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The hardest thing in the world to understand is the income tax.-Albert EinsteinTax Havens (Group 5 & 6) Sec A7A, 11A, 26A, 29A, 31A, 39A, 43A, 46A, 48A, 51A

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Tax Havens Explained

WhatWhyWhereWhoHowHowCasesGainsLossesMythsTrends

How much money goes to tax havens globally?$ 21-32 trillion32 trillion =

+

US EconomyEuropean EconomyDid you know?Thats equal to 1/3rd of the worlds GDP

http://www.advisoranalyst.com/glablog/2013/05/10/visualizing-the-worlds-tax-havens-infographic.html3

Did you know?Meanwhile, how is the US faring?The US stockpiles$ 1.7 trillion in tax havens

$$$$$$$$$$$$$$$$$$$$$$$USD 108 BillionUSD 73 BillionUSD 60.8 Billion

USD 53.4 BillionOn an average, for every one dollar companies keep at home,

they park 3 dollars offshoreSome of the big companies sending their tax-free money offshore

http://www.advisoranalyst.com/glablog/2013/05/10/visualizing-the-worlds-tax-havens-infographic.html4

Where are these Tax Havens?

BahamasBarbadosBelizeCosta RicaDominicaGrenadaPanamaSt. Kitts & NevisSt. LuciaSt. Vincent & the GrenadinesAnguillaAntiguaBritish Virgin IslandsCCayman IslandsMontserratNetherlands AntillesPuerto RicoTurks & CaicosCentral America &CaribbeanUSUS DelawareBermudaEuropeAndorraCyprusLiechtensteinLuxembourgMaltaSwitzerlandDublinGuernseyHeligolandIsle of ManJerseyMiddle EastBahrainIsraelLebanonSouth AmericaUruguayAfricaDjiboutiGhanaMauritiusSeychellesTangier

AsiaJapanPhilippinesSingaporeThailandHong KongLabuan, MalaysiaMacauPalauMarshall IslandsMicronesiaNauruNew ZealandNiueSamoaVanuatuCook IslandsGuamMarianasTahitiOceania

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The What & Why of Tax HavensWhy are there tax havens?Myth BustersCapital Neutrality ParadoxPunishment Paradox+=Current State of AffairsWhat are tax havens?#1. All Tax Havens have Zero Tax#2. Offshore tax havens are all exotic islands#3. Offshore tax havens are just for criminalsThere are varying levels of taxation in different offshore financial centres and the rates may differ if you are an individual or an offshore companyNot true. While there may be some tax havens in warm locations, there are plenty of others which are notIt is possible that the proceeds from some criminal activity end up in offshore financial centers and jurisdictions, but the majority of individuals and businesses that use these locations are completely legitimate.A country that offers foreign individuals and businesses little or no tax liability in a politically and economically stable environment. Tax havens also provide little or no financial information to foreign tax authorities. Tax havens do not require that an individual reside in or a business operate out of that country in order to benefit from its tax policies.

Tax Havens The Evolution1880

U.S. states of New Jersey and Delaware introduced the concept of Easy Incorporation1929

The technique of 'virtual' residencies was introduced - allowing companies to incorporate in Britain without paying tax . The Swiss Banking Law Amendment demanded 'absolute silence in respect to a professional secret', that is, absolute silence in respect to any accounts held in Swiss banks "absolute" here means protection from any government, including the Swiss

1934

1957

The Euromarket is an interbank or 'wholesale' financial market which, due to this implicit understanding between the Bank of England and the commercial banks, is not regulated by the Bank. But since the transactions take place in London, no other authority regulates the market and hence it became effectively unregulated or 'offshore'. a tightening of credit occurred in 1967 and 1968, contributing to rising interest rates in the Eurodollar market. As a result, dollar balances in the AsiaPacific region became attractive for many banks. Singapore responded by setting up incentives for branches of international banks to relocate to Singapore

1967

1980

Tax Havens go international, with new entrants replicating the success of the predecessors

Upside to Tax Havens?

