IFM Tax Havens

8/11/2019 IFM Tax Havens

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Tax Havens

Implications for Developed and Developing World and Capita

Akshay Jain

Amit Thakur

Greeshma Rao

Jijin Joseph

Ketan Bali


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Agenda

Introductions and Origins

Implications on Developed Countries

Implications on Developing Countries

Capital Flight

Real Life Examples

Recent News and Developments


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Introduction and Origins (1/5)Definition? The essential problem remains that even after so many years in existence; we have yet to reach a formal an

Havens.

However, numerous attempts have been made:

A country that offers foreignindividuals and businesses little or no tax liability in a politically and economically stabl

Tax havens also provide little or no financial information to foreign tax authorities. Individuals and businesses tha

take advantage of these countries' tax regimes to avoid paying taxes in their home countries.

Tax havens do not require that an individual reside in or a business operate out of that country in order to benefit fr

Primary Objectionsand Problemsin defining:

There are different criteriafor determining places suitable for investment and tax planning and no one can indisputa

with equal applicability.

Lacking the rigour of clear-cut criteria, such definition is arbitraryand ill-suited for policy formulation


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Introduction and Origins (2/5)

Origins

Ancient Ancient Greece To evade Athens high taxes

Medieval

Channel Islands and Isle of Mann

Tax Havens since 11thCentury

19thCentury

Flanders in UK had liberal tax regime American colonies positioned as Tax Havens

Modern

The growth of havens such as Cayman Islands,Bermuda, British Virgin Islands, Hong Kong, etc.in the 1960s through 1980s

Reasons

Increased globalization of the World

improvements in infrastructure, transportasignificantly lowered the transaction cos

planning schemes

Increased foreign investment leading to gr

Shift of most developed countries in taxation as their primary source of incomincome-tax rates owing to the post-war era

Introduction of rigorous financial regulatioUS, creating demand for tax planning, evasion strategies


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Introduction and Origins (3/5)why an entity would want to become a tax haven?

PrimaryReasons

Competition amongst states to position themselves as betterdestinations for investment and foreign capital (primarily inUS, UK)

Sometimes the cost of collecting tax would exceed the revenueactually collected (Caribbean and Pacific Islands)

Being forced by its mother states (the American colonies)

Since 1980, tax haven economies grew at an average annualper capita rate of 3.3 %, which compares favourably with theglobal growth at 1.4%

The bar chart suggests that for a well-governed country,

moving from a high to a low tax rate is associated with

significantly greater U.S. investment; whereas for a less

well-governed country, the association between tax rates

and U.S. investment is considerably weaker. If those who

rule poorly-governed countries believe that the elasticityof foreign investment with respect to taxes is much smaller

than elsewhere, then it may be understandable why so few

of them attempt to become tax havens.


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Introduction and Origins (4/5)Classification of Tax Havens

Under Public Intl Law

Supranational Bodies, including regionaltreaty arrangements such as the EU- inconsequence of the common tax policies,

both tax and other privileges (such as singlepassport regulation of banking institutions),there could be benefit to the Member States

Quasi-sovereign dependent territories such asUS-affiliated territories in the Caribbean, orDenmark-affiliated territories such as

Greenland or the Faeroe Islands

Autonomous bodies enjoying limitedsovereignty such as Hong Kong in PRC,Republic of Ingushetia under the RussianFederation

Regions of a country: Campione in Italy

Free economic Zones: Shannon Airport inIreland

By Aim

Income Tax Havens:

Types of income tax relieved-individual,corporate, capital gains

Means employed: Legislation concerningexempt companies, holding companies,treaty relief

Extent to which relief is granted-absence of

income tax, low income tax rates, or specialexemptions (Ireland-the Artistic Tax Haven)

Import duties (excise) tax havens

Estate tax havens

Flags of convenience

By Users

Havens for indivi

Havens for cominsurance comcompanies, etc.

