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Tax havens study material

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    CHAPTER 1

    WHAT IS A TAX HAVEN

    1.1 Introduction

    The topic of tax havens conjures alluring images of secret bank accounts in exotic locations far

    from the prying eyes of the Revenue Authorities. A tax haven is a legal jurisdiction, which

    provides a no-tax or low-tax environment. It may be a foreign country or principality or dependency

    or a designated area within a country that has a series of unique characteristics, the primary one

    being relatively lower tax rates in comparison with other countries or surrounding areas. In

    some offshore jurisdictions the reduced tax regime is aimed towards entities organized in the

    jurisdiction with all operations occurring outside the country. These jurisdictions seek to

    encourage investment and make up revenue losses by charging a variety of fees for the start up of

    the entity and on an annual basis.

    The available statistics indicate that a sizeable part of global financial activity is routed through

    tax havens. IMF calculations based on BIS data suggest that for selected Offshore Financial

    Centers (OFC), on balance sheet OFC cross-border assets reached a level of US$4.6 trillion at

    end-June 1999 (about 50 percent of total cross-border assets), of which US$0.9 trillion in the

    Caribbean, US$1 trillion in Asia, and most of the remaining US$2.7 trillion accounted for by the

    IFC (International Financial Centers), namely London, the U.S. IBF, and the JOM (Japanese Offshore

    Market). Similarly, the Tax Justice Network estimates that US$11.5 trillion of assets are held

    offshore by private individuals at a probable cost to their governments of US$255 billion a year

    in tax lost. This would be more than sufficient to fund the Millennium Development Goals as

    agreed by the United Nations.

    1.2 Tax Havens Broad Classification

    The Organization for Economic Co-operation and Development (OECD) describes a tax haven

    as a jurisdiction, which actively makes itself available for avoidance of taxes, which would

    otherwise be paid in a higher tax jurisdiction. The term tax avoidance should be noted, because

    there are ways of avoiding taxes without breaking the law, whereas the opposite term is tax

    evasion and this is generally classified as a crime.

    In the US, the IRS agents handbook defines tax haven as a term that generally connotes any

    foreign country that has either a very low tax or no tax at all on certain categories of income.

    The IRS itself defines at least 30 jurisdictions around the world as tax havens, including Austria,

    the Cayman Islands, Hong Kong, Liechtenstein, Panama, Singapore and Switzerland and lesser-

    known places such as Bahrain, Nauru, and Turks & Caicos Islands. However, the US is also

    considered a tax haven by some countries for VAT purposes as well as certain type of investment

    transactions on US Stock Exchanges by Non-US entities.

    Offshore, in its broadest sense of the term, means simply a jurisdiction other than your own. The

    country next door can be offshore for you.

    The term Offshore and Tax Haven have similar connotations and they have been used

    interchangeably in this study.

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    In a more practical context offshore usually means a country or territory which offers specific

    benefits or incentives to foreigners, mostly by way of tax concessions. These come in different

    forms: -.

    1. It may be complete tax exemption for all international business operated by non-residents

    (Seychelles, Belize).

    2. No local tax or low-tax liability on all investment income regardless of the residence of the

    investor (Bahamas, Cayman Islands).

    3. No local tax or low-tax liability on investment incomes in case of specified investments of

    non-residents (India).

    4. Local tax exemption for non-residents of that jurisdiction (Gibraltar, Channel Islands).

    5. Tax holidays for certain types of investment (Portugal, Netherlands Antilles, Iceland).

    6. Favorable tax treatment through treaties and agreements with the investors home country

    (Mauritius, Cyprus, Barbados, Netherlands, USA).

