.
This combination can make them a desirable sites for forming a holding company to
invest in a treaty partner.
2. Secrecy
By definition, all of the jurisdictions with which we are concerned, afford some level
of secrecy or confidentiality to persons transacting business, particularly with banks.
This secrecy has its origin in either the common law or in statutory law. Common law
secrecy is found in those jurisdictions which were or still are British Colonies. It
derives from the finding of an implied contract between a banker and his customer
that the banker will treat all of his customer's affairs as confidential. If violated, an
action for damages for breach of contract lies against the banker. Many jurisdictions
have confirmed or strengthed the common law rules by statute, and have added
criminal sanctions for breaching secrecy. In many cases the law was strengthened to
maintain or improve the particular jurisdiction's competitive position. For example, in
1976 the Cayman Islands, which had strict bank secrecy before, tightened its laws by
adding more substantial sanctions against persons
divulging most banking and commercial information.This tightening was a reaction to
United States v. Field in which the U.S. court directed a Cayman resident to give
testimony concerning bank information before a U.S. grand jury, even though the
testimony would violate the bank secrecy laws of the Cayman Islands and would
subject him to limited criminal penalties. Some level of secrecy is a characteristic
common to both tax havens and non-tax havens. Most countries do impose some level
of protection for banking or commercial information. At the same time, however,
many countries will not protect information from a legitimate inquiry from a foreign
government, particularly where that inquiry is made under a treaty. Tax havens,
however, refuse to breach their wall of secrecy, even where a serious violation of the
laws of another country may be involved. The distinction is between unreasonably
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restrictive rules of bank secrecy which 2/ Langer and Walker, "The Cayman Islands -
An Important Base for Foreign Companies," U.S. Taxation of International
Operations, II 8503, Prentice Hall (1978). may encourage the commitment of
international tax and other offenses, and those which pay due regard to the protection
of individual privacy, but which also permit legitimate inquiry in appropriate cases.
Secrecy is most troublesome when a violation of U.S. criminal laws is under
investigation. It also presents significant problems to IRS when it attempts to audit
legal transactions. The secrecy may be used as an excuse by a taxpayer not to produce
records, or it may present real problems preventing IRS access to records.
Tax havens exist within India as well. When Narendra Modi offers the Tatas a
tax credit for putting up the Nano factory in Gujarat, he is offering a sales tax haven
for the project for some years.
THE BIGGEST TAX HAVENS IN THE WORLD:
1. Switzerland:
Switzerland takes the number one spot in this list of the 10 biggest tax havens in the
world for several reasons. One of these is because the country implements an
extremely high level of secrecy when it comes to the financial assets of its clients.
While it is true that there are other jurisdictions that allow for even greater secrecy
such as the Bahamas and Bermuda, Switzerland beats them because the country
operates on a much larger scale. It is also because of the fact that the bank accounts
managed in the country are also operated on a massive scale. The offshore accounts
here have partial or full tax exemptions, depending on the private bank.
2. The Cayman Islands:
A British Overseas Territory situated in the western part of the Caribbean Sea, is
comprised of three different islands. There is the Grand Cayman, the Cayman Brac,
and the Little Cayman. These islands are located northwest of Jamaica and to the
south of Cuba. In the Cayman Islands, people who are looking to evade their taxes get
the full package. They do not have to pay for personal income taxes, capital gains,
corporate taxes, and payroll taxes.
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3. Luxembourg:
One of the members of the European Union, the United Nations, Benelux, OECD,
and Nato, Luxembourg is a country that reflects political consensus as it is in favor of
economic, military, and political integration. The countrys capital city, which is also
the largest, is the city of Luxembourg. In the Tax Justice Network report, the country
got a Financial Secrecy Index value of 1,621.2 and a Secrecy Score of 68, which
renders it at third place on our list.
4. Hong Kong:
In the Peoples Republic of China, there are two Special Administrative Regions, with
Hong Kong being one of them. It is located at the south coast of China and is
surrounded by the South China Sea and the Pearl River Delta. Seven million people
live in the region. Aside from being a popular tourist hot spot, Hong Kong is also a
haven for people who do not want to pay their taxes and deposit large amounts of
money in offshore accounts. Here, clients do not have to pay for sales taxes, capital
gains, and payroll taxes. They also do not have to worry about personal tax being
deducted from their money.
5. U.S.A.: The states of Nevada and Wyoming are two of the major contributing factors
to the countrys increasing problems in terms of tax evasion. In Nevada, there are no
capital gains, gift tax, personal income tax, and inheritance tax. In Wyoming, there are
no corporate taxes, inventory taxes, unitary taxes, gift taxes, estate taxes, personal
income taxes, franchise taxes, and inheritance taxes.
6. Singapore:
Singapore, an island city-state in Southeast Asia, is considered by many as one of
their best choices for opening offshore bank accounts. Almost anyone can open such a
bank account without experiencing any hassle. This is one of the major reasons why
Singapore was graded with a Financial Secrecy Index value of 1,118 and a Secrecy
Score of 71 by the Tax Justice Network.
7. Jersey:
Jersey is a British Crown Dependency that houses a great number of banks offering
offshore accounts to foreign clients. Offshore banking and investments has been a part
of the bailiwicks underground economy. In the Tax Justice Network report, Jersey
got a Financial Secrecy Index value of 750.1 and a Secrecy Score of 78.
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8. Japan:
Many of the offshore banks in Japan do not subject the deposits made by their clients
to interest rate standards and regulations. Fortunately, with the offshore banking
center that has been established in Tokyo, the countrys law enforcement authorities
would at least be able to monitor and control any developments in these financial
institutions.