Havens for trusts


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Introduction and Origins (5/5)

High standards of financial, includingbanking and commercial secrecy

No or liberal currency controls

Developed infrastructure

Available professional help-lawyers,auditors, accountants, financialanalysts

Lower standards for the regulation offinancial institutions, in particularbanks and insurance companies (thisvaries among countries)

Stable government

Lack of exchange controls

Characteristics

Quality TaxHavens

Lead discreet policas well as legal reg

Stable political and

Developed commuinfrastructure

Proximity to the w

Usually more deveSwitzerland, Mona

Regular TaxHavens

Do not possess thehaven in terms of pinfrastructure

To be competitive,standards of taxati

Attract less prudendeals

Less developed coVanuatu, Nauru.

Com


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What sets Tax havens apart?Tax Havens Normal State

Ring fenced Tax System No ringfenced tax system

Absence of public registries or

information of any kind

Public registers and information

Available

No auditing and control Mandatory auditing and treasury

Controls

No preservation of records Record keeping requirements

Legislation favours foreign

investors solely

Balanced legislation (public interests,

minority owners etc.)

Exceptions and lax, if any,

enforcement of regulation

No exceptions granted, legislation

generally enforced


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Tax Havens and Economic Development (1/2)

Damaging tax competition :- Globalisation and economic integration htaxation in one country by moving mobile taxable objects to other cou

many countries want to give favourable terms to the investors. This mnil tax rates in countries.

Inefficient allocation of investment :- To maximise the contribution toshould be made where it obtains the highest pre-tax returnin other weconomic return is best. However, private investors focuses on post taloss to socio economic benefit to the society.

Effects of secrecy :- Tax havens gives complete security to the investomoney they make from the business and saving them from giving taxe

Tax Havens and financial crisis :- In 2007, when banks have lost confifinancial strength, tax havens have worsened problem in cases where c

jurisdiction where there is lack of transparency and regulation

Illegal transfer pricing :- Overprice transactions from low-tax to high-tprice transactions in the opposite direction

Tax havens encroach heavily on the sovereignty of other countries

The six sins oftax havens

hamperingdevelopment


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Tax Havens and Economic Development (2/2)


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Positives of Tax Havens

Beneficial tax competition :- Taxhavens discipline politicians so thatthey do not increase taxes beyondlevels desirable for the voters.

Economic developmehavens :- Tax haven isdevelop strong institutmakes the place an attrinvestment location.

Increased investment in high-taxcountries :- Increased ROI for thosecompanies which are able to transfertheir taxable profits from high taxcountries to low tax countries.


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Implications on Developed Countries

Negative Effects

Revenue losses due to tax evasion generally lead to a greatertax burden on wage incomes, which are more easily controlledthan capital incomes.

Tax evasion by MNCs represents unfair competition for local

small and medium enterprises (SMEs), which do not have thesame capacity for banking profits offshore.

Such practices, therefore, accentuate social inequalities andweaken social cohesion within a country.

The loss of capital has huge repercussions on the ability ofstates to deliver essential services to the poorest people and ofthe private sector to obtain access to financial resources for

productive investment.

Comparatively LesDamaging

The percentage of the budget allocated to social sto be higher in developed countries than in develocountries.

The impact of tax evasion and tax avoidance is e

dramatic on developing countries, given their higdependence on taxes paid by MNCs.


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Implications on Developing Countries (1

ALMOST half of all money invested in developing countries is channelled through tax havens and deprivworlds poorest countries of tax revenue, according to the charity ActionAid.

According to ActionAid, in excess of $13 trillion may be hidden in tax havens. They calculate this costs devel

countries a colossal $160 billion per year, which far exceeds global aid.

In total, the OECD (Organisation for Economic Co-operation and Development) estimates that money lost to devcountries through tax havens is three times more than they receive in aid each year.

ActionAid reported that one single transaction through UK-linked tax havens would have provided India with Ubillion (1.5bn) in tax if it had not taken place offshore, according to the Indian government.

