The hardest thing in the

world to understand is the

income tax.
-Albert Einstein

Tax Havens (Group 5 & 6) Sec A

7A, 11A, 26A, 29A, 31A, 39A, 43A, 46A, 48A, 51A

Tax Havens
Explained

What

Where

Trends
Cases

How

Gains

Why

Who

Myths

Losses
How

Did you know?

How much money goes to tax havens globally?

$ 21-32

trillion

Chart Title

32 trillion
=

+
US
Econom
y

Europea
n
Economy

Thats equal to
1/3rd of the
worlds GDP

Did you know?

Meanwhile, how is the US faring?
The US stockpiles

$ 1.7

trillion in tax havens

Some of the big companies sending their tax-free money

offshore

USD 73 Billion

USD 60.8 Billion

USD 53.4 Billion

USD 108 Billion

On an average,
for every one
dollar
companies
keep at home,
they park 3
dollars
offshore

Where are these Tax

Havens?

Central
Americ
a&
Caribb
ean

Bahamas
Barbados
Belize
Costa Rica
Dominica
Grenada
Panama
St. Kitts & Nevis
St. Lucia
St. Vincent & the
Grenadines
Anguilla
Antigua
British Virgin
IslandsC
Cayman Islands
Montserrat
Netherlands Antilles
Puerto Rico
Turks & Caicos

US

Andorra
Cyprus
Liechtenstein
Luxembourg
Malta
Switzerland
Dublin
Guernsey
EuropeHeligoland
Isle of Man
US
Jersey
Delaware
Bermuda

Asia
Japan
Philippines
Singapore
Thailand
Bahrain
Hong Kong
Israel
Labuan, Malaysia
Lebanon
Macau
Middle Palau

East

Uruguay

Djibouti
Ghana
Mauritius
Seychelles
Tangier

South Africa
Americ
a

Marshall Islands
Micronesia
Nauru
Zealand
Oceani New
Niue
a
Samoa
Vanuatu
Cook Islands
Guam
Marianas
Tahiti

The What & Why of Tax

Havens
What are tax
havens?

Myth Busters

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.

in different offshore financial centres

and the rates may differ if you are an
individual or an offshore company

#2. Offshore tax havens

are all exotic islands

Why are there tax

havens?

Capital
Neutrality
Paradox

#1. All Tax Havens have

Zero
Tax
There are varying levels of taxation

Not true. While there may be some

tax havens in warm locations, there
are plenty of others which are not

Punishme
nt
Paradox

Current
State of
Affairs

#3. Offshore tax havens

are just for criminals
It 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

Tax Havens The Evolution

a
tightening
of of
credit
occurred
inor1967
and
1968,
contributing
to
The
Euromarket
is'virtual'
an
inter
bank
'wholesale'
financial
market
Swiss
Banking
Law
Amendment
demanded
'absolute
silence
in predecessors
Tax
Havens
go
international,
with
new
entrants
replicating
the
success
of Incorporation
the
The
technique
residencies
was
introduced
allowing
U.S. states
of
New
Jersey
and
Delaware
introduced
the
concept
of
Easy
rising
interest
rates
in thesecret',
Eurodollar
market.
As asilence
result,
which,
due
toprofessional
this
implicit
understanding
between
the
of
respect
to ato
that
is, absolute
in respect
companies
incorporate
in
Britain
without
paying
taxBank
. dollar
balances
in the
Pacific
region
became
for
many
England
and
theAsia
commercial
banks,
is"absolute"
not attractive
regulated
the
Bank.
to any accounts
held
in Swiss
banks
hereby
means
banks.
Singapore
responded
by place
setting
incentives
for branches
But
since
the
transactions
take
in up
London,
no other
authorityof
protection
from
any
government,
including
the Swiss
international
toand
relocate
regulates the banks
market
hencetoitSingapore
became effectively unregulated
or 'offshore'.

1880

1929

1934

1957

1967

1980

Advantage Tax Haven

Upside to Tax Havens?