9. Germany:
Germany makes it easy for people to open offshore bank accounts. However, this has
also resulted in the increasing number of individuals opening such accounts so they
can evade their taxes. The good news is that the country is trying to control this
problem through the implementation of stricter and much more stringent policies. In
the report, Germany got a score of 669.8 for its Financial Secrecy Index value, and a
Secrecy Score of 57.
10. Bahrain:
Bahrain, situated near the Persian Gulfs western shores, is a small island-country.
The archipelagos largest island is Bahrain Island. While there are plenty of financial
institutions offering offshore banking services and bank accounts in the island, its
client financial secrecy is the lowest of all the other nations included in this list.
Bahrain gets tenth place because it has the lowest level of Financial Secrecy Index
value based from the Tax Justice Networks report, which is at 660.3. It also has a
Secrecy Score of 78.
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CHAPTER - 2
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CHAPTER 2
LITERATURE REVIEW
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Literature review:
I. TAX HAVENS How Globalisation Really works
Authors:
Ronen Palan: He is a professor of International Political Economy at the University
of Birmingham.
Richard Murphy: He is the C.E.O of Tax Research, LLP, based in the U.K.
Christian Chavagneux: He is the deputy editor in chief of Alternatives
Economiques and editor of LEconomie politique.
This book calls attention to one of the major scandals. This book is an invaluable guide to the
lightly studied subject of tax havens. Clearly written and thoroughly researched, it vividly
demonstrates how central the scattered archipelago of so called Preferential Tax Regimes is
to the operation of contemporary global finance. Tax Havens belongs on the shelf of every
specialist in the international political economy of money. Impeccably researched and packed
with new insights, this groundbreaking book exposes financial capitalisms best kept secret.
II. INTERNATIONAL TAXATION Background Material
By:
ICAI - The Institute of Chartered Accountants of India.
A tax haven state is a state where certain taxes are levied at a very low rate or are not levied
at all from international tax perspective.
In view of such extremely lower rate or nil taxation individuals and/or corporate firms finds it
very attractive to shift themselves to such states. This also refers to a scenario wherein the
governments compete on the basis of the tax structure of the state. In a way then different
jurisdiction tend to become havens for different types of taxes. Following definitions sums up
and attempt to provide clarity on subject matter:
What. Identifies an area as an tax haven is the existence of a composite tax structure
established deliberately to take advantage of , and exploit, a worldwide demand for
opportunities to engage in tax avoidance. (source - The Economist)
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As per this definition a number of jurisdiction traditionally thought of as tax havens can
actually be excluded. Some other school of thoughts tends to suggest that any country that
amends/changes or modifies its tax laws solely with an aim to attract foreign capital could be
considered a tax haven. However as generally appreciated the main feature of a tax haven is
that has the tax laws and that can be used to avoid the tax laws or regulations of other tax
jurisdiction.
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CHAPTER - 3
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CHAPTER 3
OBJECTIVES
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Objectives:
To study how tax havens are used to avoid tax
To study the negative effects of tax havens and policies
implemented
To study the reasons for the existence of tax havens.
To examine the Vodafone case vis-a-vis tax havens.
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CHAPTER 4
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CHAPTER 4
OBJECTIVE 1 (RESEARCH METHODOLOGY)
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Research Methodology
MEANING OF THE RESEARCH
Research may mean the first small step in an endeavour to understand better the change
occurring and at times forced upon we as individuals or as society.
Research as process involves defining problems, hypothesis, formulation and organization
and evaluating data, deriving deductions, interferences and conclusion after careful testing.
OBJECTIVE OF RESEARCH
1. It extends, verifies or corrects knowledge.
2. It enables us to have a better understanding of our world.
3. It aids in purposive planning.
4. Research initiates, formulates, deflects and clarifies theory.
METHODS OF DATA COLLECTION
Secondary data.
Secondary data may be defined as data that has been collected earlier for some purpose other
than the purpose of the present study. Any data that is available prior to the commencement
of the research project is secondary data it is called historic data.
USES OF SECONDARY DATA
It acts as a reference for the present study.
The secondary data can be a useful benchmark, which the findings of the study can be
tested.
At times it may be the only source of data.
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SOURCES OF SECONDARY DATA
Published Sources
Unpublished sources
In this project two methods of collection were used. They are:
1. Unpublished source of data from internet.
2. Published source of data in the form of books, newspapers and international news.
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Methods of corporate tax avoidance:
1) Allocation of Debt:
One method of shifting profits from a high-tax jurisdiction to a low-tax one is to borrow
more in the high-tax jurisdiction and less in the low-tax one. This shifting of debt can be
achieved without changing the overall debt exposure of the firm.
Example: Suppose there is a company in U.S.A and its subsidiary is in Switzerland which
is a tax haven, now suppose the company needs 1000 crores loan the company borrows
the entire or most of the money form the country which is not a tax haven, though the
money borrowed is used even by the company in tax haven to reduce its tax liability
.
2) Transfer Pricing:
The second major way that firms can shift profits from high-tax to low-tax jurisdictions
is through the pricing of goods and services sold between related companies. An
important and growing issue of transfer pricing is with the transfer of rights of intellectual
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property, or intangibles. If a patent developed in the United States is licensed to a
subsidiary in a low-tax country , income will be shifted if the royalty or other payment is
higher than the true value of the license. One problem with shifting profits to some tax
haven jurisdictions is that, if real activity is necessary to produce the intangible these
countries may not have labor and other resources to undertake the activity.
How companies use transfer pricing and tax havens:
Example 1:
Lets say there is a company in U.S and it earns $I million pre-tax profit and the
company has to pay 35% tax to the government of U.S.A which comes to $350000(35%
of 1 million) and the profit after tax is $650000(I million-350000) which is the post tax
profit. So now what the company does is, it establishes a small subsidiary in a small
island nearby which is a tax haven which maintains lot of secrecy and tax rate is only 5%.
