Dr.

Ram Manohar Lohiya National Law University- ECONOMICS

DR. RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY

LUCKNOW

Academic Session: 2017-18

ECONOMICS PROJECT

TAX HAVENS AND ITS EFFECT ON GLOBAL

ECONOMY

UNDER THE GUIDANCE OF: SUBMITTED BY:

Dr. MITALI TIWARI NITIN GUPTA

FACULTY OF ARTS ROLLS NO: 167

DR. RAM MANOHAR LOHIYA SECTION ‘B’

NATIONAL LAW UNIVERSITY B.A. LLB (Hons.), SEMESTER II

SIGNATURE OF PROFESSOR SIGNATURE OF STUDENT

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 Dr. Ram Manohar Lohiya National Law University- ECONOMICS

ACKNOWLEDGEMENT

I am overwhelmed in all humbleness and gratefulness to acknowledge my depth to all those who
have helped me to put these ideas, well above the level of simplicity and into something
concrete. I would like to express my special thanks of gratitude to my teacher Dr. Mitali Tiwari,
who gave me the golden opportunity to do this wonderful project on the topic "TAX HAVENS
AND ITS EFFECTS ON GLOBAL ECONOMY”, which also helped me in doing a lot of
Research. I am really thankful to them any attempt at any level can't be satisfactorily completed
without the support and guidance of my parents and friends. I would like to thank my parents
who helped me a lot in gathering different information, collecting data and guiding me from time
to time in making this project, despite of their busy schedules, they gave me different ideas in
making this project unique.

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TABLE OF CONTENTS

TAX HAVEN: INTRODUCTION AND ORIGIN………………………………………….04

HOW TAX HAVEN FUNCTIONS…………………………………………………………06

HOW TAX HAVEN GOVERNMENTS MAKE MONEY…………………………………09

IMPACT ON POOR COUNTRIES………………………………………………………....10

TAX HAVENS AND INDIA………………………………………………………………..11

LUXEMBOURG: A CASE STUDY………………………………………………………...12

SOLUTION………………………………………………………………………………..…14

REFERENCES…………………………………………………………………………..…...19

CONCLUSION………………………………………………………………………..……..20

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TAX HAVEN: INTRODUCTION AND ORIGIN

There is no generally agreed definition of what a tax haven is. According to taxjustice.net, the
term is a bit of a misnomer because these places offer facilities that go far beyond tax. Loosely
speaking, a tax haven provides facilities that enable people or entities escape (and frequently
undermine) the laws, rules and regulations of other jurisdictions elsewhere, using secrecy as a
prime tool. Those rules include tax – but also criminal laws, disclosure rules (transparency,)
financial regulation, inheritance rules, and more.

Some definitions do focus purely on tax: for example, a widely cited academic paper describes
a tax haven as a jurisdiction where particular taxes, such as an inheritance tax or income tax, are
levied at a low rate or not at all.1 Other definitions refer to a state, country, or territory which
maintains a system of financial secrecy, which enables foreign individuals to hide assets or
income to avoid or reduce taxes in the home jurisdiction. Some refer to "secrecy jurisdictions" as
an alternative to "tax havens," to emphasize the secrecy element, and a Financial Secrecy Index
ranks jurisdictions according to their size and secrecy.2 According to Richard Murphy, secrecy
jurisdictions are places that intentionally create regulation for the primary benefit and use of
those not resident in their geographical domain. That regulation is designed to undermine the
legislation or regulation of another jurisdiction. To facilitate its use secrecy jurisdictions also
create a deliberate, legally backed veil of secrecy that ensures that those from outside the
jurisdiction making use of its regulation cannot be identified to be doing so.3

In 1998 the OECD set out a number of factor for identifying tax heavens. The four key factors
were:

1) No or nominal tax on the relevant income;

2) Lack of effective exchange of information;

3) Lack of transparency;

4) No substantial activities4

Now the question arises how did the tax havens emerge?

