Tax Havens Advantages & Disadvantages PDF

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Advantages and disadvantages;
International methods used by countries against tax havens
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Tax havens Advantages and disadvantages; International methods used by countries against tax havens

Name: Karolina Malison Stud. No.: 100358358 Words: 2578

Introduction According to the Cambridge Dictionary, a tax haven is a ‘place where people pay less tax than they would pay if they lived in their own country’ (Dictionary, 2016). According to the OECD which does not provide definition but determines four key factors to identify a tax haven which are ‘no or nominal tax on the relevant income, lack of effective exchange of information, lack of transparency and no substantial activities’ (Countering offshore tax evasion, 2009). The above definition describe tax havens as a place which is good to keep money but this does not mean that it is good for everyone. This is an independent area where there is small or even no tax, no transparency, no activity and no exchange information. People are anonymous. There is no requirement for substantial activities. These elements means that tax havens are very attractive for a lot of big corporations and rich individuals that have huge amounts of money. These factors allows tax havens to become competitive against other countries with high tax rates, transparency and exchange of information and so on. May say that what is good for investors which use tax havens is bad for governments. Why? Because tax havens focuses on international avoidance of paying taxes. ‘International tax avoidance can arise from wealthy individual investors and from large multinational corporations’ (Gravelle, 2013). Large amounts of money are not taxed and governments lose tax revenue. This happens every year and losses are in the millions or maybe even more in many countries EVERY YEAR. That why many world leaders treat tax havens as an international problem which is very difficult to solve. Even politician Jamie Whyte has said that ‘they'll never be able to eliminate all tax havens’ (BBC News, 2015). Currently tax havens are very attractive for investors due to functions such as no exchange of information’s, no transparency and so on. 'There are about 60 or so offshore jurisdictions around the world to choose from. They include places like Switzerland, the Channel Islands and Liechtenstein, but many are in the Caribbean' (CBC News, 2016). This essay will show two different sides of tax havens. One of them will be about benefits and opportunity arising from tax havens, however, another side will be about a lot of problems created by tax havens. Also this essay will demonstrate the measures adopted internationally to address the problems associated with tax haven. How countries deal with tax havens, how they cooperate with each other and what they do to act against tax havens.

Two sides of tax havens ‘Tax havens are low-tax jurisdictions that provide investors opportunities for tax avoidance’ (Why do offshore tax havens still exist, 2015). It does not mean that investors do not have to pay tax at all. In many countries income tax rate is higher if income is higher. Many investors are using tax havens to avoid high tax rate. Comparing high tax rate countries with tax havens which have low tax rate might conclude that for investor’s tax haven is a better option to choice. ‘Tax havens provide opportunities for tax planning by multinational corporations. It is often argued that tax havens erode the tax base of high-tax countries by attracting such corporate activity’ (Dharmapala, 2008). If we look on this from different viewpoint we will receive what makes opportunities for investors in tax havens are problems for governances and other countries. Tax havens create competition for other countries. They ‘are parasitic on the revenues of other countries’ (Sciencedirect.com, 2009). Many countries loss large amount of money by avoiding tax. Annual amount of tax saving kept in tax havens would help poor part of society, develop country or could be invested in institution like hospitals or education systems and so on. Another problem is to estimate tax losses because individuals are protected by tax haven law system. ‘Estimation losses from 2004 of U.S. by individual avoidance by using tax havens was between $20-40 billion annual tax losses. In Europe was about $74 billion’ (Kudrle, 2008). If more people and more companies had been using tax havens, so tax losses would have been much higher and state budget would be lower. Next benefit for investors or corporations arise from tax havens by guaranteed confidentiality and protection of banking secrecy and commercial secrecy. ‘Secrecy havens gain competitive advantage by allowing investors to disguise their ownership of offshore assets’ (Kudrle, 1997). Those people who are using tax havens remain anonymous. They are protecting their identity and size of their wealth. Tax havens develop their law in way to protect their clients. Additional tax havens are not exchange any information to other countries even if different country make a request. Privacy is protected by tax system created by tax havens. On the other hand it makes a problem for governances. Keeping the secrets by tax haves make that governance are not able to detect corporations or individuals who escaped from paying taxes. Even governance are not able to prove that someone avoid paying tax because tax havens do not provide any exchange information. Another opportunity from tax havens for investors is that the possibility of rotating funds from undocumented sources. Money keeping from tax havens might have different sources, both legal and illegal. Tax havens have adopted money and they do not look at the sources of origin. May say that for them is no difference if it is legal or illegal sources of money as long as the amount of money is still huge. They not provide any documentation about source of origin of money. So investors