Now the parent company registers a patent in the name of the subsidiary in the tax haven
and now this patent is sold to the parent company in U.S.A. The price of the patent sold to
the parent company is usually more than the market value which is known as transfer
pricing. Now the parent company will have to pay royalty to the subsidiary in return for
buying the patent. Suppose the parent company pays $800000 royalty to its subsidiary
and hence the income is shifted to the tax haven and now the parent company will have
profits of $200000(I million 800000) and hence it has to pay tax of $70000 only and
when it comes to the subsidiary it has to pay only $40000 and hence total tax paid is only
$110000($70000+$40000)but actual tax before using tax haven was $350000 which
means the company has saved $240000 of tax.
Example 2:
suppose there is a company in Canada and it produces telephones(cost of production
200$) and this company establishes its subsidiary in a tax haven Bermuda this parent
company manufactures and sells these telephones to this subsidiary at 1$ each let say
1000 units whose actual market value is 24$ and this subsidiary sells these units in the
open market on behalf of the parent company. Therefore the profit of the subsidiary is
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1000*23=23000$ and the tax rate is only 1% and the company would pay only
23000*1% which is 230$ only and tax paid by parent company is 800*30%(let say 30%
is tax rate in Canada)is 240 therefore total tax paid is 470$
and tax saved is 1000*24=24000, 24000-200=23800, 23800*30%=7140$ and actual tax
paid is only 470$ hence tax saved is 7140$-470$=6670$
3) Contract Manufacturing:
When a subsidiary is set up in a low-tax country and profit shifting occurs, as in the
acquisition of rights to an intangible, a further problem occurs: this low-tax country may
not be a desirable place to actually manufacture and sell the product. For example, an
Irish subsidiarys market may be in Germany and it would be desirable to manufacture in
Germany. But to earn profits in Germany with its higher tax rate does not minimize taxes.
Instead the Irish firm may contract with a German firm as a contract manufacturer, who
will produce the item for cost plus a fixed markup.
4) Hybrid Entities, and Hybrid Instruments:
Hybrid entities that achieve tax benefits by being treated differently in the United States
and the foreign jurisdiction, there are also hybrid instruments that can avoid taxation by
being treated as debt in one jurisdiction and equity in another.
5) Tax Credit:
Alternatively, the use of tax havens can be a source of tax credits which would also
reduce the effective tax rate on investment in high-tax countries.
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Other ways:
Residence Jurisdiction:
In most countries in the world, residence is the primary basis of taxation. In
some cases the low tax jurisdiction levy no, or only very low , income tax. But
almost no tax haven assess any kind of capital gain tax. Relocating personal
residency to a tax haven therefore acts like an attractive proposition.
Asset Holding & Management:
Asset holding involves utilizing a trust or a company, or a trust owning a
company. Company or a trust can be formed in one tax haven, and will usually
be administrated and resident in another. The function is to hold assets, which
may consists of a portfolio of investments under management, trading
companies or groups, physical assets such as real estate or valuable premises.
The essence of such arrangements is that by changing the ownership of the
assets into an entity which is not resident in the high tax jurisdiction, they
cease to the taxable in that jurisdiction. Often the mechanism is employed to
avoid a specific tax.
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CHAPTER - 5
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RESEARCH METHODOLOGY
SOURCES OF SECONDARY DATA
Published Sources
Unpublished sources
In this objective, two methods of collection were used. They are:
1. Unpublished source of data from internet.
2. Published source of data in the form of books, newspapers and international news.
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CHAPTER 5
OBJECTIVE 2 (NEGATIVE EFFECTS OF TAX
HAVENS)
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Negative effects of tax havens:
Damaging tax competition:
Economic integration has made it easier to avoid taxation in one country by moving mobile
taxable objects to other countries. In particular, increased capital mobility has made it
possible for countries to attract capital by offering favorable tax terms. A welfare economics
perspective indicates that, when countries compete to attract taxable objects, taxes will be set
too low because each country will not take account of the fact that they harm other nations.
Tax havens have contributed to reinforcing tax competition by offering secrecy rules and
fictitious domiciliary positions combined with zero tax regimes.
The degree of harmful tax competition will largely depend on the mobility of the tax
base. It has normally been assumed, for example, that people are less mobile than capital.
First, it affects the way the tax burden is distributed between different groups in society, such
as owners of capital and wage earners. Viewed in isolation, a reduction in capital taxes means
that owners of capital pay a relatively smaller proportion of total taxes and wage earners pay
a higher share.
Inefficient allocation of investment:
To maximise the contribution to value creation, investment should be made where it obtains
the highest pre-tax return in other words, where the socio-economic return is best.
However, private investors are not concerned with the pre-tax return but with the post-tax
return, which is the income they retain. Ideally, the tax system should be designed to ensure
that private and socio-economic investment decisions coincide.
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That would yield the highest possible value creation. As mentioned above, however, taxes
influence investor behaviour. The greater the difference between private and socio-economic
returns, the more the tax system will impose an efficiency loss on the economy.
Effects of secrecy:
The secrecy rules mean that tax havens can easily become pass-through locations where
investors achieve anonymity from the tax authorities in their home country and from possible
creditors. This is lucrative for these jurisdictions because, in exchange for zero or very low
tax, they make money from fees or from the use of local representatives and administrators
by foreign companies. The effect of such rules on other countries is that the cost of
committing economic crimes is reduced, because both the criminal activity and its proceeds
can be concealed.
