This article is written by Raghav Ajmera.

Introduction

Tax havens are countries or foreign jurisdiction that offers favorable tax and financial secrecy to its customers investing from outside their border. There are roughly 45 tax havens today in the world among which Switzerland tops the rank. Because when it comes to financial information of clients the country implements a high level of secrecy. The tax havens are those countries which have a low tax rate with respect to foreign investment. There are both positive and negative effects of tax haven countries. The primary aim of tax haven countries is to attract foreign investors. If companies have paid taxes in the tax haven jurisdiction, then companies can avoid taxes in the home jurisdiction.

Meaning

A tax haven is a jurisdiction with low tax regime which provides individuals and businesses opportunities of tax evasion. Some of its definitions only focus on tax but it has other definitions too. It refers to the country or jurisdiction which maintains the system of financial secrecy, which enables foreign individuals to hide their assets and income in their home jurisdiction. As of February 2008 the Organisation for Economic Co-operation and Development (OECD) there are three factors to identify whether the jurisdiction is tax haven or not:

• Lack of transparency – A lack of transparency in operation of the legal or administrative provision is another factor to determine the tax havens.
• It must have a low rate of taxation – Tax havens impose nominal taxes as a place to be used by non-residents to escape high taxes in their country of residence.
• Laws to protect financial information – This is the most vital feature of a tax haven as it protects the financial information of the investor with a high level of supremacy.

The tax haven countries are generally smaller in size, commonly below 1 million in size. Tax haven countries have a mean government index of 0.73 which is quite higher than that of the non-tax haven countries. (Dharmapala and Hines, 2006) Tax haven countries are beneficial for both the countries that are the host country as well as the companies and individuals maintaining accounts in them.

What is common among these Tax havens?

Every tax haven country stands for the same meaning and therefore having the same characteristics. These characteristics are the things to determine whether the country is a tax haven or not. Some of the characteristics are :

• Very stringent regarding the privacy laws,
• Secrecy laws and Nondisclosure policies are very strict,
• Do not release account information to other governments and law enforcement agencies,
• Do not have any financial information exchange policies except where drug trafficking and terrorism are suspected,
• Most of these Tax Havens have a legal system based on the British common law.

Why hasn’t this been curbed?

The tax evasion is not a good thing to perform. This is simply giving fewer taxes in other jurisdiction so that the individual need not need to pay it in their home jurisdiction. It has not been curbed because of some of the following reasons that are :

• Internet and communication technology improvement has created a connection to the people across the globe which has improved the way for more investment.
• Tax havens thrive in the financial services sector.
• Several nations have largely escaped the global crackdown on tax havens and are not on OECD’s blacklist.

Top tax havens

Switzerland

Switzerland ranks number one in the list of top 10 tax havens. One-third of the world’s private fortune resides in Swiss banks. Banking is the pillar of its economy – 11% of GDP in 2006 as against 5.8 percent in 1990. In Switzerland, bank secrecy is among the strictest in the world. It is also because of the fact that the bank accounts operated in the country are also managed and operated on a massive scale. The share of assets and investments made in Switzerland by resident and non-resident clients is roughly equal. Various tax exemptions/reductions are available to Swiss companies doing business abroad, or foreign persons resident in Switzerland.

Benefits from Switzerland

• Low tax rates

Switzerland provides low tax rates for the investors investing their fund in the country which helps in avoiding the taxes in their home jurisdiction.

• Financial secrecy

Switzerland provides a high level of secrecy to customers regarding their financial assets. It is not easy to get financial information about the customers. Their banking rules and policy are very strict.

The Cayman Islands

The Cayman islands situated in the western part of the Caribbean sea compromises of three different islands. There is the Grand Cayman, the Cayman Brac, and the Little Cayman. These islands are located northwest of Jamaica and to the south of Cuba. In the Cayman Islands, people who are looking to pay a minimum amount of tax or no tax gets a full package. Here they do not have to pay for personal income taxes, capital gains, corporate taxes. The country does not even withhold tax on foreign clients.

Benefits from The Cayman Islands

• Income tax

Here the people do not have to pay income taxes. Income tax is usually imposed on people or entities with respect to their income or profits

• Capital gain tax

It is the tax on the capital gains, the profit realized on the sale of a non-inventory asset. Here you do not have to pay the capital tax.

• Corporate taxes

It is the tax imposed on a company. It is the direct tax imposed on the companies according to their income or profits. Here you are free from paying corporate taxes.

Luxembourg

Luxembourg has a stable and high-income market economy which features moderate growth, low level of inflation. Everyone is aware of its bank secrecy laws and its reputation as a tax haven. In April 2009, it led to the addition of Luxembourg in the “grey list” of nations with questionable banking arrangements by the G20. According to the Tax Justice Network report, the country got a Financial Secrecy Index value of 1,621.2 and a Secrecy Score of 68.

Benefits from Luxembourg

• Financial secrecy

Every investor investing in a tax haven country looks for a high level of secrecy regarding their financial assets and also this is the major attribute of any tax haven country. Luxembourg provides a high level of secrecy to its customers.

Hong Kong

The 13th most traded currency in the world is the Hong Kong dollar as of 2016. The vital feature of the country is low taxation and free trade. Hong Kong is a place for the people who don’t want to pay their taxes and investor deposit their money in large amounts in the offshore account. The stock exchange market of Hong Kong is the seventh largest in the world. The sales taxes, capital gains, and payroll taxes are not to be paid by the clients here.