Beneficial Tax CompetitionEconomic Development in Tax HavensIncreased Returns to Shareholders with Companies in High Tax RegimeTax havens discipline politicians so that they do not increase taxes beyond levels desirable for the voters.Tax haven is able to develop strong institutions and makes the place an attractive investment location.Increased ROI for those companies which are able to transfer their taxable profits from high tax countries to low tax countries.Advantage Tax Haven

TRANSFER PRICING

MALDIVES ISLAND

PRE-TAX PROFIT:INR 1 CRORECORPORATE TAX : 25%TAXES PAID TO GOVERNMENT:INR 25 LAKHS

INTELLECTUAL PROPERTYIP COST: INR 80 LAKHSCORPORATE TTAXES PAID : INR 4 LAKHSAX : 5%REMAINING PROFITS: 20 LAKHSCORPORATE TAX : 25%TAXES PAID : INR 5 LAKHSThe How of Corporate Tax Havens?

HYBRID MISMATCH ARRANGEMENTDOUBLE DEDUCTIONA CO.B CO.Indirect HoldingHybrid EntityTreated by A country as transparent or disregarded for tax purposesTreated by B country as non-transparentEquity interestEquity interestLoanInterest

Equity InfusionCountry B now subjectsHybrid Entity under Corporate taxInterest expenses of HybridEntity are allocated to A(transparent treatment

DOUBLEDEDUCTIONThe How of Corporate Tax Havens?

HYBRID MISMATCH ARRANGEMENTDEDUCTION / NO INCLUSIONA CO.B CO.fundingHybrid InstrumentEquityDebtThe How of Corporate Tax Havens?

HYBRID MISMATCH ARRANGEMENTFOREIGN TAX CREDIT GENERATORSA CO.B CO.SEEKING FINANCINGSPECIAL PURPOSE VEHICLEPreferred SharesEquity infusionPreferred SharesCashA Co sells the SPV preferred shares to B Co and receives cash in exchange, and at the same time the parties agree that A Co will purchase back the shares at a later point in time at an agreed price.Sale : Foreign Tax Credit Regime, Allowing claim to Foreign tax creditFor Corporate tax paid by SPV to A countryLoan : exemption applied For dividend paid out by A to B During the time , the stock was heldThe How of Corporate Tax Havens?

..about Ugland House, a small building in Cayman Islands, where 12,748 companies are registered and supposedly conduct their business (among them Coca Cola and Intel Corp.) No real activity is going on!Either this is the largest building in the world or the largest tax scam (US President Barack Obama, Jan. 5, 2008, debate in Manchester, N.H.)

Negative effects of tax havens 1/2

Multi-Pronged StrategyEffects of secrecyTax havens have contributed to reinforcing tax competition by offering secrecy rules and fictitious domiciliary positions combined with zero tax regimes. This is not tax competition in the normal sense, because low taxes are combined with legal structures which represent a major encroachment on the sovereignty of other countries.Tax competition makes the national tax base more tax sensitive.The secrecy rules mean that tax havens can easily become pass-through locations where investors achieve anonymity from the tax authorities in their home country and from possible creditors. This is lucrative for these jurisdictions because, in exchange for zero or very low tax, they make money from fees or from the use of local representatives and administrators by foreign companies.Tax havens have contributed to information asymmetry between various players in the financial markets. They have increased the risk premium on financial transactions .To maximise the contribution to value creation, investment should be made where it obtains the highest pre-tax return in other words, where the socio-economic return is best. However, private investors are not concerned with the pre-tax return but with the post-tax return, which is the income they retain.Two principal methods are available to a multinational company for transferring profits from a high-tax to a low-tax country. The first method is to overprice transactions from low-tax to high-tax countries and under-price transactions in the opposite direction. The second method is to structure the balance sheet of a company to minimise tax. Such a strategy reduces the taxable profit in the high-tax country and, conversely, increases it in the low-tax country.The use of tax havens also affects which countries have the right to tax capital income which can lead to a more unequal division of tax revenues. This problem is particularly associated with the taxation of capital gains by companies registered in a tax haven.Damaging tax competitionInefficient allocation of investmentIllegal transfer pricingFinancial CrisisMore unequal division of tax revenues

Negative effects of tax havens 2/2

Very few Australians will have heard of Burdekin Investments, one of the thousands of low-profile post-box companies that makes its home at Ugland House, a resort-style office building in George Town, the capital of Caribbean tax haven the Cayman Islands.It keeps a much lower profile than its parent, Australia's biggest company, Commonwealth Bank, whose logo is proudly borne by the group's branches on shopping strips across the country.