This is a complex question, and research is in its infancy. In very general terms, the offshore
phenomenon has always existed, in that it has always been possible for wealthy people to take
their wealth (or themselves) elsewhere to other jurisdictions, to escape the responsibilities of

1
Dharmapala, Dhammika and Hines Jr., James R. (2006) Which Countries Become Tax Havens?
2
Tax Justice Network (2015) Financial Secrecy Index
3
Richard Murphy, ‘What do you do to oppress people? Turn their state into a tax haven?’ (Tax Research UK 12
August 2013) < http://www.taxresearch.org.uk/Blog/2013/08/12/what-do-you-do-to-oppress-people-turn-their-state-
into-a-tax-haven/> accessed on 26 October 2016
4
Countering Offshore Tax Evasion: Some Questions and Answers (2009) OECD

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society at home. The use of differing tax laws between two or more countries to try to mitigate
tax liability is probably as old as taxation itself. In Ancient Greece, some of the Greek
Islands were used as depositories by the sea traders of the era to place their foreign goods to thus
avoid the two-percent tax imposed by the city-state of Athens on imported goods. The practice
may have first reached prominence through the avoidance of the Cinque Ports and later the staple
ports in the twelfth and fourteenth centuries respectively. In 1721, American colonies traded
from Latin America to avoid British taxes.

The founding of the Swiss Confederation in 1848 marked the birth of perhaps the first organised
and identifiable tax haven – though bankers in Geneva and Zurich had harboured Europeans
élite’s’ wealth in conditions of secrecy for years beforehand. Various pirate coves in the
Caribbean, the English Channel and elsewhere also hosted what might be described as early
offshore activity. The era of financial globalisation from the 1960s onwards marked a new, more
virulent phase of offshore activity, as staid and secretive Swiss-styled banking secrecy was
complemented by more aggressive, hyperactive Anglo-Saxon strains that took off in the
Caribbean and Britain’s nearby Crown Dependencies, alongside Luxembourg and other
European havens. Analysis by the University of Glasgow’s Emmanuel Mourlon-Druol reveals a
spectacular acceleration in tax haven activity during the latter half of the 1970s. He calculated
that in 1973 there were eight banks in the Cayman Islands; by 1981 that figure had jumped to
111.

The United States began deliberately putting into place secrecy facilities from the 1970s in
particular. European jurisdictions such as Ireland and the Netherlands began to get in the game.
Asian havens, notably Hong Kong and Singapore, also have long histories as centres for often
illicit offshore finance and are the fastest-growing segment of the offshore game today.5

5
< http://www.taxjustice.net/faq/> accessed on 26 October 2016

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HOW TAX HAVEN FUNCTIONS

The main motivation for the use of tax havens is probably the tax advantage they offer, even
though many transactions involving these places have little impact on taxation imposed by
taxpayer’s country of residence, as tax haven countries are also used in some cases for genuine
trade or business reasons. The main uses of havens for tax purposes are briefly analyzed as
follows.

1. Emigration and shifting of residence.

In countries with a relatively high level of taxation, taxpayers may be tempted to avoid being
subjected to domestic taxes by moving their residence to a tax haven country. However,
emigration to another country may take place only if it offers a better or at least an equivalent
environment to that left behind, accompanied by non-tax motivation, as tax savings can
frequently be obtained in more convenient ways than through emigration. Alternatively,
residents of high tax countries may attempt to manipulate rules concerning fiscal residence to
avoid domestic taxes. Individuals may set up an artificial residence in a tax haven so as to
deceive fiscal residence tests provided for under domestic legislation, even though in practice
they retained essential links with their country of origin.

2. Personal residency

Since the early 20th century, wealthy individuals from high-tax jurisdictions have sought to
relocate themselves in low-tax jurisdictions. In most countries in the world, residence is the
primary basis of taxation. In some cases, the low-tax jurisdictions levy no, or only very low,
income tax. But almost no tax haven assesses any kind of capital gains tax, or inheritance tax.
Individuals who are unable to return to a higher-tax country in which they used to reside for
more than a few days a year are sometimes referred to as tax exiles.

3. Corporate residency

Corporate persons, in contrast to natural persons, can own subsidiary corporations in many
countries. That allows them to take advantage of the variety of laws, regulations, and
conventions in multiple countries, without overtly engaging in any questionable activities. Only
in extreme cases will they move their formal corporate headquarters.6

4. Asset holding

Asset holding involves utilizing an offshore trust or offshore company, or a trust owning a
company. The company or trust will be formed in one tax haven and will usually be administered
and resident in another. The function is to hold assets, which may consist of a portfolio of

6
Reuven S. Avi-Yonah (2002): For Haven's Sake: Reflections on Inversion Transactions; University of Michigan
Law School, Tax Notes, Vol.95 no.12, 17 June 2002

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investments under management, trading companies or groups, physical assets such as real
estate or valuable chattels. The essence of such arrangements is that by changing the ownership
of the assets into an entity which is not tax resident in the high-tax jurisdiction, they cease to be
taxable in that jurisdiction.