There are six main consequences of that secrecy:
1. Increased tax evasion and tax avoidance;
2. Redistribution of wealth from the poorest in the world to the richest in the world;
3. Increased opportunity for corruption;
4 Financial instability;
5. Inefficiency within markets;
6. Weaker democracies.
More unequal division of tax revenues:
The use of tax havens also affects which countries have the right to tax capital income which
can lead to a more unequal division of tax revenues. This problem is particularly associated
with the taxation of capital gains by companies registered in a tax haven. Under international
tax law, both the country where an owner is domiciled (if a private individual) or registered
(if a company) and the country where the company operates basically have the right to tax
capital gains. A large network of bilateral tax treaties seeks to overcome the potential
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problem of double taxation which arises because more than one jurisdiction has the right to
tax the same tax base. These treaties normally apply the domiciliary principle in other
words, the country in which the owner is domiciled or registered acquires the right to tax,
rather than the source country where the income has been earned. Traditionally, this way of
assigning the right to tax has been justified with reference to the strong ties which typically
exist between the country of domicile and the taxpayer. If a personal taxpayer pays tax in the
country where they are domiciled, they will also benefit from the range of public services
financed by the tax. This justification disappears in the case of legal entities merely registered
in a jurisdiction.. In such circumstances, principles of fairness suggest that the right to tax
should rest with the source country. Many tax treaties between OECD members and
developing countries have taken account of the effect of the domiciliary principle on the
distribution of taxes by giving the source country the right to impose a withholding tax up to
a specified amount. This system ensures that the source country also receives a share of the
tax revenues. Typically, tax treaties established between tax havens and other developing
countries make no provision for such a withholding tax
Other effects:
1. Tax havens help rich people hide money that should be spent on schools, hospitals, roads
and other public services.
2. Tax havens force poor people to pay the taxes of the rich.
3. Tax havens help criminals hide their loot.
4. Tax havens help dictators and their friends steal the resources of developing countries.
5. Tax havens allow banks to dodge financial rules and regulations.
6. Tax havens corrupt markets, concealing insider dealing and supporting aggressive tax
dodging by multinational companies.
7. Tax havens create a private world of secrecy.
8. Tax havens widen the gap between rich and poor people.
9. Tax havens make laws in secret which affect us all.
10. Reduction in budget revenues.
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11. High risk of Plunders.
12. Capital outflow.
Zug is a tax haven in Switzerland with a tax rate of 15% to 16% which is half when
compared to U.S tax rate of 35%. It is a place with lowest tax rate in switzerland. Percapita
income of Switzerland is 8 times more than per capita income of india and it ranks 7th in HDI
and India ranks 128th . GDP of India is 15 times more than Switzerland which is means there
is no actual production taking place in Switzerland. The population of Zug is 26000 and the
number of companies are 30000. The number of companies are growing at the rate of 800 per
year and these companies are nothing but mailboxes.
Transocean a Texas company claims that it is swiss and is headquartered in Zug for tax
benefits. It saved 2 billion $ in taxes by doing so. Weatherford International a Texas company
also did the same. But in reality they just had a mailbox in a small building.
98 of the FTSE 100 companies have 8492 offshore subsidiaries. A advertising company
called WPP has 611 tax haven companies. Big four British Banks have 1649 subsidiaries. All
these companies are registered in Jersey. 6 of the top 10 tax havens of the world are
controlled by U.K.
Top 50 U.S firms setting up establishment in Irish nations. Most of them have a permanent
establishment not in the country in which it did the most business , but in the country where it
can pay least amount of tax. Top 50 firms have established their business in tax havens, there
are 19 in Ireland, 8 in Switzerland, 5 in Netherlands and 1 in Luxemburg , which clearly
shows that the greatest number is in Ireland.
Tax havens raise foreign capital through:
Low tax rate
High privacy
Low control
Easy company registration
Due to which Worlds total wealth is about $191 trillion and the money in tax havens
is $32 million that is 1/6th of worlds wealth.
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Tax Havens Black List:
At the London G20 summit on 2 April 2009, G20 countries agreed to define a blacklist for
tax havens, to be segmented according to a four-tier system, based on compliance with an
"internationally agreed tax standard." The list as per April 2 of 2009 could formerly be
viewed on the OECD Data, but had been removed by 2012. The four tiers were:
1. Those that have substantially implemented the standard (includes most countries
but China still excludes Hong Kong and Macau).
2. Tax havens that have committed to but not yet fully implemented the standard
(includes Montserrat, Nauru, Niue, Panama, and Vanuatu)
3. Financial centres that have committed to but not yet fully implemented the
standard (includes Guatemala, Costa Rica and Uruguay).
4. Those that have not committed to the standard (an empty category)
Those countries in the bottom tier were initially classified as being 'non-cooperative tax
havens'. Uruguay was initially classified as being uncooperative. However, upon appeal the
OECD stated that it did meet tax transparency rules and thus moved it up.
Policies Implemented
The OECD Guidelines and transfer pricing today:
The OECD required the use of the controversial arms length principle for the pricing of
goods and services transferred between entities under common ownership. This principle
states that goods or services should be priced as they would be priced in an open market ,
with participants negotiating as if they were independent parties. This limits the number of
market comparison available for establishing an appropriate price. In addition some goods
and services are made available only on an intra-group basis, and in such cases no market
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comparison is available to help determine an appropriate price. This happens, for example ,
with components traded in a half-finished state and when intellectual property or
management services are traded.
For traded tangible goods, models have been built to overcome the problem, and
the resulting techniques have become tried and tested over many years of use to establish
what is and what is not acceptable practice. As a result, disputes among countries that have
effective transfer pricing regimes in operation have probably diminished over time.