thank to tax havens which transform illegal and untaxed money to legal cash which may be used in non-havens countries. On the other hand these illegal sources provide bases to money laundering which is process of ‘processing money from an illegal source such as drug dealing, so that it appears to have come from a legitimate source’(Dictionary Of Accounting, 2010). Investors might have achieved it by paying illegal money to foreign banks which are located in tax havens and then ‘transferring its equivalent to a bank with a good name in a hand-currency area’ (Dictionary Of Accounting, 2010).Tax havens are very useful for many criminals because it allows them to introduce illegal cash in rotation. 'Their activities create a criminogenic environment in which illicit financial flows are easily disguised and hidden amongst legitimate commercial transactions.’ (Christensen, 2005). Money from illegal sources such as, drugs trafficking or coming from trade of illegal weapons became legal money. May say that tax havens make easier functioning of illegal business. Criminals know where they should allocate money to change the state of illegal money for legal money and then enter them into rotating. Many of multinational businesses treat tax havens as a part of strategy to avoid paying tax. Tax havens are not only helping to escape from paying tax but also are serving to many other functions which attract corporations and individuals. One of these function is ‘that tax havens serve a distinctive function, facilitating the reallocation of income from high-tax to low-tax locations (Why do offshore tax havens still exist, 2015). Tax haven helps in transferring money from high tax localisation to the low tax localisation. That causes the situation whene ‘the government loses both individual and corporate income tax revenue from the shifting of profits and income into low-tax countries’ (Gravelle, 2013). Additional opportunity from tax haven is growth of non-haven investments. The reason for this is that the investors are saving money by allocating them in tax haven and avoid paying high rate tax. ‘Firms with sizeable foreign operations benefit the most from using tax havens, an effect that can be evaluated by using foreign economic growth rates as instruments for firm-level growth of foreign investment outside of tax havens’ (Why do offshore tax havens still exist, 2015). Many say that it could be beneficial for the other countries because some investments are done even if they come from tax havens. ‘Most of the biggest soccer funds are based in tax havens, allowing investors to shield their identity. "You don’t know where it is coming from, who are the people, is it good money or bad?’ (Bloomberg.com, 2016). On the other hand more non haven investments ‘should have the greatest demand for tax haven operations’ (Why do offshore tax havens still exist, 2015). Even if tax havens favour more non haven

investments it will still increase tax haven operations. ‘The characteristic of a tax haven is the transactions that are recorded there take place elsewhere. That means that whilst the tax havens are very good at regulating what takes place within them, the truth is that almost nothing takes place within them.’(www.bbc.co.uk). Another problem arising from tax haven 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.’ (Gravelle, 2013). Tax haven contribute to the problem such as boosting inequality and corrupting the global economy.’ (Tax Justice Network, 2016)