Often the mechanism is employed to avoid a specific tax. For example, a wealthy testator could
transfer his house into an offshore company; he can then settle the shares of the company on trust
(with himself being a trustee with another trustee, whilst holding the beneficial life estate) for
himself for life, and then to his daughter. On his death, the shares will automatically vest in the
daughter, who thereby acquires the house, without the house having to go through probate and
being assessed with inheritance tax.7 Most countries assess inheritance tax, and all other taxes,
on real estate within their jurisdiction, regardless of the nationality of the owner, so this would
not work with a house in most countries. It is more likely to be done with intangible assets.

5. Trading and other business activity

Many businesses which do not require a specific geographical location or extensive labour are
set up in tax havens, to minimize tax exposure. Perhaps the best illustration of this is the number
of reinsurance companies which have migrated to Bermuda over the years. Other examples
include internet-based services and group finance companies. In the 1970s and 1980s corporate
groups were known to form offshore entities for the purposes of "reinvoicing". These reinvoicing
companies simply made a margin without performing any economic function, but as the margin
arose in a tax-free jurisdiction, it allowed the group to "skim" profits from the high-tax
jurisdiction. Most sophisticated tax codes now prevent transfer pricing schemes of this nature.

6. Financial intermediaries

Much of the economic activity in tax havens today consists of professional financial
services such as mutual funds, banking, life insurance and pensions. Generally, the funds are
deposited with the intermediary in the low-tax jurisdiction, and the intermediary then on-lends or
invests the money (often back into a high-tax jurisdiction). Although such systems do not
normally avoid tax in the principal customer's jurisdiction, it enables financial service providers
to provide multi-jurisdictional products without adding another layer of taxation. This has proved
particularly successful in the area of offshore funds. It has been estimated over 75% of the
world's hedge funds, probably the riskiest form of collective investment vehicle, are domiciled in
the Cayman Islands, with nearly $1.1 trillion US Assets under management although statistics in
the hedge fund industry are notoriously speculative.

7. Anonymity and bearer shares

Bearer shares allow for anonymous ownership, and thus have been criticized for
facilitating money laundering and tax evasion; these shares are also available in some OECD

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countries as well as in the U.S. state of Wyoming.8 In a 2010 study in which the researcher
attempted to set-up anonymous corporations found that 13 of the 17 attempts were successful in
OECD countries, such as the United States and the United Kingdom, while only 4 of 28 attempts
were successful in countries typically labelled tax havens.9 In 2011, an OECD peer review
recommended that the United Kingdom improve its bearer share laws.10

In 2012 the Guardian wrote that there are 28 persons as directors for 21,500 companies.

8. Money and exchange control

Most tax havens have a double monetary control system, which distinguish residents from non-
resident as well as foreign currency from the domestic, the local currency one. In general,
residents are subject to monetary controls, but not non-residents. The company’s operations will
not be subject to exchange controls as long as it uses foreign currency to trade outside the tax
haven. Tax havens usually have currency easily convertible or linked to an easily convertible
currency. Most are convertible to US dollars, euro or to pounds sterling.

Let’s say I run a company based in United States and it makes 1 million dollars in pre-tax profit.
Now pre-tax profits are those profits that have not been taxed yet. The corporate tax in US is
35% which means that out of 1 Million dollars 350,000 $ will be paid in taxes (if taxed in US).
Now to save up on corporate taxes what a company has to do is to reduce the profits. If the
profits are reduced then the taxes levied on them will also reduce. Now how does a company go
about reducing its profit without actually reducing its profit? Let’s say that there is an island near
US that has a substantively lower tax rate, say 5%. Now what happens is that my company,
which is physically located in the US, will create a subsidiary company in this island and hand
over some intellectual property like patent, trademark etc. to this company (this is called transfer
pricing). Now the subsidiary company has all of the intellectual property of the parent company.
We have to keep in mind that this subsidiary company is owned and operated by the parent
company. Now the Parent company will come up and argue that it does not have 1 million $
profit as it had to license the use of this intellectual property and will show that a large amount of
its profit has been used up for the same (say 800,000$). It’s left with only 200,000$ profit on
which 35% tax will be levied which will come up to 70,000$. In the island country the corporate
tax is only 5%. 5% of 800,000% (which it has earned from the parent company) is 40,000$.
Hence the total tax paid by my company reduces from 350,000$ to just 110,000$.