The situation with regard to intellectual property is different , not least because
such assets can be easily relocated to tax havens and low tax jurisdiction. Some companies
threatened to move their head offices to Ireland , itself a tax haven, suggesting that the
practice is widespread and any measure to stop it would be costly to companies and effective
to a revenue authority. As Earnest & Young noted in their global transfer pricing report for
2007, 40% of all MNEs thought transfer pricing the single biggest tax issue they faced , and
service transactions were much more likely to face challenges than those relating to supply
through tax havens.
For Multinational Corporations using those locations, transfer pricing is probably
the biggest issue they face, not least from the perspective of reputation. Baker(2005) has
identified the significant rate of tax evasion he thinks is facilitated by transfer pricing abuse
through tax havens in 2008 the U.K based charity Christian Aid (2008) suggested that such
abuse might cause the lives of 350000 children a year as a result of revenues lost to the
government of developing countries. Debate on the issue is not likely to end in foreseeable
future.
The debate is being fuelled by a proposal from about 20 members of European
union for the creation of a common consolidated corporate tax base(CCCTB).
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The controlled Foreign Company:
A second unrelated measure is controlled foreign company legislation. The U.S
government was discontented about erosion of its tax base when companies operate through
foreign subsidiaries in tax havens. Ultimately a compromise singled out certain kinds of Tax
Haven income of the so called controlled foreign corporations that might be taxed in the
home jurisdiction. The rules implemented in 1962 did not include all income from foreign
subsidiaries in the tax base. Rather, they singled out passive income attributable to foreign
subsidiaries that had at least 50% U.S share holders.
Attacks on Trusts in Europe:
The other issue of great concern as the 1980s progressed was the use of off shore trusts. The
U.K, in particular, was increasingly aware of the use of such arrangements by those do not
domiciled but resident in the country to avoid tax. In fact, many who were supposedly taxable
in full in the U.K were using this arrangements to avoid capital taxes in particular. For a brief
period the U.K threatened to change both its residence and its domicile rules of taxation.
The changing attitude of tax administration:
Another response to the rise of tax havens developed through national courts and national
legislations. Tax havens pose two distinct sets of problems to tax authorities: one has to do
with avoidance, and the other with evasion. In terms of avoidance, tax havens are often used
to defer tax, to avoid tax withholding or , in combination with other regulatory avoidance, to
increase returns on capital. There was already some discussion on the role played by channel
islands in facilitating tax avoidance on the U.K main land. However, much of the work to
close loopholes, which began in 1960s was aimed at identifying and then terminating such
arrangements. Conversely, evasion is facilitated primarily with tight secrecy provisions
provided by tax havens and results in an outright and deliberate failure to pay tax. With
regard to both set of problems, the Gordon report states that the congress has never sought to
eliminate tax haven operations by U.S tax payers. Instead, from time to time the congress has
identified abuse and legislated to eliminate them. The U.S approach was piecemeal driven in
part by media attention. The most successful unilateral measures were the income tax treaties
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concluded with other countries. This is of vast importance in relation to the tax haven
problem. It should be noted that this comment has a particular U.S context : The United
States has far more of this treaties with tax havens states than any other nation simply
because of its economic power; some contain unique provisions. For example the treaty
between United States and Cayman that permits the latter to turn over bank records in cases
involved in tax fraud and false tax statements.
Criminalization of money laundering:
Money laundering seems to provoke more public indignation than tax evasion.The quest to
take profits out of crime has targeted bankers, lawyers, accountants and professional advisors
as much as conventional criminals.
The United states took the lead in the earlier and mid 1980s the U.S Senate permanent
subcommittee on investigation exposed the criminal use of offshore banks. The
subcommittees work did not get much media exposure ; nevertheless , it prompted the
passage of money laundering control act 1986.
Policy in France
France adopted tax avoidance legislation as far as in 1933. Yet serious political mobilisation
against money laundering occurred only in late 1990s. Advent of a socialist government in
1981 stimulated considerable capital flight from france and stories told of backpackers
serving as couriers and carrying sacks of cash from paris to Luxembourg. A French
Assembly report at the time implicated shell companies in Luxembourg, Switzerland and the
channel islands as a principle conduits for capital flight.
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U.S Multinational Investment in Tax Havens :
Top Twelve destinations
COUNTRIES FDI (in Billions USD)
UK 364
Canada 246
Netherlands 215.7
Australia 122.6
Bermuda 108.5
Germany 99.2
Japan 91.8
Switzerland 90.1
Mexico 84.7
Ireland 83.6
Luxemburg 82.6
British Caribbean dependencies 80.6
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In India
The famed wall of secrecy around Swiss banks has crumbled, with Switzerland signing an
international agreement on fighting tax evasion - a move that will allow India and other
countries access to information on concealed illicit money.
Switzerland agreed to exchange information and provide assistance in tax matters after it
signed the Organisation for Economic Cooperation and Development's (OECD) Multilateral
Convention on Mutual Administrative Assistance in Tax Matters on Tuesday. India is among
the 58 signatories of the convention.
Three years ago, India and Switzerland signed a bilateral agreement that would give
authorities in India access to Indians holding Swiss bank accounts. Under this, India needed
to only provide a name, not even an account number, to get the details.
0
50
100
150
200
250
300
350
400
Bill
ion
s (i
n U
S $
)
Countries
Flow of FDI
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There are no official estimates of India's black economy. Global Financial Integrity, a
Washington-based think-tank, has estimated that Indians salted away $462 billion
(about Rs. 28 lakh crore in current exchange rates) in overseas tax havens between 1948-
2008.
In 2011, the government commissioned a joint study by three think-tanks to estimate Indian
entities' unaccounted wealth both at home and abroad. The study's findings have not yet been
made public, but is speculated to have pegged the size of black economy at about 30% of
India's gross domestic product) or about Rs. 35 lakh crore.