Under the joint tax treaty, investors sending money into India can't be taxed by India if they pay capital-gains tax in Mauritius. The rate here is low enough to make it advantageous to route investments through the island. From April 2000 to February 2012, some $63.6 billion came into India via Mauritius, including financial investments and foreign direct investment

Tax havens and developing nations

A common feature of many developing countries is that they often lack resources, expertise and capacity for building up and developing an efficient civil service, so that the quality of the tax collection system is frequently found to be weaker in developing countries than in richer nations. As a result, developing countries often also have limited opportunities to pursue cross-border investigations, which demand both time and resources.

An important features of tax havens are that they sign various tax avoidance treaties between developing countries. Since developing countries are net recipients of investment, treaties lead to reduction in their tax bases. Developing countries have to cede their right to tax in this way because tax havens have got very strong negotiating power compared to them.

Tax collection in developing countries is much lesser than developed counties. One might think that reduced government revenues resulting from the use of tax havens would be partly offset by higher post-tax private incomes. But this does not happen. Tax havens make unproductive activity more attractive, which means that fewer resources are employed in productive operations

Tax havens can weaken quality of institutions and political systems in the developing country as politicians can make greater use of the opportunities offered by tax havens to conceal the proceeds of economic crime and rent seeking.Tax treaties between tax havens and developing countriesReduced tax revenues Tax havens and institutional quality Reduction in economic activity The institutional framework for addressing international tax spillovers is weak. As the strength and pervasiveness of tax spillovers become increasingly apparent, the case for an inclusive and less piecemeal approach to international tax cooperation grows.The tax revenue loss is largest for developing countries. Compared to OECD countries, the base spillovers from others tax rates are two to three times larger, and statistically more significant. . . . The apparent revenue loss from spillovers. . . is also largest for developing countries.Source: http://www.financialtransparency.org/2014/06/25/imf-tax-havens-cause-poverty-particularly-in-developing-countries/The laws of many developing countries need strengthening if they are to tax gains on such indirect transfers.

INDIACapital Flight from Developing Nations The Top 20 Losers

In total, 10 million individuals around the world hold assets offshore, but almost half of the minimum estimate of $21tn $9.8tn is owned by just 92,000 people. And that does not include the non-financial assets art, yachts, mansions in Kensington that many of the world's movers and shakers like to use as homes for their immense riches.

http://www.theguardian.com/business/2012/jul/21/offshore-wealth-global-economy-tax-havens17

TAX HAVENS AND DEVELOPED COUNTRIES

Unfair PracticesSocial InequalityIncrease in costDecrease in Tax RevenueImplications on Developed CountriesErode national tax base of the country. Revenue losses due to tax evasion generally lead to a greater tax burden on wage incomes, which are more easily controlled than capital incomes.Tax evasion by MNCs represents unfair competition for local small and medium enterprises (SMEs), which do not have the same capacity for banking profits offshore.Hamper the application of progressive tax rates and the achievement of redistributive goals. therefore, accentuate social inequalities and weaken social cohesion within a country.Discourage compliance by taxpayers and increase the administrative costs of enforcement

Tax havens and economic developmentThe seven sins of tax havens hampering development..The negative impact of these factors may be an insurmountable hindrance to economic development in poor countriesTax havens encroach heavily on the sovereignty of other countries1Tax havens harm the efficiency of financial markets4Tax havens undermine national tax systems and increase the costs of taxation6Tax havens reduce the efficiency of resource allocation5Tax havens make it more profitable and less risky to engage in economic and other crimes2Tax havens hurt private income too3Tax havens hurt institutional quality (bureaucracy at large) and thereby economic growth (and democratic development in the long run)7

Set up a company in LuxembroughSet up a company in IrelandSave Tax in Ireland because interest payment can be charged only against Profits in IrelandAvoid tax in Luxembrough because company will not pay tax on interest received from Irish companyLend that company 1Bn Euro interest freeBorrows 1 Bn from L company and pays interest

Some companies derive not from physical goods but from royalties on intellectual property, like the patents on software that makes devices work. Other times, the products themselves are digital, like downloaded songs. It is much easier for businesses with royalties and digital products to move profits to low-tax countries than it is, say, for grocery stores or automakers. A downloaded application, unlike a car, can be sold from anywhere.