Apart from this role tax havens also provide secret havens where illegal money could be easily
stashed away as they have very stringent secrecy laws and they do not share information with the
international community, for e.g. Switzerland.

8
Gravelle JG. (2013). Tax Havens: International Tax Avoidance and Evasion
9
Sharman JC. (2010). Shopping for Anonymous Shell Companies: An Audit Study of Anonymity and Crime in the
International Financial System. Journal of Economic Perspectives.
10
Bearer shares and delays blot UK record on information exchange. Tax Journal.

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HOW TAX HAVEN GOVERNMENTS MAKE MONEY

1. Customs and Import Duties

Despite what their name might imply, tax havens are not completely tax-free. Low-income tax
jurisdictions normally supplement lost government revenues with taxes on most goods imported
into the country, known as customs and import duties. These are a form of indirect taxes and can
make the cost of living high because they are applied to the price of items before being sold
locally. In Britain’s Trillion Pound Paradise, a 2016 BBC documentary on the Cayman Islands,
the presenter was shocked to find out that the island’s high import duties caused a pack of fish
fingers to retail for as much as £8.50. ($12)

2. Corporate Registration and Renewal Fees

As already mentioned, there are a lot of companies that find the legal and business environment
in tax havens to be very attractive. A research paper published by the International Monetary
Fund (IMF) in 2011 entitled Republic of San Marino: Selected Issues for the 2010 Article IV
Consultation revealed that there were more than 600,000 offshore companies registered in the
British Virgin Islands alone. Furthermore, earlier this year the Guardian reported that there
were more than 100,000 companies domiciled in the Cayman Islands. To put that into
perspective, that’s roughly two companies for every resident on the island.

Although most offshore financial centres impose no corporate income tax, their governments still
financially benefit from having thousands of companies registered in their jurisdiction. That is
because tax haven governments typically impose a registration fee on all newly incorporated
business entities like companies and partnerships. Also, companies are required to pay a renewal
fee each year to still be recognized as an operating company.

There are also additional fees that are imposed on the companies depending on the type of
business activity that they engage in. For example, banks, mutual funds and other companies in
the financial services business usually need to pay for an annual license to operate in that
industry. All of these various fees add up to create a strong source of recurring revenue for tax
haven governments. It is estimated that the British Virgin Islands collects over $200 million each
year in the form of corporate fees.

3. Departure Taxes

Quite a few tax havens have a very vibrant tourism industry, welcoming hundreds of thousands
and even millions of visitors each year. This high level of tourism creates an extra revenue
source for some of these countries in the form of departure taxes. A departure tax is essentially a
fee that is levied on a person upon their exit of a country.

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Now, if a layman looks at these sources of making money he will think it’s not worth the trouble.
A country can easily earn more money through its resources so why go to all the trouble of
making yourself a tax haven? To answer this question, we have to look at the composition of
theses tax haven countries. Most of these havens are small countries, mostly islands and
dependencies of countries like UK and Spain, with little or no natural resources and population
of under 500,000. They do not have a strong natural resource base. They have a literate
population, are a parliamentary democracy (mostly) and have good infrastructure and
communication services. They do not have any recourse than to fall on their financial sector to
float their economies and hence Tax Havens are born.

IMPACT ON POOR COUNTRIES

There are a number of impacts of tax havens on developing countries 18 as Tax Justice
Network reports:

• Secret bank accounts and offshore trusts encourage wealthy individuals and companies to escape
paying taxes

• The ability of transnational corporations to structure their trade and investment flows through
paper subsidiaries in tax havens provides them with a significant tax advantage over their
nationally based competitors. In practice this biased tax treatment favours the large business over
the small one, the international business over the national one, and the long-established business
over the start-up. It follows, simply because most businesses in the developing world are smaller
and newer than those in the developed world and typically more domestically focused, that this
inbuilt bias in the tax system generally favours multinational businesses from the North over
their domestic competitors in the developing countries.