Switzerland has been under intense global pressure to cooperate with overseas authorities to
share information about accounts in its banks, often favoured by tax evaders.
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CHAPTER - 6
RESEARCH METHODOLOGY
SOURCES OF SECONDARY DATA
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Published Sources
Unpublished sources
In this objective, two methods of collection were used. They are:
1. Unpublished source of data from internet.
2. Published source of data in the form of books, newspapers and international news.
CHAPTER 6
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OBJECTIVE 3 (WHY TAX HAVENS EXIST AND
CONTINUE TO THRIVE)
Tax havens: Why they exist and continue to thrive
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For small countries to create an entire profitable industry by passing a few laws appears to be
a cheap and effective road to economic development. It is estimated that the size of assets
held in these tax havens is in excess of $21 trillion, and most of which is beyond the reach of
tax collectors
Presently in the world there are between 50 to 60 active tax havens. They exist in all parts of
the world. Some of them are in surprising places. They also specialize. Some like Bermuda
are the locations of international insurers. Other like Panama concentrates as flags of
convenience.
The real question about tax havens is why they exist at all? With the possible exception of
Switzerland, these are tiny and very vulnerable states. Pressure from larger countries can and
have forced them to become more transparent. Yet they continue to thrive. The inescapable
conclusion is that they fulfil a very real and often protected economic niche which is
becoming increasingly necessary in an era of globalization.
Promoters of OFCs like to argue that they provide both regulatory and tax neutrality for
international transactions. A kaleidoscope of international laws, overlapping and
contradictory regulations might make these transactions impossible. There are also, often,
very real reasons for secrecy. Hostile governments often, have confiscatory policies against
political enemies and safe havens for cash are a necessity.
Still the misuse of tax havens might outweigh many of their benefits. They are certainly a
destination for all sorts of ill gotten gains. Accounts in the Caymans were subject to massive
misuse by organized gangs from Mexico and elsewhere. It is estimated that elites from 139
low to middle income countries have parked up to $9.3 trillion in these havens. But it is not
just small tax havens. Corporate secrecy in places like Delaware made them a favourite of the
convicted arms smuggler Viktor Bout, also known as the Merchant of Death.
They are also handy in helping with international tax planning. Because under many tax
systems subsidiaries are considered as separate entities, transactions between related
corporations are taxed at different levels in different jurisdictions. This leads to enormous
issues of transfer pricing or perhaps better described as transfer mispricing. For example,
American corporate profits are at an all time high in proportion to GDP, but this record has
not been matched by the amounts American corporations pay in taxes which are at an all time
low.
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But like the elites, these corporations have power. Although it is possible to eliminate the
problem of tax havens, doing so would have to overcome powerful entrenched interests
around the world. Global competitiveness including tax and regulatory arbitrage reduce the
prospect for the easiest way to get rid of tax havens: harmonization. If countries could agree
on a simple and efficient way to tax their citizens and to regulate their businesses, then the
need for tax havens would be sharply reduced. But most countries cannot even agree on the
definition of a crime. What is a bribe in one place might be considered only the cost of doing
business in another. As long as these divides exist, OFCs will have a bright future.
Positive effects of tax havens:
The economic literature cites a number of positive aspects related to tax havens. In principle,
tax havens could have a positive impact on prosperity in (a) countries which are not tax
havens and (b) countries which are tax havens. The economic literature primarily cites effects
which only affect the prosperity of tax havens. These are presented below. Beneficial tax
competition Some commentators have maintained that a political system has an underlying
tendency to set the level of taxation too high. This view is derived from the notion that
politicians are not solely concerned to serve voter wishes, but that they have private interests
related to a high level of taxes (see, for instance, Brennan and Buchanan, 1980). Such private
motives could be the desire for power, which would be bolstered by a large public sector. In
such circumstances, tax havens with low or non-existent taxes can help to keep taxes in
other countries down. This is because other countries would lose part of their tax base to the
tax havens if they set tax levels too high. In other words, the tax havens discipline politicians
so that they do not increase taxes beyond levels desirable for the voters.
Increased investment in high-tax countries:
Tax havens can contribute to increased activity in high-tax countries, and so do not crowd out
investment there. This argument is advanced by Desai, Foley and Hines (2006). They point
out that tax havens can contribute positively to a high level of investment if investors can
transfer taxable profits from a high-tax country to a tax haven. This will increase the effective
return on investment in high-tax countries and thereby make them more attractive for further
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investment. Alternatively, the use of tax havens can be a source of tax credits which would
also reduce the effective tax rate on investment in high-tax countries. Furthermore, it might
be that economic activity takes place in tax havens which involves the sale of low-priced
goods and services (low-priced because they are not taxed) to high-tax countries. Such
activities would also increase the return on investment in high-tax countries. The analysis by
Desai, Foley and Hines (2006) builds on the assumption that an investor can make real
investments with a real level of activity in a tax haven. In fact, foreigners who use the
preferential tax regime are not permitted to invest locally, have local employees or use the
countrys currency. The Commission accordingly takes the view that the assumption
underlying the analysis is based on ignorance of investor regulations in tax havens.
Economic development in the tax havens:
Dhammika and Hines (2006) study which countries become tax havens. They find that these
countries often display political stability, a well-functioning legal system, a democratic form
of government, little corruption and a relatively well-qualified bureaucracy. One reason that
countries become tax havens could be that low tax is not the only important attraction for
mobile capital. Institutional conditions which assure the safety of investments and the
conduct of financial transactions may also be important. The study shows that tax havens are
well organised and that competition over capital sharpens the requirements for institutional
quality and good politics. Since institutional quality is an important factor for economic
expansion, competition over capital between tax havens helps to improve their growth
prospects (see Hines 2004). The extent to which such growth occurs at the expense of
expansion by other countries is not an issue addressed in this literature.