Methods used by OECD and governments to working against tax havens As was shown above many aspects and functions of tax havens have two sides, good and bad. May say that what is good for corporations or individuals which using tax havens usually is bad for governments and other non-havens countries. Avoidance in paying taxes by individuals or corporations are international problems. Many world leaders and organisations like OECD decided to find a solutions and measures which might be taken to reduce losses in governments’ tax revenue. That is why OECD and governments are working together to eliminate harmful tax practices. Work of OECD is focused on ‘progress in the implementation of the principles of transparency and effective exchange of information in tax matters’ (https://www.oecd.org/). One of the step to fight with tax havens was created by OECD a list of tax haven in 2000 which has changed over time. OECD focused on information exchange between countries. If country agreed to cooperate and exchange information then it will be removed from a blacklist. Very important is to cooperate between countries about tax havens which are agreed to share information. If governments are working together, they will have more power to change negative influences arising from tax havens. Common function against tax havens is in exchanging information between countries. Tax havens are popular with keeping a secrecy about their clients. Many nations have signed agreement between each other about exchange important information but ‘deeming countries that have signed an exchange-of-information agreement similar to that recommended by the OECD not to be tax havens for any tax purposes’ (Ambrosanio and Caroppo, 2005). Another step against tax havens was created by OECD more inflexible standard to find tax cheaters. Since 2014, 97 jurisdictions have agreed to impose a new disclosure requirements for bank accounts, trusts, and some other investments held by international customers. (Bloomberg.com, 2016) Next method used by all countries is by applying a code of conduct. ‘The Code of Conduct, like the OECD initiative applies to a range of potentially harmful tax measures, including legislative provisions, regulations, and administrative practices’ (Ambrosanio and Caroppo, 2005). A lot of countries should be using a code of conduct because it contained a collection of rules about behaviours relate to other people and how to manage a business with other people. That will help with mutual cooperation e.g. EU countries with deal against tax havens. Creating a Financial Action Task Force (FATF) was ‘set up to protect a financial systems from criminal usage of money-laundering purposes, identifying detrimental practices and non-cooperative jurisdictions.' (EDEN and KUDRLE, 2014). Tax havens lead to money laundering. FATF creates practice to combat money laundering.

'European Union European Commission focuses on removing unfair tax competition' (EDEN and KUDRLE, 2014). To improve cooperation between countries, European Union created own rules which applies only to the EU members. ‘The European Commission has called for greater information-sharing about tax deals by EU national governments.’(www.bbc.co.uk). Additionally, internal cooperation in EU countries made that exchanging information is much better, together they will try to eliminate unfair tax competition and find a good solution for tax havens. Another method was that ‘The European Commission has called for greater information-sharing about tax deals by EU national governments.’(www.bbc.co.uk) Next method is to limit the transfer of tax revenue from capital taxation to the havens. Next method is using sanctions imposes on tax havens. Tax havens are exposing on sanction by other countries ‘if they failed to collect and share information upon request about individuals and corporations attempting to evade or avoid income taxes (Kudrle, 2008) An example of that how countries might deal with tax havens is USA when a Switzerland did not want to exchange information about bank accounts belonged to Americans. The USA put a lot of pressure and warned Switzerland that 'If Swiss banks don't give information to the USA government about the accounts of Americans with these banks, they will cancel their banking licence in the USA' (www.bbc.co.uk). That action was working in case of US and Switzerland but is not mean that it will be working with other tax havens as well. Everything depend of the cost. In 2010 America introduced the Foreign Account Tax Compliance Act. This act is used to minimalize harmful tax practise. In this Act financial firms are required to ‘disclose foreign accounts held by U.S. citizens and report them to the IRS or face steep penalties’. (Bloomberg.com, 2016). This Act refers to American citizens who have to disclose their foreign bank account. In that way U.S governance tried to get useful information to detect individuals who avoid of paying tax.

Conclusion As was showed in this essay tax havens have two side, good and bad. Tax havens are characteristic for keeping banking secrecy, lack in exchanging information and no transparency. Usually that what was good for investors and corporations are bad for governments. Tax havens is attractive for many rich individuals as well as for criminal environments. Very low tax rates or even no tax make that tax havens are very competitive to the countries with high tax rare. Law system created by tax havens are attractive for foreign money. Their system is popular with keeping banking secrecy by not exchanging any information about their clients. Tax haven is associated with a huge scope of many different problems. Every year many countries have tax revenue losses by avoidance of tax paying. The amount of losses is huge, so they cannot be precisely estimate. Governances are not able to detect who avoided tax paying, because individuals are protected by tax havens law system. Tax havens favour criminal environment and money laundering so that illegal money became legal. That is why many world’s leaders cooperate with each other to limit works of tax haven. OECD and other countries focus on exchanging information. EU members created internal rules which apply only to EU countries and it makes easier with exchanging information and to eliminate unfair tax coopetition as well. Another method against tax havens are sanctions imposed by other countries. Investment in the havens remain very easy to disguise and it is difficult to detect. That is why cooperation between governments and organizations like OECD is very important.