• Banking secrecy and trust services provided by global financial institutions operating offshore
provide a secure cover for laundering the proceeds of political corruption, fraud, embezzlement,
illicit arms trading, and the global drug trade.

• The offshore economy has contributed to the rising incidence of financial market instability that
can destroy livelihoods in poor countries. Offshore financial centres (OFCs) are used as conduits
for rapid transfers of portfolio capital in to and out of national economies which can have a
highly destabilizing effect on financial market operations.

Tax havens harm both industrialized and developing countries, but the damaging
impacts are largest in developing countries. This is partly because these countries are poor and
thereby have more need to protect their national tax base, and partly because they generally have
weaker institutions and thereby fewer opportunities for enforcing the laws and regulations they

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adopt. Tax treaties between tax havens and developing countries often contribute to a significant
reduction in the tax base of the latter. In addition, certain effects of tax havens primarily make
themselves felt in developing countries. While the existence of tax havens is likely to have had
little impact on political institutions in rich nations, a number of indicators suggest that tax
havens contribute to maintaining a vicious circle in developing countries whereby weak
institutional capacity facilitates illegal capital flight, and tax evasion and capital flight in the next
instance restrict the development of institutions.11

TAX HAVENS AND INDIA

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. When Nitish Kumar demands special status for Bihar, he is essentially demanding that his
state should become a tax haven for domestic and global investors in order to develop faster. Not
only that. Politicians create their own tax havens to favor their voters. Today, farmers pay
absolutely no income tax whatsoever so if you want to evade income tax legitimately, you could
do worse than marrying into a farming family and show most of your income as derived from
agriculture. Seen in this perspective, tax havens are instruments through which states which
would never have got capital are using the bait of tax advantage to develop themselves.12 . A tax
haven is not necessarily a shady place to park your money (though some of them surely are): it is
merely about giving individuals and companies tax or other breaks and get them to invest there.
Even today, countries have double-tax avoidance treaties, which enables companies to
legitimately pay lower taxes in one country and avoid the higher tax rate in another country.
Mauritius is famous because it has zero tax on certain types of incomes and we have a double-tax
treaty with that country.

11
<https://www.cmi.no/publications/3470-tax-havens-and-development> accessed on 26 October 2016
12
<http://www.moneycontrol.com/news/business/why-tax-havens-existhow-india-has-its-own-tax-
havens_847801.html?utm_source=ref_article> accessed on 26 October 2016

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LUXEMBOURG: A CASE STUDY

Luxembourg has been the tax haven of choice for many corporations and mega-rich individuals
around the world since the 1970s. It has thrived as a tax haven due to its political and economic
stability and huge tax incentives, encouraging foreign companies to move there. The country's
small state government has provided offshore bank holders with top-notch confidentiality
and asset protection for years. Luxembourg's tax system allows hundreds of U.S. corporations to
store massive chunks of their business outside their home countries, which cuts billions from tax
bills.13
The European country of Luxembourg is situated in Western Europe and is bordered by
Germany, France and Belgium. The official languages spoken in the Grand Duchy of
Luxembourg are French, German and Luxembourgish. The country has an estimated population
of a little over 500,000 people. Luxembourg has become one of the more popular tax havens
located on the European continent. Luxembourg is a tax haven and has a vibrant banking sector.
Luxembourg also offers offshore insurance, investment fund management and the registration of
ships and vessels.

The tax havens of the world are classified as countries or territories which provide services to a
client based mostly made up of non-residents. The tax havens have very low or no taxes at all in
place and are very efficient at providing privacy and confidentiality for clients.

The tax haven of Luxembourg is one of Europe’s leading financial centres. In fact, the tax haven
of Luxembourg is considered to be the second largest banking centre on the European continent.
Offshore banking in the tax haven of Luxembourg gained momentum in the 1970’s. Today as
banking centre tax haven Luxembourg has branches for most of the world’s leading financial
institutions. The tax haven of Luxembourg has at least one hundred and fifty (150) banks
offering services to both residents and non-residents of the tax haven.

Luxembourg draws the largest corporations from around the world that are seeking asylum from
large corporate taxation, specifically in countries such as the United States where the corporate
tax rate at 35%, as of 2015, is the third highest in the world. In comparison, Luxembourg has a
corporate tax rate of 21%, significantly lower than that of the U.S.