The benefits of offshore financial centres and tax havens are numerous. The main ones, and
the reasons why individuals choose to go offshore, are that they offer a range of taxation
levels from which to choose plus they allow for the creation of offshore entities to increase
privacy in addition to having complex and detailed legislation protecting their investors
assets. A number of individuals use tax havens under the advice of The Offshore Company
UK in order to limit or avoid high levels of tax they pay in the country of residence.
As previously discussed, different tax havens offer different levels of taxation. It is, however,
important to bear in mind that because an offshore jurisdiction has zero tax, it is not
necessarily the best tax haven to suit your needs. There may be other offshore financial
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centres that offer different benefits that are more appropriate for you. This is why it is
important to speak to an offshore tax haven consultant to ensure that you are getting the best
advice for your circumstances, helping you to reduce the risk of exposure to tax competition.
Asset protection is one of the main reasons why companies and individuals go to corporate
tax havens. Because of the strong privacy legislation in place in many of these offshore
financial centres, it is not possible for a third party to gain access to information about
offshore accounts, investments or trusts.
What are the positive effects of tax competition?
Tax competition is the use by governments of low effective tax rates to attract capital and
business activity to their country. Tax competition appears to operate through a two-stage
process: first some pioneer countries (not just tax havens) will reduce their tax rates, or
offer low effective tax rates through tax exemptions or reliefs; then other countries will lower
their own taxes in response to this competition.
Encouraging economic growth
So the most important effect of tax competition is to reduce taxes in developed countries.
And the main effect of reduced tax rates in developed countries is to increase their GDP. As
taxes are lowered there will be more savings, more investment in productive plant, and more
entrepreneurism.
Efficient capital markets
Low tax jurisdictions also make international capital markets more effective. By providing
tax-free vehicles, they can minimise the problems of double taxation that can occur with
cross-border investment.Tax havens do not poach international capital; they merely act as
conduits for investment back into the industrialised countries. This conduit action is
necessary because tax systems do not cope very well with international investment. Where
investors, fund managers, holding companies and operating companies are all within the
same country, the tax system usually has rules to make sure that the money is only taxed
once. But if they are in different countries, the different countries can have very different tax
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systems, so the same profits can effectively be taxed more than once as they are passed up the
chain. By providing a low-tax environment for investment funds, tax havens make
international capital markets more efficient and allow international pooling of capital possible
where it would otherwise be prevented by a lack of co-ordination of cross-border tax and
investment regulations. By doing this they increase the amount of available international
investment capital, most of which is going to flow back to the large industrialised nations,
and enable it to be invested without the distortions caused by the need to avoid double
taxation.
Benefits to the poor
It is argued that only the rich are benefited from tax havens but it also benefits the poor by
increasing the investment and which would inturn increase employment both in the tax haven
as well as in the home country.
Beneficial tax competition
Some commentators have maintained that a political system has an underlying tendency to
set the level of taxation too high. This view is derived from the notion that politicians are not
solely concerned to serve voter wishes, but that they have private interests related to a high
level of taxes (see, for instance, Brennan and Buchanan, 1980).Such private motives could be
the desire for power, which would be bolstered by a large public sector. In such
circumstances, tax havens with low or non-existent taxes can help to keep taxes in other
countries down. This is because other countries would lose part of their tax base to the tax
havens if they set tax levels too high. In other words, the tax havens discipline politicians so
that they do not increase taxes beyond levels desirable for the voters.
No filing requirements
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International Business Companies typically have no requirements to file the accounts on the
public record. In some locations, they are not even not required to keep books and records. In
addition, it is rare for memorandums and article of association to be on public record.
Low Incorporation Costs
The costs of setting up IBCs are minimal, usually in a range between $100 and $500. IBCs
are generally exempt from all taxes, although they pay a minimal annual license fee to the
tax haven.
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CHAPTER - 7
RESEARCH METHODOLOGY
SOURCE OF SECONDARY DATA
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Unpublished sources
In this objective, the method of collection used is :
1. Unpublished source of data from internet.
CHAPTER 7
OBJECTIVE 4 (CASE STUDY)
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Vodafone case study
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The Vodafones tax saga made the legislature of our country realize that our tax laws are
obsolete and insufficient to cater to the modern corporate environment. If you are wondering,
what the issue all about, heres a simple explanation:
Capital Gain Tax
Capital Gain Tax is the tax that one has to pay if he makes gains on selling capital assets like
land, building or even shares.
Tax Deduction at Source (TDS)
When two parties buyer and the seller enter into a transaction, the seller would have to pay
Capital Gain Tax to the Government, on profit he makes by selling his asset. But the practice
is that the buyer while paying for the purchase, deducts the said tax amount from the total
purchase amount, sets that portion aside to be paid to the Government, and pays the
remaining to the seller. This is called Tax Deduction at Source.
Parties involved
Vodafone International Holdings BV: Netherlands based telecom company
Hutchison Telecommunication International Ltd. (HTIL): Hong- Kong based company
Hutchison Essar Ltd. (HEL): India based company
CGP Investments Holdings Ltd.: Cayman Island based company (Cayman Island is a tax
haven, implying, it imposes negligible tax on business transactions)
What the parties did
HTIL, the Hong-Kong company, the big boss in this case, owned CGP theCayman Islands
Company. CGP instead, held 67% stakes in Hutchison Essar Ltd or HEL the Indian
company.
HTIL -> CGP ->HEL
HTIL sought to sell its India based HEL by selling away CGP. Vodafone agreed to buy the
same for about 11 billion dollars.
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Now comes the question what is wrong or apparently wrong with the transaction?
