Tax Haven

Tax havens are nations that provide corporations and people no tax responsibility for their bank savings in the country.

These nations often have a politically and economically stable climate. They provide several tax perks that may be abused as evil tax evasion strategies.

Meaning:

• It is a jurisdiction with extremely low tax rates, which range from 2% to occasionally as low as 0.02%. This is done to boost both foreign investment and the flow of money into the local economy.
• Because of the reduced tax rates, it gives large multinational enterprises and businesses an incentive to establish in these nations.
• Base erosion and profit shifting eventually results when businesses move their profits from high-tax to low-tax jurisdictions.
• Since there are no residence restrictions in tax haven nations, investing there is more advantageous.
• For Example: To avoid paying high taxes on US territory, Apple Inc. has stashed a total of $214.9 billion abroad. Using Ireland as a tax haven. Apple would have paid $65.4 billion in taxes to the US government if tax haven advantages had not been used.

Types:

• Pure Tax Havens are those where income or capital gains are not charged at all. For example: Bermuda, Cayman Islands.
• Countries where taxation is low due to the signing of various tax agreements between different countries regarding double taxation. For example:  Liechtenstein, Switzerland, Ireland.
• Countries where the exemption is given from paying taxes for cross-border transactions. For example: Costa Rica, Philippines, Panama.
• Countries, where preferential treatment is given to offshore and holding companies. For example: Austria, Luxembourg, Thailand.
• Countries that provide financial benefits and privileges to various offshore companies. For example:  Bahamas, Antigua & Barbuda.
• Countries that act as tax havens for certain export-oriented industries. For example: Ireland, Madeira in Portugal.

Tax Havens: Impact on India’s Economy:

• Tax Havens lower the tax liabilities and tax base for taxation nations and hence lead to a lack of funds required for the development of the economy.
• It obstructs the efforts of the government to mobilize resources to bring back the black money.
• It hampers the implementation of various economic policies of the government.
• It causes the inequitable distribution of tax burden. As reduction of tax liability for some individuals causes an increase in the rates of taxes as charged by the government. Hence the burden of which falls on honest taxpayers.
• It prevents redistribution of wealth and reduction of income disparity. It also causes the concentration of economic power in the hands of few individuals.
• Tax havens encourage base erosion and profit shifting which causes wastage of time, effort, and energy on behalf of the Indian tax authority.
• It deteriorates the social and moral fabric of the society. And encourages activities such as bribery, intimidation, tampering of official records, submission of fake documents, etc.

Tax Havens:Steps taken to counter

• Reinforcement of national & international rules governing controlled foreign companies (CFCs).
• Fix problems with resident corporations evading taxes by using a non-resident affiliate.
• Proposing numerous amendments to the domestic tax laws and regulations as well as the model tax convention
• Creating a variety of payment methods to reduce base erosion and profit shifting.
• Recognize any negative tax practises currently in place and fix them. For example: Base reduction using the transfer pricing mechanism.
• Collaboration with OECD on global minimum tax rate and Base Erosion and Profit Shifting.