You are on page 1of 6

Analysis of Tax Havens

Many myths follow the tax haven such as lots of tax evasion, higher tax, bad policies, and burden of tax towards the poor and away from the rich. Also, at present tax haven are considered the doorway to international drug running and money laundering (countries such as Singapore, Hong Kong, Switzerland, and Luxembourg). But there is no evidence to prove this. The United States is the world's largest tax havens for foreigners (invested more than a decade of trillions). Being a tax haven has facilitated the economic growth and flow of capital to the American economy. But, the European Commission, United Nations and Organization for Economic Co-operation and Development (OECD) argued that tax havens are bad for economic growth. However, OECD was found discriminating among smaller and less powerful nations to powerful ones. United States, United Kingdom, Austria, Belgium, Switzerland, Luxembourg werent blacklisted in OECDs Tax haven blacklist despite the fact that they were tax havens as being OECDs own member nations. Also, OECD bureaucrats enjoyed tax free salaries and instead demanded tax havens to close and tax rates to be increased by other nations. Ironically, people completely insulated from taxation are persecuting nations for free-market tax systems. Tax havens: It is any jurisdiction that satisfies two criteria: 1. Attractive tax laws for global investors and entrepreneurs 2. Protects fiscal sovereignty by not putting foreign tax law above domestic tax law Tax havens are determined by factors such as jurisdiction imposes no or only nominal taxes, lack of transparency. It has a jurisdiction that may be attempting to attract investment and transactions that are purely tax driven. Tax havens promote fair tax competition between nations. Countries with the more constructive tax regimes attract prosperous people to move there. Thus, it changes the balance of power away from the overbearing established powers that would seek to form a global cartel/monopoly of high-tax countries. Countries are encouraged to become tax haven as it: 1. Encourages investment and brings capital: The worlds economic growth has grown more than the 1970s since the introduction of tax havens. Tax haven promotes tax competition which forces greater fiscal responsibility and affords taxpayers the ability to enjoy more of what they earn. This in turn draws savings, investment, and skilled labor into the economy. It reduces tax bias towards saving and investments.1Capital investment is a key to long run prosperity and rise in living standards.

New England journal of International and Comparative law

Submitted by: Mamita Shrestha(10118)/ MBA Fall 2010/ Reviewed by: Ashish Singh(10102)

Analysis of Tax Havens


2. Boosts living standards: Tax haven generates high living standards, creates economic prosperity for people and is important for developing countries having big increases in prosperity and big decrease in poverty. According to the World Bank, nine out of thirteen richest jurisdictions are tax havens. (Table no. 1.1, Annex I) 3. Better governance: Lack of sound institution, property rights, rule of law and sound money are the indispensable building blocks for wealth creation in the economic growth. A study brought out that countries seeking to be tax havens are encouraged to improve their institutions because global investors do not invest in poorly governed jurisdictions.2 A sound political and social condition is required in the country to attract global investors. 4. Increase prosperity in high tax nations : Most countries have more favorable tax rules for inbound investment. There are better rules for foreigners. The citizen from high tax nations tends to move money to neighboring tax haven and then act as a foreigner and use the tax haven as an investment platform to invest back in their country. The additional investment that takes place increases its prosperity.3 5. Promote good policies: The countries are pressurized to lower tax due to tax competition which has helped reduce double taxation in many countries. Many death and wealth taxes have been reduced by nations resulting in encouragement to people to set aside todays income for tomorrows growth. The government is less likely to be greedy when they know tax payers have escape options. Even OECD economists admitted that the ability to choose the location of economic activity offsets shortcomings in government budgeting processes, limiting a tendency to spend and tax excessively. Decentralization can make governments more accountable and may bring competition and encourage public sector efficiency. 6. A safe haven in protecting human rights: Tax Havens are safe heavens for people to save their assets from the corruption in the politically incompetent governance. In many countries governments are the problem. They fail to provide civilized society. There is corruption, crime and oppression to religious, political, racial, ethnic, sexual minorities. It makes sense to protect your familys interest by putting your money some other safe place where the political elite
2

Which countries become tax havens?-Dhammika Dharmapala, James R. Hines Jr. Do tax havens divert economic activity?- B. Mihir A. Desai a. , C. Fritz Foley b. , James R. Hines Jr. c,T a Harvard Business School

Submitted by: Mamita Shrestha(10118)/ MBA Fall 2010/ Reviewed by: Ashish Singh(10102)