Corporations that funnel profits through Luxembourg are charged around 1%. This is a huge
incentive for large corporations that have the opportunity to save billions in corporate tax bills by
moving cash to Luxembourg at such low rates.

As a tax haven Luxembourg does not tax the interest gained by offshore bank accounts. Offshore
bank accounts in the tax haven of Luxembourg are a guaranteed means of increasing capitals

13
<http://www.investopedia.com/ask/answers/100115/why-luxembourg-considered-tax-haven.asp> accessed on 26
October 2016

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whilst at the same time receiving quality asset protection. In the tax haven of Luxembourg
offshore bank accounts are very easy to establish and maintain.

In the world of offshore banking, banking secrecy has become a cornerstone. In many tax havens
of the world banking secrecy is a key feature. In Luxembourg the privacy of offshore bank
account holders is highly regarded. Banking Secrecy has kept the tax haven of Luxembourg very
popular as a tax haven since more and more people are trying to find tax havens which will
protect them and their investments. All information in offshore bank accounts in the tax haven of
Luxembourg is regarded as confidential and cannot be given out without the written
authorization of the offshore bank account holder.

Since offshore banking is very important in the tax haven of Luxembourg the offshore banks in
the tax havens go to great lengths to ensure that quality products and services are received by all
their clients. Offshore banks in the tax haven of Luxembourg are well known for providing
quality and sophisticated banking services. Some of the bank services available for offshore bank
clients in the offshore tax haven of Luxembourg include international credit cards, debit cards,
internet banking, bank accounts in multi-currency, banking via the telephone and issuing bank
drafts among other services.

The tax haven of Luxembourg does not incorporate offshore companies but there are certain
forms of Luxembourg companies which can take advantage of tax exemptions in the tax haven.
A Luxembourg Holding Company or SOPARFI is a resident company in the tax haven of
Luxembourg which operates subsidiaries. The Luxembourg holding company is permitted to
carry out offshore activities. This company is exempted from paying taxes on dividends if it
holds for the least 10% of a subsidiary for a period of one (1) year or more. A Luxembourg
holding company will also be exempted from paying taxes on dividends if the company has
already been charged corporate taxed of a at a rate of 11 % or more.

Holding companies incorporated in the tax haven of Luxembourg can get exempted from paying
withholding taxes if the beneficiary is another Luxembourg holding company or a Company
incorporated in the European Union. In the tax haven of Luxembourg, a holding company can be
exempted from paying capital gains tax.

The tax haven of Luxembourg continues to be the tax haven of choice for many persons around
the world. The country is very stable both economically and politically. Luxembourg as a tax
haven has been able to provide clients with safe asset protection. Luxembourg has been able to
provide offshore bank account holders with banking secrecy and privacy for decades and will
continue to do so well into the future as the government authorities of Luxembourg are very
supportive of the country’s offshore banking sector and are constantly putting measures in place
which will improve on the tax haven competitiveness.14

14
<http://www.taxhavens.biz/european_tax_havens/tax_haven_luxembourg/> accessed on 26 October 2016

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SOLUTION

1. 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.

WHAT’S HAPPENING NOW?

A U.S. multinational corporation mines natural resources in Africa and sells it in the United
States and Europe. It sets up a complex array of subsidiary companies, each with a different
name, in tax havens across the world.

The corporation shifts billions in profits to those tax haven subsidiaries, thus avoiding tax in
countries with stronger regimes.

When it publishes its annual report, the multinational rolls up all the information from each
country – trading, profits, tax payments. – into one big lump.

No-one – governments, the public, even investors and shareholders – knows what happened
where.

With this piece of accounting trickery, a huge black hole has been created in corporate accounts.

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.

With this single accounting measure, countries, rich and poor, will be able to call multinational
companies to account at last.

Countries could tax the companies properly. They could fund the schools, roads and hospitals
their citizens need, without having to beg for aid.

2. UNITARY TAX

This would involve taxing multinational corporations according to the real economic substance
of where they actually do business.

WHAT HAPPENS NOW?

Imagine a Swedish company with 25,000 employees in Sweden, 25,000 employees in France,
and five tanned accountants throwing paper aeroplanes in a sweaty booking office in the Cayman
Islands.
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Thanks to some clever wizardry, the company’s advisors claim that most of its business takes
place in the Cayman Islands.