References Ambrosanio, M. and Caroppo, M. (2005). Eliminating Harmful Tax Practices in Tax Havens: Defensive Measures by Major EU Countries and Tax Haven Reforms. 1st ed. [ebook] Available at: https://www.wiwi.europauni.de/de/lehrstuhl/fine/fiwi/lehre/bachelor/int_besteuerung/ambrosanio.pdf [Accessed 22 Oct. 2016].

BBC News. (2015). Why do offshore tax havens still exist? - BBC News. [online] Available at: http://www.bbc.co.uk/news/business-33628020 [Accessed 21 Oct. 2016].

Bloomberg.com. (2016). Ronaldo’s First Club Vows to Get Higher Returns in Player Market. [online] Available at: http://www.bloomberg.com/news/articles/2016-10-12/ronaldo-s-first-club-vows-toget-higher-returns-in-player-market [Accessed 23 Oct. 2016].

Bloomberg.com. (2016). The World’s Favorite New Tax Haven Is the United States. [online] Available at: http://www.bloomberg.com/news/articles/2016-01-27/the-world-s-favorite-new-tax-haven-isthe-united-states [Accessed 23 Oct. 2016].

CBC News. (2016). Tricks the world's super wealthy use to hide assets offshore. [online] Available at: http://www.cbc.ca/news/world/offshore-tax-havens-1.3520086 [Accessed 20 Oct. 2016].

COUNTERING OFFSHORE TAX EVASION. (2009). Available at: https://www.oecd.org/ctp/harmful/42469606.pdf [Accessed 21 Oct. 2016].

de Mooij, R. and Devereux, M. (2010). An applied analysis of ACE and CBIT reforms in the EU. International Tax and Public Finance, 18(1), pp.93-120.

Dharmapala, D. (2008). What problems and opportunities are created by tax havens?. Oxford Review of Economic Policy, 24(4), pp.661-679.

Dictionary, t. (2016). Tax Haven Meaning in the Cambridge English Dictionary Available at: http://dictionary.cambridge.org/dictionary/english/tax-haven [Accessed: 20 Oct 2016]

Dictionary Of Accounting. (2010). 4th ed. Oxford.

EDEN, L. and KUDRLE, R. (2014). Tax Havens: Renegade States in the International Tax Regime. Available at: http://www.voxprof.com/eden/Publications/EDEN-KUDRLE-LAW-AND-POLICY-2005lapo_178_LOW.pdf [Accessed 22 Oct. 2016].

Gravelle, J. (2013). Tax Havens: International Tax Avoidance and Evasion. Congressional Research Service. Available at: http://www.fredsakademiet.dk/ordbog/sord/skattely.pdf [Accessed 21 Oct. 2016].

John Christensen, "The looting continues: tax havens and corruption", Critical perspectives on international business, Vol. 7 Iss: 2, pp.177 – 196, Available from Emerald

Kudrle, R. (2008). The OECD’s Harmful Tax Competition Initiative and the Tax Havens: From Bombshell to Damp Squib. The Berkeley Electronic Press. Available at: https://www2.hhh.umn.edu/publications/7102/document.pdf [Accessed 21 Oct. 2016].

Robert Thomas Kudrle, "Did blacklisting hurt the tax havens?", Journal of Money Laundering Control, Vol. 12 Iss: 1, pp.33 – 49, Available from: Emerald [Accessed 21 Oct. 2016]

Sciencedirect.com. (2009). Tax competition with parasitic tax havens. [online] Available at: http://www.sciencedirect.com/science/article/pii/S0047272709000929 [Accessed 22 Oct. 2016].

Tax Justice Network. (2016). The G20 and OECD tax haven blacklist proposals risk becoming another whitewash - Tax Justice Network. [online] Available at: http://www.taxjustice.net/2016/07/22/g20oecd-tax-haven-blacklist-proposals/ [Accessed 22 Oct. 2016].

Why do offshore tax havens still exist?. (2015). 1st ed. [ebook] BBC News. Available at: http://www.people.hbs.edu/ffoley/havens.pdf [Accessed 20 Oct. 2016].

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