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Tax Haven: An International Obligation

Revenue earned through taxes keeps an economy buoyant. Therefore, a tax payers' honesty towards paying off legitimate tax amounts is salient. But several affluent and well-linked people with the help of the upper crust white-colors, lawyers and scheming foreign governments escape from their duty of paying taxes. Tax evasion worth trillions takes place and offshore financial centres or commonly tax havens are making it happen.

Billions worth of money from all countries around the world are held by shell companies that exist just on paper and a meld of tax regulation and confidentiality laws equips individuals and businesses to curtain a part of their incomings from their country's tax administration. This amount is later used by MNCs to flush out their competitors.

What Is a Tax Haven?

A tax haven, also known as an offshore financial center is a jurisdiction with a low tax rate which allows MNCs and individuals to bolt the rule of law of the country they're residing in. A tax haven offers minimal tax liability to foreign corporations and individuals and the part that makes it so convenient for the people to shore off funds to shell companies is that tax havens don't require the person to be a citizen or corporations to operate within that country to avail the tax benefits. This tax haven arrangement extends a way for mega-corporations to avoid income tax or the high corporate tax liabilities in their native land. And not just tax evasion, these tax havens also augment a space to transfer and contain money obtained through illegal means.

There yet isn't any universal definition of a tax haven but in the year 1998, a Paris-based group of 38 countries namely the Organization for Economic Cooperation and Development came up with three attributes to define and identify a tax haven:
  • Nominal or No Tax Liability- The prime criterion to know whether a jurisdiction is a tax haven or not is to look through the tax structure of that nation. The tax arrangement isn't the same everywhere. It varies from nation to nation, but tax havens levy quite low amounts for the same.
  • Little to no information exchange- Tax havens prioritize the protection of financial information at any cost and even have codified laws that prevent interference and inquiry of international or foreign authorities. Therefore, there is almost no token disclosure of information.
  • Absence of transparency- As aforesaid, tax havens restrict almost all information to themselves, which leads to a lack of transparency. The administrative structure of such jurisdictions is always blurred which multiplies the possibilities of back-channel clandestine decisions that most of the time won't be for the welfare of other country's economies.

These three were the prime criteria that the OECD listed to identify a tax haven but later on, it was realized that just these factors aren't enough to pronounce a nation as a tax haven. Therefore, later on, the UN Government Accountability Office further came up with two more peculiarities of a tax haven. These are:
  • Promotion as an offshore financial centre- Tax haven market and promote themselves as offshore financial centres and invite individuals and corporations to invest and deposit in their nations. These usually are small island countries with relaxed tax liabilities, flexible regulations and much more favourable government policies.
  • No requirement of a concrete presence- Tax havens don't ask for the person investing or depositing in their jurisdiction to be present substantively or be a citizen. They don't even require a business to really have a setup or produce commodities over there. A mere presence on paper is enough to avail tax benefits.

Benefits Of Tax Haven
  • To tax havens: Jurisdictions that are identified as tax havens aren't unconditionally tax-free. Tax liabilities in these nations are less than those in other countries but are there and even these low tax amounts hold up nicely. Several estimates pronounce that tax havens all around the globe have amounted to trillions. So, these tax havens are profited when their economic organizations and banks usher in a wide sum of money.

    Along with this, the offshore financial centres make striking sums of money through the amounts paid in by people using and forming shell companies within the tax havens. Apart from this, charges like renewal charges, license fees, registration fees, etc are to be paid every year. Additionally, customs on import duties are charged which counterbalances the losses in tax yields.
  • To companies: Tax havens provide corporations a channel to shift the profit earned by them to avoid paying taxes for the same. In line with several estimates, corporations whose contribution was about one-third of the gross federal earnings through their gains and kindred commercial taxes, shifting of profit or avoiding tax payments have brought down the contribution by a notable cutback to one-tenth of the total. This practice of profit shifting using a tax haven technically isn't illegal and ergo facilitates corporations and individuals with income and corporate tax evasion.
Along with this, tax haven offers credit advantages too and as every country may not be efficient enough to avail or borrow funds internationally. Several experts are also of the view that tax havens and shell companies promote foreign investments. But although profitable to corporations, this practice in the long run degrades the financial and economic growth of the home nation of that particular corporation. Tax havens therefore are like huge loopholes in the tax laws of the particular nation