That sum is almost enough to provide every Indian primary school child with a subsidised midday meal for ayear.


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Reduced tax revenues :- A common feature of many developingcountries is that they often lack resources, expertise and capacity forbuilding up and developing an efficient civil service, so that the qualityof the tax collection system is frequently found to be weaker indeveloping countries than in richer nations. As a result, developingcountries often also have limited opportunities to pursue cross-borderinvestigations, which demand both time and resources.

Tax treaties between tax havens important features of tax havens aravoidance treaties between develocountries are net recipients of invetheir tax bases. Developing countrthis way because tax havens have compared to them.

Reduction in economic activity :- Tax collection in developingcountries is much lesser than developed counties. One might think kthat reduced government revenues resulting from the use of tax havenswould be partly offset by higher post-tax private incomes. But thisdoes not happen. Tax havens make unproductive activity moreattractive, which means that fewer resources are employed inproductive operations

Tax havens and institutional quaquality of institutions and politicalas politicians can make greater usehavens to conceal the proceeds of

Implications on Developing Countries (2


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Capital Flight from Developing Countr

A

t

A

a

Ec

A

to

f

1

In the Democratic

Republic of the Congo,

where the per-capitaincome is $272, deals

between corporations

and a handful of

government officials cost

the nation more

than $1.3 billion from

2010 to 2012 due to adeliberate undervaluation

of assets and sale to

foreign investors.

TopLosers Capital flight from developing countries


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Capital flight from developing countries

(mainly due to transfer mis pricing)

A corporation working in a developing countrysets up a subsidiary in a tax haven

They sell their product at an artificially lowprice to this subsidiary -enabling them todeclare minimal profits and consequently pay

very little tax to the government of thedeveloping country

Their subsidiary in the tax haven sells theproduct at the market pricefor comparativelyhuge profits coupled with a low tax rate (ornone at all).

State-owned mines

to anonymous shel

Virgin Islands for anprice which was the

price to major listed

cost the DRC $1.35

education and health

where 71.3% of the

lives below the pove


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Players and Their Subsidies

Hutchinson Telecommunications

International Ltd

CGP investment Holding

Hutch Essar ltd.

(HEL)

Hong-Kong

Cayman Island

India

Has 67% sta

Vodafone International

Netherland

Vodafone group plc

London

Purchased this

company from

Hutch at $11 bn

Real Life Examples 1.Vodafone Deal

Real Life Examples 2 Apple


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Think Different.Tax Different.

Apple Inc. USA

Apple Inc. Ireland

Parent Company

Subsidiaries

Foreign sales, which

account for 60% of

profits

Tax Nowher

Fall Under Tax

Haven

Real Life Examples 2.Apple


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The tax reform plan would require multinationals with extensive warehouse operations in an

overseas country, such as Amazon, to pay local tax on any profits arising from sales in thatcountry.

The Group of 20 and the OECD are taking steps to put and end to global

tax havens

A new bill will allow the Israel Tax Authority to share information with tax haven countries

Israel Considers Bill For Sharing Data With Tax Havens

The British Virgin Islands got more FDI last year than the major emerging economies of India

and Brazil combined

Top tax haven got more investment in 2013 than India and Brazil - U.N.

Recent News and Developments

2013 data leak In April 2013 details of thou

companies were published

US Legislation

The Foreign Account Tax C

passed by the US Congressthe country into tax haven b

Liechtensteinbanking scandal

In February 2008, Germanymillion to Heinrich Kieber, Treuhand, a Liechtenstein bof the bank and their accoun

G20 BlackList

At the London G20 summitagreed to define a blacklist according to a four-tier syst"internationally agreed tax 2009 can be viewed on the were:

Those that have substanti(includes most countries bKong and Macau).

Tax havens that have comimplementedthe standa(includes Montserrat, Nau

Financial centres that havimplementedthe standaRica and Uruguay).

Those that have not commcategory)


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Thank you

Documents

IFM Tax Havens