Ah, the Cayman Islands. Fantastic climate, awesome water sports and lovely fresh seafood.

Plus, a tax rate that’s close to zero.

So, the company’s nifty footwork means that it avoids paying vast amounts of tax in Sweden and
France, which means less money for public services in those countries.

Unitary tax 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 country’s resources
do they depend on to do business?

Under unitary taxation, France and Sweden would get to tax (almost) half of the corporation’s
overall profits at their own tax rates, and only tiny weenie amounts of its profits would be
allocated to Cayman to be taxed at its zero percent rate.

3. AUTOMATIC INFORMATION EXCHANGE

Developing countries – and rich ones – must get the information they need to tax their wealthiest
citizens properly.

WHAT HAPPENS NOW?

It’s a slow day in a poor country. But a few hundred wealthy and powerful individuals are
rubbing their hands in anticipation.

An IMF loan is on its way. The loan comes in – there is a flurry of phone calls and visits to the
central bank and treasury – and before you can say “capital flight” the money has flitted out to
the world’s tax havens. All that’s left is the debt. Not to worry – the country’s poorest citizens
can stump up for that.

Now there is a popular revolution, and the government’s corrupt officials are booted out. The
new rulers want to know where the money has gone. They need it for vital public services. How
can they find out?

They can’t – because of tax haven secrecy.

There may be an agreement with one or two tax havens, where the havens agree to share
information. But these agreements are next to useless. The global standard promoted by
the OECD, a club of rich nations, says that you must already know the precise information

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you’re looking for – the name of the tax cheat, their bank account details, and what they’re
suspected of doing – before you even ask a tax haven for it! And even then, you have to fight
your way through the tax haven courts to get confirmation of that information that you already
knew about.

European countries already share some information about their citizens automatically – you
don’t have to ask for it.

It is time for the OECD’s useless system to be consigned to the scrap heap, and for automatic
information exchange to be rolled out across the world. Tax havens must sign up or be hit with
defensive countermeasures.

Developing countries – and rich ones – must get the information they need to tax their wealthiest
citizens properly.

Automatic information exchange is how they can do it.

4. DISCLOSURE OF THE REAL LIFE, PROPER, FINAL, ULTIMATE, ACTUAL

OWNERS OF COMPANIES.

Ensuring that every human who has a stake in a corporate structure – a’ true beneficial’ owner –
has his or her identify available on a searchable, low-cost public register. And we should slap
severe sanctions on those havens that don’t shape up.

WHAT HAPPENS NOW?

The roof of your house caves in. It’s a huge job to fix it – and you get some builders in. They
charge a fortune – but, well, what price a roof over your head?

Then six months later, your roof caves in again! Time to sue the builder. Only there’s a problem.
The building company has gone bankrupt. So you chase down the company owners – but find
that the company’s registered in a tax haven. You go through the courts, and you’re delighted
that your country has an agreement to share information with the tax haven! After a lot of work,
you find out the names of the company’s directors, along with photocopies of their passports and
even their shoe sizes.

Only now there’s another problem. And it’s a biggie.

The company ‘directors’ are in fact ‘nominees’: directors who have merely rented their name to
the company. Each of them, it turns out, are directors of thousands of companies. They are straw
men hiding the real builders – those people who extracted those tens of thousands from you for
‘fixing’ your roof, and who doubtless extracted millions from many other unsuspecting punters –
and who remain a mystery. The tax haven has ‘shared’ all the information it has with your

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country and the courts – but still you are no closer to tracking down the real, warm-blooded
humans who set up the building company – humans who are quite likely to be swilling
champagne now, driving their Ferraris through the streets of Monaco, and laughing heartily.

While you, in your dilapidated home, wonder how to pay for a new roof.

Countries have signed lots of agreements to share information with each other. Tax havens
enthusiastically sign up to these agreements. “We will give you all the information we have,
whenever you ask for it,” they say. And they mean it – only it’s a trick. They simply make sure
they don’t have the information in the first place. They will tell you all about the nominee
directors, the trustees, and the other sham officials who make the secrecy world function –
knowing that you are no closer to finding the real warm-blooded humans behind the mischief.

We can stop this. We can make sure that every human who has a stake in a corporate structure
like this has their identity available on a searchable, low-cost public register. And we should slap
severe sanctions on those havens that don’t shape up.