Where Are Tax Havens Present and Are Tax Havens Illegal?
Tax evasion is different from that of tax saving. Avoiding tax to some extent with the use of some legal loopholes is tax saving but usually, corporations and rich-end individuals go beyond those legal ways and in a curtain of that illegal tax evasion takes place. The practice of tax evasion is criminalized but as several authorities argue, the distinction between tax saving and tax evasion is quite faint due to which challenging these evasions becomes very difficult and it continues behind closed doors and in veils.

Offshore financial centres are one such vessel that businesses and individuals use to shift and save the profit earned to save tax and even after being aware that the same is happening these tax havens aren't yet brought down and one of the biggest reasons for the same is that the biggest players in this platform are some of the all-powerful countries from all around the world. Their dominance in this area acts as a lock on the doors of financial secrecy with access to the key just to themselves.

At present, numerous Tax havens are present and are diversely spread all around the world. A rank-wise listing of dominating tax haven countries is given in the Corporate Tax Haven Index. These countries are ranked according to preferences given by MNCs.

Some of the chart-topping tax havens according to the index are:
  • Netherlands
  • Bermuda
  • Cayman Islands
  • Luxembourg
  • Singapore
  • Mauritius
  • British Virgin Islands
  • Bahamas
  • Hong Kong
  • Jersey
  • Switzerland
  • Ireland

When we outline the meaning and working of Tax Havens, it appears like a practice that's completely illegal and unethical. Although tax havens are often referred to as global black holes and are considered an international obligation, it isn't entirely outlawed. At present, as said in Public International Law, every country around the world is sovereign and has the authority to formulate rules and regulations according to their requirements and will.

No one apart from the authorities of that particular nation is laid the right to regulate the legal and financial structure of the nation. This connotes that it's solely up to that nation to formulate the tax structure and whether to levy duties and charges or not. Accordingly, as levying low tax rates falls within the sovereign powers of the nation, establishing tax havens or offshore financial centres isn't illegal.

Why Are Tax Havens an International Obligation?
Although not illegal, tax havens facilitate businesses and individuals to tax evade by investing and depositing the profit earned by them and the presence of shell companies doesn't even require them to set up a business or reside in these tax havens. This practice eventually puts the long-term fiscal health of the nation at risk and contributes to weakening the quality of institutions and the political system in developing countries. It is one important cause of the current international financial crisis, financial instability, and the sidestepping of financial control.

The thought of tax havens may seem significant from a business' outlook, but these offshore financial hubs are inflicting dire damage to the socio-economic growth of the nation. They are playing a huge role in creating economic inequality and tax haven secrecy is making it possible by making it difficult for financial regulators to identify and mitigate risk in capital markets.

Tax havens also encourage people to engage in crimes such as illegal arms trading, human trafficking, narcotics trafficking, public corruption, tax evasion, smuggling, and diamond trafficking etc. Tax havens are used by such people to cushion their assets, entirely relying on the confidentiality that these havens provide. The practice gradually is wearing away every push to change. By facilitating them an escape hatch, and permitting them to safeguard their assets offshore, it is thus subverting the strain for change. Furthermore, along these lines, political change turns out of the question in emerging nations.

Tax havens clarify that the same is true that the abating of money and assets from developing nations to offshore centres takes place due to corruption and persecution within their own country. Anyway, this is just the situation for the cash-rich 1%. These well-off residents are the ones with the ability to achieve any kind of change in developing nations. This financially assists many grievous offences like warfare and terrorism. Thus, this debilitates the social security of developing nations, and some other countries in this respect.