Tax haven is
Tax havens
able to
discipline
develop
Beneficia politicians so
strong
that they do
l Tax
institutions
Competit not increase
and makes
taxes beyond
ion
the place an
levels desirable
attractive
for the voters.
investment
Increased
location.
Returns toIncreased ROI
Sharehold for those
ers with companies
Companie which are able
s in High to transfer
their taxable
Tax
profits from
Regime
high tax
countries to
low tax

Economic
Developm
ent in Tax
Havens

The How of Corporate Tax

Havens?

TRANSFER PRICING

PRE-TAX
PROFIT:
INR 1
CRORE

CORPORATE TAX : 25%

TAXES PAID TO
GOVERNMENT:
INR 25 LAKHS
IP COST: INR 80 LAKHS
CORPORATE TTAXES
PAID : INR 4 LAKHS
AX : 5%

INTELLECTUAL PROPERTY

REMAINING PROFITS: 20
LAKHS
CORPORATE TAX : 25%
TAXES PAID : INR 5 LAKHS
MALDIVES ISLAND

The How of Corporate Tax

Havens?

YBRID MISMATCH ARRANGEMENT

DOUBLE
DEDUCTION

Treated by A
country as
transparent
or
disregarded
for tax
purposes

DOUBLE DEDUCTION
Interest expenses of Hybrid
Entity are allocated to A
(transparent treatment
Loan
Interest

A CO.
Equity
interest

Indirect
Hybrid Entity
Equity
Infusion

Equity
interest

Country B now
subjects
Hybrid Entity under
Corporate tax

B CO.

Holding

Treated by B
country as
nontransparent

The How of Corporate Tax

Havens?

YBRID MISMATCH ARRANGEMENT

DEDUCTION / NO INCLUSION
A CO.
Equity

funding

Hybrid Instrument

Debt

B CO.

The How of Corporate Tax

Havens?

YBRID MISMATCH ARRANGEMENT

FOREIGN TAX CREDIT GENERATORS

A 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.

Preferred Shares
SEEKING FINANCING
Cash

A CO.
Pr

Eq
uit
y

inf
efe
Loan : exemption applied
us
rre
ion
For dividend paid out by A to B
dS
During the time , the stock was held har
e
s

SPECIAL PURPOSE
VEHICLE

B CO.

Sale : Foreign Tax Credit Regime,

Allowing claim to Foreign tax credit
For Corporate tax paid by SPV to
A country

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.)

..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!

Negative effects of tax havens

1/2
The secrecy rules mean that tax havens can easily become pass

To maximise the contribution

to value creation,
investment should be made
where it obtains the highest
pre-tax return in other
words, where the socioeconomic 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.
Tax 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.

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.

Inefficient
allocation of
investment

Tax havens have

contributed to information
asymmetry between
various players in the
financial markets. They
have increased the risk
premium on financial
transactions .

Two principal methods

are available to a
multinational company
for transferring profits
from a high-tax to a lowtax 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

Effects of secrecy
Financial Crisis

MultiPronged
Strategy
Illegal transfer
pricing

Damaging tax
competition
More unequal division
of tax revenues

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.

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
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
Tax
treaties
between
tax
demand both time and resources.

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.

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.
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 laws of many developing

countries need strengthening if
they are to tax gains on such
indirect transfers.

Reduction in economic activity

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 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.

Source: http://www.financialtransparency.org/2014/06/25/imf-tax-havens-cause-poverty-particularly-indeveloping-countries/

Capital 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.

INDIA

TAX HAVENS AND DEVELOPED

COUNTRIES

Tax
Tax evasion
evasion by
by
MNCs
MNCs
represents
represents
unfair
unfair
competition
competition for
for
local
local small
small and
and
medium
medium
enterprises
enterprises
(SMEs),
(SMEs), which
which
do
not
have
do not have
the
the same
same
capacity
capacity for
for
banking
banking profits
profits
offshore.
offshore.