Benefits from Hong Kong

• Low tax rate

The investor here gets the benefit of low tax rate regarding their financial investments. People try to invest more in this regions.

• Free trade

This kind of policy is followed by some international markets in which countries’ governments do not restrict imports from, or exports to, other countries.

United States of America (USA)

The states of Nevada and Wyoming are the two major contributors to the increasing problem of tax evasion in the USA. Capital gains, gift tax, personal income tax, and inheritance tax are not there in Nevada. The corporate taxes, inventory taxes, unitary taxes, gift taxes, estate taxes, personal income taxes, franchise taxes, and inheritance taxes are not there in Wyoming.

Benefits from the USA

The investors or the organizations here do not have to pay the capital taxes, gift tax or the inheritance tax which attracts hundreds of people to invest their money in these tax havens. The tax havens have helped in a major economic development of the country. With respect to investment, tax policies are obviously capable of affecting the volume and location of FDI

Singapore

Singapore also was known as the lion city. Singapore is considered the best-suited option for the opening of offshore bank accounts. This is one of the major reasons why Singapore was graded with a Financial Secrecy Index value of 1,118 and a Secrecy Score of 71 by the Tax Justice Network. Singapore has the world’s eleventh largest foreign reserve because of its location, skilled workforce, low tax rates, advanced infrastructure.

Benefits from Singapore

This country is considered the best option to do an investment in the tax havens as it has a good level of financial secrecy with low tax rates. The tax rates are as low as possible that is why it attracts customer to invest their money.

New Jersey

Jersey houses a great number of banks offering offshore accounts to foreign clients. Offshore banking and investments have been a part of the bailiwick underground economy. In the Tax Justice Network report, Jersey got a Financial Secrecy Index value of 750.1 and a Secrecy Score of 78.

Benefits from Jersey

• Financial secrecy

This country offers a high level of financial secrecy to its customers which is very beneficial. Every customer hiding their taxes from their home jurisdiction searches for the country with the most level of secrecy.

Germany

Germany has made easy for the people to open offshore bank accounts which led to the increasing number of bank accounts opened by people so that they can evade their taxes but the good thing is that the country has implemented more and more stricter policy to reduce the problem. As per the Tax justice network report, Germany got a score of 669.8 for its Financial Secrecy Index value, and a Secrecy Score of 57. It is the third world largest exporter of goods having the largest economy in Europe.

Benefits from Germany

• Tax evasion

This country helps in the evasion that is not paying taxes or paying low taxes also having the low-level corruption. The country has large capital stock.

Bahamas

The Bahamas as everyone is aware is another top tax haven. The main reason behind the Bahamas being the tax haven is that they lack capital gains tax, inheritance tax, personal income tax, and gift tax. It was revealed in the Panama Papers that The Bahamas is the jurisdiction with the most offshore entities or companies. It’s banking and international financial services, accounts for some 15% of GDP.

Benefits from Bahama

The Bahama is one of the richest countries. It has the most number of shore accounts of companies or entities. This country attracts foreign investment not only because income earned locally is taxed at favorable rates, but also because tax haven activities facilitate the avoidance of taxes that might otherwise have to be paid to other countries.

How Indians can benefit from these tax havens

The tax havens are increasing inequality, poverty, reducing the financial market and thus promoting corruption. The tax havens have affected the world socially and economically. Tax haven cannot be a benefit to the Indian economy. The size in which tax haven causing danger to the Indian economy can be determined from the fact that Mauritius which is a small country with an economy 1/100th the size of the Indian economy is one of the major exporter of foreign capital to India (Approx 43% of the Indian FDI). This part states why tax haven is a great danger to India than other developed countries. There are a couple of instances which determines why it is a threat to India and not to other developed countries.

• According to reports the amount of money stashed away from India between 2002- 2006 is estimated to be the US $ 27.3 billion annually. For these five years, the total sum would be US$136.5 billion. The major fact is that this data is only of five years. The figure for the amount lost from 1991 (when India liberalized and foreign investment started pouring in) till date would be several times this figure. But this loss in tax revenue is far more serious for India than other rich countries. This is because when such phenomenon occurs in India they cannot retaliate due to the inefficient and weak tax collection system, taxes on immobile tax items are difficult to collect and identify. Hence the loss of capital gain tax in India. Now if we look into the other developing countries case when above such factor occurs they increase the tax on immobile items and reduces the tax on mobile capital. Just by looking at the numbers it can be identified that it is not a benefit to the Indian economy.
• A major concern to the Indian economy is the use of tax havens for the undercover financing of terrorist activities.
• Another major consequence of tax havens which is not a benefit to the Indian economy is that they are the contributors to the weakening of the quality of institutions, bureaucracy, and political system. This is all because of lack of effective law policies and enforcement which means that the politicians can take advantage and opportunities provided by the tax havens in concealing their money obtained by illegal means and crimes.
• Since it can be concluded that tax havens are a hindrance to the growth of India.

Conclusion

The available instances state that tax havens are a real threat to the Indian economy as they weaken our national and political setup, also deteriorate our taxes, undermine our national security. Tax havens basically are jurisdictions with a minimal tax liability. These nations have a very extreme level of secrecy regarding the financial information of the businesses or individuals. The tax havens reduce the overall efficiency of financial markets and thus starts the crime of tax evasion. The countries around the world have to join the hands together and curb this problem faced by them.