Revenue generated by taxes levied in a country is salient for utilities like infrastructure, medical facilities, education, and so on. Be that as it may, tax havens create a dearth of tax revenue for nations because rich-end multi-national corporations exploit these tax havens.

They give assurance to unlawful tax dodgers, thus divesting developing nations from income that could be utilized to support interest in economic and financial administration whereupon broad-based development of the nation depends and later on to bridge the revenue gap made by tax havens, government either resorts on credits, cuts back on amenities, or amass taxes at higher rates from everyone else and unfortunately all this leads to missing out of the unprivileged and the inequality gap widens.

It nearly is impossible to figure out the pecuniary losses related to tax havens developing countries have to deal with. Confidentiality, electronic trade and the developing portability of capital have left all states with issues in revenue assortment. The distinction between tax avoidance and tax aversion is consistently blurring out making it truly challenging for law-imposing authorities to distinguish legal tax saving from the tax evasion movement.

However, at a modest approximation, tax havens have added to revenue depletion for developed nations of no less than US$50 billion every year which almost is equal to 6 times the assessed yearly expenses of attaining universal primary education, and three times the amount required to cover worldwide primary medical facilities.

But till the day confidentiality prevails, there will constantly be motivation to put gains and resources in tax havens and it is undermining the international market. The grey space laid out by the offshore interface between illegal and legal financial dealings has turned into a crucial modern component of crime and a vital system for corruption. Offshore platforms, by integrating tools to cloud the origin of funds with the condition of non-concordance with an international institution in tax and criminal investigation, give a 'Bermuda triangle' to darken assets and camouflage the cash trail from crimes.

The tools utilized many times are equivalent to those utilized for tax evasion: offshore financial balances and company registrations safeguarded by confidentiality regulations; offshore trusts; move valuing and intra-firm property exchanges. Subsequently, there is a need to ask tax havens to uncover the monetary resources of their taxpayers.

Tax havens are not just disregarding the financial interest of different nations by causing overflow impact yet in addition executing illicit acts. It is easing corruption, tax evasion, stowing away of political conflicts, manipulation of business sectors and the avoidance of anti-trust regulations. This sabotages democracy. Tax evasion by MNCs too is a type of corruption. It is like looting the poor for their selfish benefits.

The well-off people and MNCs who utilize their authority and position to capture financial additions to themselves and utilize the financial system to their advantage are the victors of the entire plot. In reality, the world isn't short on prosperity. The size of the worldwide economy has nearly quintupled throughout recent years.

In the year 2017, its worth reached almost $78 trillion. However, the gap between the rich and the poor widened, with an enormous expansion in wealth with the people on the top, while all of the wealth with those at the base was falling. Starting around 2015, the most extravagant 1% had more luxury than collaboratively rest of the world. Such outrageous financial imbalance is being backed up by a scourge of tax avoidance and aversion that has reached a freakish scale. According to several estimates, around 33% of absolute worldwide GDP is presently held in tax havens.

A lot of this cash is undisclosed and untaxed - and the rest is under-taxed. While millions across the world are underprivileged, wealthy people and organizations, who ought to be paying the most tax rather augment their benefits by avoiding as much tax as they can. They do this by utilizing tax havens or by causing nations to contend to give tax breaks, exceptions and lower rates.

Keeping in mind that a portion of the tax evading rehearses are unlawful, many endeavour shortcomings in the present tax framework - without violating any regulations. Taking advantage of the mystery given by tax havens, the wealthy are proceeding to evade their taxes, denying the most unfortunate nations from having the option to offer vital assistance.

Since the year 2014, an immense number of records - including the Panama Papers and the Paradise Papers outrages-have been spilt by the International Consortium of Investigative Journalists (ICIJ) divulging how tax avoidance and evasion have become standard business practice around the world. It has been disclosed that several affluent people around the globe, including popular big names and eminent politicians, are utilizing tax havens to dodge paying taxes on their fortunes.