    In addition, some foreign countries may afford better legal protection from creditors and other

    potential litigants who might attempt to seize an individuals wealth. This is the second most

    important aspect that determines why offshore jurisdictions are so popular - asset protection. It

    may even have nothing to do with tax, although usually both are intertwined. Its just safer to be

    offshore. Except in the event of proven criminal activity (excluding so-called fiscal offences

    such as tax evasion or other money collection disputes), most offshore governments uphold

    strict confidentiality laws for banks, corporate registries, and trust companies. These laws protect

    offshore investors from third parties, including both private and government authorities.

    1.3 History of Tax Havens

    Some twenty years ago, there were only a handful of offshore centers, and to many their use was

    surrounded in an air of secrecy. Also, there were only a few professionals specializing in

    offshore practice, and those that did, typically made use of only one or two jurisdictions.

    Over the last twenty years, startling advances in technology and the telecommunications revolution

    have made it easier for individuals and businesses to access offshore facilities - so much so, that

    todays offshore industry has developed in to a major global business, spanning all quarters of

    the world, involving, in one way or another, approximately half of the worlds financial transactions

    by value.

    Consequently, International Financial Services Centers are no longer surrounded by the mystique

    of twenty years ago. They are used globally, twenty-four hours a day, each and every day, as an

    integral and important part of the worlds financial system i.e. Singapore, Hong Kong, Dubai,

    etc.

    The political and economic catalysts that influenced the growth of the offshore industry in the

    eighties and nineties will continue to influence growth in the next two decades also.

    These catalysts are:

    Political and economic instability.

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    Market globalization and deregulation.

    The internationalization of business.

    The lifting of trade barriers.

    A trend towards steady global economic growth.

    A global relaxation of foreign exchange controls.

    In addition to political and economic catalysts there are also global tax related catalysts that

    continue to influence the growth of offshore industry. These include:

    High tax regimes.

    More effective tax recovery.

    The opportunities of utilizing double taxation treaties.

    An increasing number of countries, often but not exclusively third world, have seized upon this

    opportunity to offer companies based in high tax areas, a tax haven if they move their legal

    identity to their own low tax shores. Not only does this save the organization tax, it ensures that

    the haven country gets both revenue from registration fees (to its government) and employment

    and income for its citizens by way of formation agents and furthering their own businesses.

    There are a large number of offshore jurisdictions worldwide, each offering different entities but

    all sharing a common aim - to attract international business by way of offering a low or zero tax

    base from which to operate.

    1.4 OECD Approach

    The list of tax havens identified by the OECD in 2000 provides an overview of Offshore Financial

    Centers. Though most of the countries in this list are no longer considered by the OECD to be

    uncooperative, and some prominent tax havens (such as the Cayman Islands) are not included,

    it shows the geographical distribution and range of Offshore Financial Centers. Islands and other

    small countries dominate the list, which includes countries from all over the world.

    Andorra a small country in Western Europe;

    Anguilla a group of islands in the Caribbean Sea, an overseas territory of the UK;

    Antigua and Barbuda a group of islands in the Caribbean Sea;

    Aruba a Caribbean island, part of the Kingdom of the Netherlands;

    The Bahamas a group of islands off the coast of Florida;

    Bahrain an group of islands off the coast of Saudi Arabia;

    Barbados a Caribbean island;

    Belize a small country in Central America;

    British Virgin Islands a group of islands in the Caribbean Sea, an overseas territory of the

    UK;

    Cook Islands a group of islands in the South Pacific Ocean, self-governing but in free

    association with New Zealand;

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    Dominica a Caribbean island;

    Gibraltar a small country in Southwestern Europe, an overseas territory of the UK;

    Grenada a group of islands in the Caribbean Sea;

    Guernsey/Sark/Alderney a group of islands in the English Channel, a dependency of the

    British Crown;

    Isle of Man an island in the Irish Sea, a dependency of the British Crown;

    Liberia a West African country;

    Liechtenstein a small country in Western Europe;

    Maldives a group of islands in the Indian Ocean;

    Marshall Islands a group of islands in the Pacific Ocean;

    Monaco a small country in Western Europe;

    Montserrat a Caribbean island, an overs

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