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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