Erode
Erode national
national tax
tax base
base of
of the
the
country.
Revenue
losses
due
country. Revenue losses due to
to tax
tax
evasion
generally
lead
to
a
greater
evasion generally lead to a greater
tax
tax burden
burden on
on wage
wage incomes,
incomes,
which
are
more
easily
which are more easily controlled
controlled
than
than capital
capital incomes.
incomes.

Implications
on
Developed
Countries

Hamper
Hamper the
the application
application of
of
progressive
progressive tax
tax rates
rates and
and the
the
achievement
of
redistributive
achievement of redistributive goals.
goals.
therefore,
therefore, accentuate
accentuate social
social
inequalities
inequalities and
and weaken
weaken social
social
cohesion
within
a
country.
cohesion within a country.

Discourage
Discourage
compliance
compliance by
by
taxpayers
taxpayers and
and
increase
increase the
the
administrative
administrative
costs
costs of
of
enforcement
enforcement

Tax havens and economic

development
1
1

The seven sins of tax havens hampering

development..

Tax havens encroach heavily on the sovereignty of

other countries

2
2

4
4

3
3

Tax havens harm the efficiency of financial markets

Tax havens hurt private income too

5
5

Tax havens make it more profitable and less risky to

engage in economic and other crimes

Tax havens reduce the efficiency of resource

allocation

7
7

6
6

Tax havens undermine national tax systems and

increase the costs of taxation

Tax havens hurt institutional quality (bureaucracy at large)

and thereby economic growth (and democratic development
in the long run)

The negative impact of these factors may be an

insurmountable hindrance to economic development
in poor countries

About Corporates and

Loopholes
Set up a
company
in
Luxembro
ugh
There are no special corporate tax

Set up a
company
in Ireland

Save Tax in Ireland because

interest payment can be
charged only against Profits
in Ireland

Royalty payments for intellectual property

licenses are one of the largest differences
rates in Ireland. There are rules
between gross income and taxable income for
(which apply to all companies) on
some companies. For example, if a company
how taxable income is calculated to
with a gross income of A incurs a trade charge of
determine the figure to which the
B for royalty payments then taxable income (to
12.5% rate is applied. This rate is
which the 12.5% rate is applied in Ireland) is A
applied to taxable income not gross
minus B.
profit.
LendSome
thatcompanies derive not Borrows
taxoninintellectual
Luxembrough
1 goods but fromAvoid
from physical
royalties
property,
company
because
company
not
like the patents on software that
makesLdevices work. Other
times, the
products will
themselves
Bn from
1Bn are
Euro
pay tax on
received
digital, like downloaded songs.
It is much easier for businesses
withinterest
royalties and
digital
company
interest
from
Irish company
products to move profits to low-tax
countries than it is, say,
for grocery
stores or automakers.
and pays
a car, can be sold from anywhere.
freeA downloaded application, unlike
interest

Almost all of Apples foreign operations are

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

Foreign
sales, which
account for
60% of
profits

Parent
Company
Apple Inc. USA

Fall Under
Tax Haven

Subsidiaries
AOI. Ireland

Tax
Nowher
e

rlds second largest beer company

nual turnover of 12 billion and profits of 2 billion
SABMiller began in Africa in 1895, still
reigns supreme there
SABMiller has more tax haven companies
(65) than it has African breweries and
bottling plants
Ghana, 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

Country by Country Reporting!

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 world
Enter Country by Country Reporting!

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.

Unitary Tax
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 Islands
Enter Unitary Tax!

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.

Automatic Information
Exchange
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

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.

True Beneficial Ownership

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

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.

International work on tax havens

The 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.

FATF is an international organisation established by the G7 countries in 1989 to advise on policies for combating money laundering

It 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.

The 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 countries

OECD 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 authorities

It 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 evasion

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 .

international
organisations work

IMF

Financial
Action
Task Force
(FATF)

OECD

EU

Thank You