Section 9 of Income Tax Act
Section9(1) of the Income Tax Act said that income is deemed to accrue or arise in India
(directly or indirectly) through or from any business connection, property, asset, source of
income, or transfer of a capital asset situated in India.
Based on this law, the Income Tax Department decided to issued notice to both HEL (now
VEL Vodafone Essar Ltd) and Vodafone stating that they are in default of payment of
Capital Gain Tax of 2.1 billion dollars, for a purchase of an Indian company HEL from
HTIL by Vodafone (Here, Vodafone being the buyer should have deducted the tax at source
to pay to the Government, but it did not do so)
At the Bombay High Court
After much drama, when the matter reached the Bombay High Court, the arguments from
both sides were as follows:
Vodafones argument
Among several arguments, Vodafones main contentions were that:
It had entered into a genuine transaction within permissible legal framework, which therefore
cannot be called sham transaction. It said that Indian exchange control regulations
recognized investment companies like CGP, based in tax havens like Cayman Islands.
Vodafone contended that there is no income that accrues or arises in India since the
transaction took place with respect to shares of a company located outside India, i.e. shares of
CGP in Cayman Islands, under a contract entered into outside India, and payment was made
outside India.
Capital Gain Tax is levied on profits made from transfer of assets. Vodafone argued that
through purchase of shares, it has acquired a right to control the Indian business operations
and not the ownership of the assets in India, which continues to remain with the Indian entity
HEL. It tried to draw distinction between transfer of shares and transfer of underlying assets
or undertaking.
IT Departments argument
According to the Revenue, the deeming as given in Section 9, is a legal fiction and all income
derived by a nonresident from whatever source is brought within the ambit of the provisions
if there is a nexus.
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Section 2(14) of the Income Tax Act, defines a capital asset as property of any kind held by
an assessee, whether or not connected with his business or profession. Shares are capital
assets the transfer of which results in capital gains that are taxable under the ITA.
Bombay High Courts decision
The Bombay HC ruled that where the underlying assets of the transaction between two or
more offshore entities lies in India, it is subject to Capital Gains Tax under relevant income
tax laws in India. The Court invoked the territorial nexus rule wherein a state can tax if it
finds connection between the state and the person sought to be taxed. The court concluded
that Vodafone was liable to deduct tax at source (TDS).
At the Supreme Court
When the case reached the Supreme Court, the Apex Court set aside the Bombay High
Courts decision and held that such Capital Gain Tax cannot be imposed on Vodafone
because the transaction was an overseas one, thereby India lacked tax jurisdiction.
Amendment with retrospective effect
Upon this, the legislature proposed amendment to the ITA, with retrospective effect from
1962 so that all persons, whether residents or non-residents, having business connection in
India, will have to deduct tax at source and pay it to the government even if the deal is
executed on foreign ground.
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CHAPTER - 8
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CHAPTER 8
LIMITATIONS OF STUDY
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Limitations of Study:
Time factor:
Time given to us is only 3 months, to make our project more exhaustive and to enrich our
project with best levels of quality and standard will require more time.
.
No primary data:
We have tried getting information related to tax havens from various firms but we couldnt
get any primary data regarding tax havens.
Study is more general than specific
Our study is not related to any particular company or to a particular place or country. It is a
overall study and this might not be applicable to all the places consistently , circumstances
might change based on the specific countrys economy, people, government,etc.
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CHAPTER - 9
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CONCLUSION
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Conclusion:
Overall effect
The Commission cannot see that the positive effects of tax havens outlined above are in any
way sufficient to compensate for the damaging impact which has been identified. In fact, the
position is that the positive impact of tax havens is largely confined to these jurisdictions
alone, and thus make no positive contribution in an overall perspective. The Commissions
view is, accordingly, that tax havens impose losses on other countries because they weaken
the ability of tax systems to yield tax revenues and encourage transfer pricing, economic
crime and income transfers in general from high-tax to low-tax countries. The Commission
does not object to countries choosing their own tax rates and is not opposed to low taxes, but
would stress that competition between high-tax and low-tax countries is not conducted on
equal terms. Virtually all tax havens have a dual tax system, with extremely favourable rates
for foreigners and more normal rates for residents. This type of discrimination does not occur
to the same extent in other countries. In addition, tax havens combine low or no tax with legal
structures which prevent access to information by other countries, and which cut the link with
real ownership while providing anonymity which caters to tax evasion in the country of
domicile. So tax havens are not involved in competition on equal terms, but in a type of
competition which is directly aimed at harming the economies of other countries. The fact
that very limited real economic activity is conducted by the companies in tax havens which
are offered zero or very low tax rates further supports this view. The tax havens thereby serve
as pass-through locations for capital rather than as places which lay a sound basis for value
creation and in which capital is genuinely invested locally. In the following, the Commission
will analyse the particularly damaging effects of the tax havens on developing countries.
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CHAPTER 10
SUGGESTIONS AND RECOMMENDATIONS
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Suggestions and Recommendations
Country by country reporting:
Under country by country reporting, the multinationals would have to break their information
down by country of operation including in each tax haven so that citizens and authorities
can see what the corporations are doing in their countries.
Unitary taxation:
This would involve taxing multinational corporations according to the real economic
substance of where they actually do business.
Where is their workforce based? Where are their assets actually held? Which countrys
resources do they depend on to do business?
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Automatic information exchange:
Developing countries and rich ones must get the information they need to tax their
wealthiest citizens properly.
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Making wilful blindness a criminal offence:
We can bring hard penalties against the pinstripe intermediaries who help the tax evaders.
The IMF and other bodies dealing with money-laundering must officially make tax evasion a
money-laundering offence.
OECD is considering a change in tax rules to force companies to declare permanent
establishment in the countries where they do the most sales.
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CHAPTER - 11