We want full transparency.

5. 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.

WHAT HAPPENS NOW?

A drug dealer gets caught in a police sting and is slapped in jail. Better still – his or her
financiers and accountants get charged with money-laundering and are packed off in disgrace
too. Justice is done. Rightly so.

But the story doesn’t end there.

The drugs money laundering industry is part of a much bigger picture. It is dwarfed by another:
the tax evasion industry.

Now here’s the rub. The drug money launderers and the tax evaders use exactly the same tax
haven scams and tricks as each other. Money laundering and tax evasion are two rails on the very
same tracks through the global financial system.

But the world has decided to tackle one – and not the other. It has made drugs trafficking a
money laundering offence: if you are a financer or accountant or banker and get caught helping a
drugs trafficker, you may well go to jail too.
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But not tax evasion. Even though tax evasion a criminal offence in most countries, it isn’t a
money-laundering offence. Tax evaders go to jail. But the wealthy tax haven accountants,
lawyers and bankers who helped them commit these crimes? They walk free.

The money-launderers and their financiers almost never get caught – there is a failure rate of 99
percent, by some estimates. That’s because we haven’t got serious about tax havens, or about tax
evasion.

It is time for this to change.

Turning a blind eye to tax evasion – asking no questions of your clients – is not ok.

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 turning a
blind eye to tax evasion a money-laundering offence.

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REFERENCES
ONLINE SOURCES

• https://en.wikipedia.org/wiki/Tax_haven
• http://www.npr.org/2011/03/17/134619750/how-offshore-tax-havens-save-companies-billions
• http://www.globalissues.org/article/54/tax-avoidance-and-havens-undermining-
democracy#Tacklingtheproblemorpretendingtodoso
• https://en.wikipedia.org/wiki/Panama_Papers
• http://economia.icaew.com/business/july-2015/how-tax-havens-are-surviving
• http://www.thehindu.com/opinion/op-ed/the-problem-of-secretive-tax-havens/article8458300.ece

Books and Journals

• Black Money and Laws to curb Black Money in India by Manish Kumar.
• Black Money and FATCA’2016 by Taxman.

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CONCLUSION
Indians exported goods and services worth at least Rs.17 trillion over the past four decades but
did not remit an equivalent amount in foreign exchange, an HT analysis of classified central bank
data shows. This is probably the first measure of how much the economy bled from tax evaders
stashing funds offshore.

The amount accounts for a fourth of India’s current Gross Domestic Product. The money,
substantially higher now when adjusted against the value of the US dollar, is believed to have
been parked in tax havens.15

In 2014 the tech giant Google—which now falls under parent company Alphabet—transferred
11.7 billion Euros (approximately $13 billion) to Bermuda in an effort to minimize the taxes it
had to pay on its income through a little tax maneuver that has been dubbed a “Double Irish with
a Dutch Sandwich.”

A 2012 report by the British Tax Justice Network estimated that between US$21 trillion and $32
trillion is sheltered from taxes in unreported tax havens worldwide.16

These figures show how serious the problem tax havens pose to the world economy at large and
specially the developing economies which need the money for development and welfare.
However, the solution to the problem of Tax Havens remains at bay not because of lack of
legislation but because of powerful vested interests (For instance in 2010, India introduced the
"general anti avoidance rule" (GAAR) which forbid any and every sort of tax avoidance
structuring, legal or illegal. This has been put in abeyance, though it is widely expected to kick-
in in 2018/19 as recently declared by the Finance Minister (Government of India)). What we
have to understand is that the services provided by Tax Havens are not technically illegal but
they are used in such a manner as to accomplish illegal objects.

What would really end the concept of tax havens is a unitary tax regime and information
exchange regime throughout the world but that goal for a long period of time will remain out of
reach.

15
Appu esthose Suresh, ‘In 44 years, India lost at least Rs 17 trillion to tax havens’ (Hindustan Times 2 November
2016) <http://www.hindustantimes.com/india-news/in-44-years-india-lost-at-least-rs-17-trillion-to-tax-
havens/story-8rTjbju22U2KQR9KmJ1qAP.html> accessed on 3 November 2016
16
"Tax havens: Super-rich 'hiding' at least $21tn". BBC News. <http://www.bbc.com/news/business-18944097>
accessed on 3 November 2016

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