Tax Havens

Implications for Developed and Developing World and Capital Flight

Akshay Jain Sandipkumar Gorasiya
Amit Thakur Saquib Hasnain
Greeshma Rao Shreyas Dwiwedi
Jijin Joseph Vishal Gupta
Ketan Bali Umang Gulati
Agenda
Introductions and Origins
Implications on Developed Countries
Implications on Developing Countries
Capital Flight
Real Life Examples
Recent News and Developments
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 and conclusive definition of Tax
Havens.
However, numerous attempts have been made:
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. Individuals and businesses that do not reside a tax haven can
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 from its tax policies.
Primary Objections and Problems in defining:
There are different criteria for determining places suitable for investment and tax planning and no one can indisputably claim to define all of them
with equal applicability.
Lacking the rigour of clear-cut criteria, such definition is arbitrary and ill-suited for policy formulation


Introduction and Origins (2/5)
Origins
Ancient
Ancient Greece
To evade Athens high taxes
Medieval
Channel Islands and Isle of Mann
Tax Havens since 11
th
Century
19
th
Century
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 Economy, followed by
improvements in infrastructure, transportation and communications,
significantly lowered the transaction costs of using different tax
planning schemes
Increased foreign investment leading to greater demand
Shift of most developed countries in the direction of income
taxation as their primary source of income, including confiscatory
income-tax rates owing to the post-war era.
Introduction of rigorous financial regulation in countries such as the
US, creating demand for tax planning, tax avoidance, and tax
evasion strategies
Introduction and Origins (3/5)
why an entity would want to become a tax haven?

Primary
Reasons
Competition amongst states to position themselves as better
destinations for investment and foreign capital (primarily in
US, UK)
Sometimes the cost of collecting tax would exceed the revenue
actually collected (Caribbean and Pacific Islands)
Being forced by its mother states (the American colonies)
Since 1980, tax haven economies grew at an average annual
per capita rate of 3.3 %, which compares favourably with the
global 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 elasticity
of 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.
Introduction and Origins (4/5)
Classification of Tax Havens

Under Public Intl Law
Supranational Bodies, including regional
treaty arrangements such as the EU- in
consequence of the common tax policies,
both tax and other privileges (such as single
passport regulation of banking institutions),
there could be benefit to the Member States

Quasi-sovereign dependent territories such as
US-affiliated territories in the Caribbean, or
Denmark-affiliated territories such as
Greenland or the Faeroe Islands

Autonomous bodies enjoying limited
sovereignty such as Hong Kong in PRC,
Republic of Ingushetia under the Russian
Federation

Regions of a country: Campione in Italy

Free economic Zones: Shannon Airport in
Ireland
By Aim
Income Tax Havens:

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

Means employed: Legislation concerning
exempt companies, holding companies,
treaty relief

Extent to which relief is granted-absence of
income tax, low income tax rates, or special
exemptions (Ireland-the Artistic Tax Haven)

Import duties (excise) tax havens

Estate tax havens

Flags of convenience
By Users
Havens for individuals

Havens for companies, including captive
insurance companies, banks, holding
companies, etc.

Havens for trusts
Introduction and Origins (5/5)
High standards of financial, including
banking and commercial secrecy
No or liberal currency controls
Developed infrastructure
Available professional help-lawyers,
auditors, accountants, financial
analysts
Lower standards for the regulation of
financial institutions, in particular
banks and insurance companies (this
varies among countries)
Stable government
Lack of exchange controls
Characteristics
Quality Tax
Havens
Lead discreet policies in terms of taxation
as well as legal regulation in general
Stable political and economic situation
Developed communication and
infrastructure
Proximity to the world financial centres
Usually more developed countries such as
Switzerland, Monaco, Luxembourg, etc.
Regular Tax
Havens
Do not possess the benefits of a quality-tax
haven in terms of politics, economy, and
infrastructure
To be competitive, further lower the
standards of taxation and legal regulation
Attract less prudent companies and shadier
deals
Less developed countries such as Liberia,
Vanuatu, Nauru.
Competition
What sets Tax havens apart?
Tax Havens Normal States

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
Tax Havens and Economic Development (1/2)
Damaging tax competition :- Globalisation and economic integration has made it easier to avoid
taxation in one country by moving mobile taxable objects to other countries. So to attract capital,
many countries want to give favourable terms to the investors. This may start a tax war. Fear of
nil tax rates in countries.

Inefficient allocation of investment :- 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 focuses on post tax income thus creating the
loss to socio economic benefit to the society.

Effects of secrecy :- Tax havens gives complete security to the investors in terms of hiding the
money they make from the business and saving them from giving taxes in their home country.