Through a complex and loosely directed tax framework, MNCs and wealthy people effectively look to expand their benefits by putting them away offshore and avoiding paying taxes in their nations. Tax havens are at the core of this framework. They permit a monstrous amount of wealth to stream untaxed and stealthily, far away from tax specialists and controllers.

One of the main reason tax havens are surviving are the presence and perpetuation of a competitive tax structure. It is engendering dire effects on the economy internationally and all more explicitly on developing nations. The tax havens are executing tax atrocity by poaching business institutions to their jurisdiction, and in this way extend extreme depletion in the country's financial development and improvement. Such issues have led to the addition of drives intended to handle different aspects of the issue.

The Organization for Economic Co-operation and Development is taking several measures to crack down on destructive tax competition, UN organizations are attempting to control illegal tax avoidance, and the Financial Stability Forum (FSF) is looking at the effect of the offshore framework on worldwide monetary stability. It likewise gives those TNCs that are all set to exploit international tax evasion opportunities to get an unjustifiable competitive edge over the local and small business owners.

Tax contests, and the suggested menacing of migration, have constrained developing nations to bring down corporate tax rates dynamically for multinational investors. Looking back a decade, these rates were regularly in the scope of 30-35% - comprehensively parallel to the common rate in most OECD nations. Today, hardly any developing nations apply corporate tax rates of more than 20%. Productivity contemplations represent just a little piece of this shift, proposing that tax rivalry has been a focal thought.

Assuming that developing nations were applying OECD corporate tax rates their incomes would at least be US$50 billion higher. Whenever effectively utilized, reserves directed through tax provisos into offshore monetary centres could be utilized to fund imperative interests in health and education. No part of this is to contend a re-visitation of high tax systems that dissuade speculation action.

Unfamiliar direct ventures can create genuine advantages for advancement. But without a justified degree of tax assortment, the state can't keep up with the social and financial framework expected to maintain fair development.

Every coin has two sides. Tax havens commonly are completely considered detrimental to the economies of countries apart from that of those tax havens, the real scenario is much wider than that. Offshore financial institutions in several manners are considered an important slice of the overall global economic development. Tax havens brace FDI in high-tax nations which in turn maximize investment towards underdeveloped or developing nations.

Such havens do regulate the international financial markets and advance tax competition between different purviews. This obliges the nations with high tax rates to bring down their tax rates.

Although tax havens cultivate financial development as it has been observed that they have swift economic development, they at the same time are also handicapping international growth and development and despite the pragmatics, being pessimistic is imperative as the negative impacts are endured enough that they can't be overseen. Consistently, around a sum of $200 billion, which is almost equivalent to 40% of the total profit made by MNCs is evaded worldwide with the help of tax havens.

But the most beguiling part is that even after having a provision of low tax, these tax havens just with the help of sheer fascination made by them manage to gather much more tax revenues than the other countries. The presence of tax havens has many impacts. At one level, the lower taxes or no taxes in a single nation put the squeeze on different nations to keep their taxes low.

This is great for taxpayers temporarily, however, the mystery and mistiness related to a portion of the tax havens might support tax evasion or other criminal operations that can hurt the world economy in the long haul. The crackdown on tax dodgers in certain nations shows that taxpayers need to step with alert.

The answer to this is a worldwide corporate tax harmonization. If the whole world consented to a specific corporate tax rate, these issues wouldn't generally exist, since there would be no more tax havens. Endeavors are being made by international associations like the Organization for Economic Co-activity and Development (OECD)and even nations to forestall tax avoidance through abuse of international regulations.

The presentation of the BEPS Action Plan and ensuing revision of DTAAs to frame MLIs is an extraordinary forward-moving step in forestalling tax avoidance. Nonetheless, while endeavours are being made to check the act of Base Erosion and Profit Shifting, it is undeniably challenging to plug every one of the escape clauses as the sway of the countries can't be messed with.

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