About Corporates and Loopholes

Almost all of Apples foreign operations are run through an Irish company with no employeesApple pays 2%or lessin corporate income tax in IrelandApple Operations International, which provided 30% of Apples worldwide net profits from 2009 to 2011, doesnt pay taxes anywhereApples US profits keep ending up in Ireland, tooMost of the $102 billion Apple is keeping overseas is in US banks.The magic of check-the-box makes whole companies disappearApple is seemingly terrible at estimating its own taxes

Apple Inc. USAAOI. IrelandParent CompanySubsidiariesForeign sales, which account for 60% of profitsTax NowhereFall Under Tax Haven

Worlds second largest beer companyAnnual turnover of 12 billion and profits of 2 billionSABMiller began in Africa in 1895, still reigns supreme thereSABMiller has more tax haven companies (65) than it has African breweries and bottling plantsGhana, the worlds 28th poorest country - SABMiller paid zero income tax there between 2008-10 after shifting millions of pounds into notorious tax havens such as Switzerland and Mauritius.

Accra Brewery, Ghanas second-biggest beer producer, supplies 29 million of beer a year and rising. Despite this, the brewery made a loss between 2007-10 and paid corporation tax in only one of those four years

In contrast, SABMiller worldwide showed pre-tax profits of about 16 per cent in 2009

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.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 worldEnter Country by Country Reporting!Country by Country Reporting!

This 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 countrys resources do they depend on to do business?Under unitary taxation, France and Sweden would get to tax (almost) half of the corporations overall profits at their own tax rates, and only tiny weeny amounts of its profits would be allocated to Cayman to be taxed at its zero percent rate.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 IslandsEnter Unitary Tax!

Unitary Tax

European countries already share some information about their citizens automatically you dont have to ask for it.

It is time for the OECDs 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.Its a slow day in a poor country. But a few hundred wealthy and powerful individuals are rubbing their hands in anticipation.Enter Automatic information exchange

Automatic Information Exchange

We can stop this. We can make sure that every human who has a stake in a corporate structure like this has their identify available on a searchable, low-cost public register. And we should slap severe sanctions on those havens that dont shape up.The roof of your house caves in. Its 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?Enter True beneficial ownership

True Beneficial Ownership

International work on tax havensThe OECD has worked since 1996 to open up tax havens and prevent harmful tax practices In 1998, the OECD identified a number of potentially harmful tax arrangements in member countriesOECD occupies a central place in efforts to establish tax treaties (partly in order to avoid double taxation) and agreements on exchanging information relevant to the tax authoritiesIt has carried out extensive work related to tax evasion through the use of manipulated transfer pricing. Outcomes of these efforts include recommended formulations for prohibiting the manipulation of transfer prices as well as measures against such forms of tax evasionThe goal of the IMF is to promote monetary and financial stability, in part through international cooperation. This has been the starting point for the organisations work in relation to tax havens.IMF uses the term offshore financial centres (OFCs). Its current work related to OFCs primarily represents a continuation of a programme launched in 2000 , the organisation invited the OFCs to an individual assessment of their rules and systems for financial regulation and stability, and for reporting statistics.IMF recently established the AML/CFT Trust Fund as a project to combat money laundering and the financing of terrorism, which includes reform efforts, training, support for implementation and research.

Financial Action Task Force (FATF)

OECD

IMFFATF is an international organisation established by the G7 countries in 1989 to advise on policies for combating money launderingIt has produced the 40+9 recommendations for such action (No country has lived fully up to all the 40+9 recommendations.)A process was launched by the FATF in 1998 to identify countries which represented problem areas in the fight against money laundering.EU provides a number of points where the work impinges on tax havens. These include collaboration on fighting crime. Moreover, the EU places great emphasis on strengthening competition by ensuring a level playing field for all players offering the same product or service.EU has adopted a savings directive.93 This specifies that countries and other jurisdictions in the European Economic Area (EEA) must automatically exchange data on interest income received by individuals.EU has also reached agreement with a number of other countries and jurisdictions on similar information exchange or withholding tax arrangements. Switzerland, Liechtenstein, Andorra and a number of Caribbean tax havens are among the countries covered by such agreements.

EUinternational organisations work

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