Tax Havens and financial crisis :- In 2007, when banks have lost confidence in each others
financial strength, tax havens have worsened problem in cases where counterparty exists in the
jurisdiction where there is lack of transparency and regulation

Illegal transfer pricing :- Overprice transactions from low-tax to high-tax countries and under-
price transactions in the opposite direction

Tax havens encroach heavily on the sovereignty of other countries
The six sins of
tax havens
hampering
development
Tax Havens and Economic Development (2/2)

Positives of Tax Havens
Beneficial tax competition :- Tax
havens discipline politicians so that
they do not increase taxes beyond
levels desirable for the voters.
Economic development in the tax
havens :- Tax haven is able to
develop strong institutions and
makes the place an attractive
investment location.
Increased investment in high-tax
countries :- Increased ROI for those
companies which are able to transfer
their taxable profits from high tax
countries to low tax countries.
Implications on Developed Countries
Negative Effects
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.
Such practices, therefore, accentuate social inequalities and
weaken social cohesion within a country.
The loss of capital has huge repercussions on the ability of
states to deliver essential services to the poorest people and of
the private sector to obtain access to financial resources for
productive investment.
Comparatively Less
Damaging
The percentage of the budget allocated to social spending tends
to be higher in developed countries than in developing
countries.
The impact of tax evasion and tax avoidance is especially
dramatic on developing countries, given their higher
dependence on taxes paid by MNCs.
Regulation Measures
To avoid tax
competition, many high
tax jurisdictions have
enacted legislation to
counter the tax
sheltering potential of
tax havens. Generally,
such legislation tends to
operate in one of five
ways:
Attributing the income and gains of the company or
trust in the tax haven to a taxpayer in the high-tax
jurisdiction on an arising basis. Controlled Foreign
Corporation legislation is an example of this.

Transfer pricing rules, standardization of which has
been greatly helped by the promulgation of OECD
guidelines.

Restrictions on deductibility, or imposition of
a withholding tax when payments are made to
offshore recipients.

Taxation of receipts from the entity in the tax haven,
sometimes enhanced by notional interest to reflect the
element of deferred payment. The EU withholding
tax is probably the best example of this.

Exit charges, or taxing of unrealized capital gains
when an individual, trust or company emigrates.
Implications on Developing Countries (1/2)
ALMOST half of all money invested in developing countries is channelled through tax havens and deprives the
worlds 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 developing
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 developing
countries 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 US$2.2
billion (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 an entire
year.
Reduced tax revenues :- 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.
Tax treaties between tax havens and developing countries:- 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.
Reduction in economic activity :- Tax collection in developing
countries is much lesser than developed counties. One might think k
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 and institutional quality :- 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
Implications on Developing Countries (2/2)
Capital Flight from Developing Countries
Africa loses more money
through outflows than it
gets in aid and foreign
direct investment.
Although total illicit flows
are obviously difficult to
calculate, the U.N.
Economic Commission for
Africa estimates that, in
total, Africa lost more than
$854 billion in illicit
financial flows between
1970 and 2008a yearly
average of $22 billion.
In the Democratic
Republic of the Congo,
where the per-capita
income 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 a
deliberate undervaluation
of assets and sale to
foreign investors.

Top Losers
Capital flight from developing countries
(mainly due to transfer mis pricing)
A corporation working in a developing country
sets up a subsidiary in a tax haven
They sell their product at an artificially low
price to this subsidiary -enabling them to
declare minimal profits and consequently pay
very little tax to the government of the
developing country
Their subsidiary in the tax haven sells the
product at the market price for comparatively
huge profits coupled with a low tax rate (or
none at all).
State-owned mines in the Congo were sold
to anonymous shell companies in the
Virgin Islands for an exceptionally low
price which was then sold on at their market
price to major listed companies. Such deals
cost the DRC $1.35 billion- twice the
education and health budget of a country
where 71.3% of the population currently
lives below the poverty line.
Players and Their Subsidies
Hutchinson Telecommunications
International Ltd
CGP investment Holding
Hutch Essar ltd.
(HEL)
Hong-Kong
Cayman Island
India
Has 67% stakes
Vodafone International
Netherland
Vodafone group plc
London
Purchased this
company from
Hutch at $11 bn
Real Life Examples 1. Vodafone Deal
Think Different.
Tax Different.
Apple Inc. USA
Apple Inc. Ireland
Parent Company
Subsidiaries
Foreign sales, which
account for 60% of
profits
Tax Nowhere
Fall Under Tax
Haven
Real Life Examples 2. Apple

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 that
country.
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 thousands of owners of offshore
companies were published
US Legislation
The Foreign Account Tax Compliance Act (FATCA) was
passed by the US Congress to stop the outflow of money from
the country into tax haven bank accounts.
Liechtenstein
banking scandal
In February 2008, Germany announced that it had paid 4.2
million to Heinrich Kieber, a former data archivist of LGT
Treuhand, a Liechtenstein bank, for a list of 1,250 customers
of the bank and their accounts' details.
G20 BlackList
At the London G20 summit on 2 April 2009, G20 countries
agreed to define a blacklist for tax havens, to be segmented
according to a four-tier system, based on compliance with an
"internationally agreed tax standard. The list as per April 2 of
2009 can be viewed on the OECD website. The four tiers
were:
Those that have substantially implemented the standard
(includes most countries but China still excludes Hong
Kong and Macau).
Tax havens that have committed to but not yet fully
implemented the standard
(includes Montserrat, Nauru, Niue, Panama, and Vanuatu)
Financial centres that have committed to but not yet fully
implemented the standard (includes Guatemala, Costa
Rica and Uruguay).
Those that have not committed to the standard (an empty
category)
Thank you