Analysis of Tax Havens


cannot seize it. Tax havens provide a refuge to people who need protection. Even the OECD's Jeffrey Owens admitted that "tax havens are essential for individuals who live in unstable regimes." 7. Pro-growth strategy: The countries like France, Germany, and England came into economic power when there wasnt any tax in their country itself (Table no. 1.2, Annex I). But now they are not allowing the developing countries to use the same strategy for their economic growth. Income tax permanently adopted by OCED nations was before 1700s and 1800s which was the time they climbed from agricultural poverty to middle class prosperity.4 However, various myths follow tax haven which has been exposed below: 1. Tax haven means lots of tax evasion: OECD says that $100 Billion unpaid tax is hidden in Tax havens. The number apparently came from a former Democratic staffer named Jack Blum who estimated that there was $70 Billion unpaid individual income tax. But he failed to ascertain it upon asking the written discussion of his estimating procedure.5 2. Attacking tax haven improves tax compliance: OECDs claimed that tax havens deprived them of much needed tax revenues. However, OECD nations have had a skyrocketing Tax Revenue. Even OECD stated that High tax rates are undermining tax bases, thereby restricting revenues. To some extent legal tax avoidance can be reduced by closing loopholes and illegal tax evasion can be contained by another enforcement of tax code. But the root of the problem appears in many cases to be the high tax rates.6 Friedrich Schneider, a leading expert explained that Income taxes and payroll taxes are the reason for shadow economy. People are liable to disobey government if the tax is higher. Lower tax encourages people to earn and report more income to the tax authorities. 3. Tax havens means higher tax for ordinary people: There is a notion that the tax is increased to the general public due to tax havens. Some people put their money offshore and the government in order to get more tax revenues increases its tax rate. But when there is high tax competition and the government well knows that the current tax is driving the investment away, further increasing the tax rate and driving the rest of the investment sounds inappropriate.

4 5

Source: Aldty and Jensenz, December 2007 Congressional Research Service memo, July 23 2001 6 OECD Economic Outlook,IV. Forces Shaping Tax Policy June, 1998

Submitted by: Mamita Shrestha(10118)/ MBA Fall 2010/ Reviewed by: Ashish Singh(10102)

Analysis of Tax Havens


4. Tax haven promotes bad policy: OECD argues that the low-tax policies unfairly erode the tax bases of other countries and distort the location of capital and services. These actions induce potential distortions in the patterns of trade and investment and reduce global welfare. But no evidence has been brought out. Tax havens instead shift the resources in productive sectors. There are more boosts to the private sectors leading to employment generation, innovation, efficiency, productivity. 5. Tax havens are rogue regimes: Tax havens have low tax jurisdictions but are the best governed places. Even the World Bank governance indicators agree of best governance countries such as Switzerland, Singapore, Luxembourg, Hong Kong, Liechtenstein, Cayman Islands in terms of government effectiveness, regulatory quality, and rule of law and control of corruption. 6. Promotes money laundering: Tax havens have very strict anti- money laundering policies. Financial Action Tax Force (FATF) holds not even one of the tax havens under its black list. Few are considered under the Central Intelligence Agency (CIA) among non-tax haven nations and the International Narcotics Control Strategy Report of United States. Also, major tax havens are cleared by the Internal Revenue Service (IRS) for having good Know Your Customer laws for hindering dirty money. Furthermore, all tax havens are members of the Egmont Group which can be passed by only those jurisdictions that have effective financial intelligence units to fight money laundering. Dirty money generally is laundered where it is obtained, and criminals avoid taking it offshore since that creates a trail for investigators. Even according to United Nations Money Laundering can proceed very easily without bank secrecy, in fact, it may well be that launderers avoid it precisely because it acts as a red flag.7 Thus, developing countries like Nepal can look forward to becoming a Tax haven, but many things have to be dealt with before becoming a tax haven: y Increase the tax base by reducing the tax: When tax rates are high, taxpayers find ways to avoid and evade. Taxable rates changes can have a significant impact on taxable income, thus leading to substantial amounts of revenue feedback. The tax- rate reductions will have a positive impact on economic performance and good tax cuts will be better than the foregone tax revenue. The reduced tax rates helps increase tax base.

UN for drugs control and crime prevention- Financial havens , Banking secrecy and Money laundering, 1998

Submitted by: Mamita Shrestha(10118)/ MBA Fall 2010/ Reviewed by: Ashish Singh(10102)

Analysis of Tax Havens


y Increase Trade balance: Nepal relies highly on its import activities. It can reduce import and increase export by reducing the export tax rates and imposing extra duties on imported luxury goods and transportation costs. The domestic production is to be promoted such as carpet production by providing tax exemptions, promotion of the industry by the government through announcements, trade and transit treaties to control unwarranted restrictions and extra tariff and taxes. Increasing revenue sources: Nepal has leading resources in agriculture, medical herbs and water. Additional subsidies can be provided to the agricultural and medical herbs sector for its further development. Government can give incentives to different levels working in these sectors such as tax exemption for 5 years to investing private companies; outsourcing advanced technology and skilled labor from India and China to work on the Hydro power sectors; providing royalties and free food and lodging for the individuals. Reduction of Foreign Direct Investment(FDI): The capital flow of FDI is around 30 % of the Nepalese economy and it can be further diverted to the productive sectors such as agricultural and medical herbs for revenue and employment generation. The dependency on the FDI can be reduced slowly by replacing it with the revenue collected from the productive sector development. Political Stability: Increase Strict anti- money laundering policies such as hiring of officers from the NRB to Casinos to timely check the activities and high penalty options to casinos found guilty; timely review of the budget and its implementations process to see the funds being utilized as per the budget. Other sources: Open investment and growth in areas such as Bio-products; provide incentives such as low tax rate to Domestic Banks to encouraging them to invest in rural sectors; provide packages to outside companies such as tax exemption, employee benefit schemes to open industries in Nepal.

References: www.oecd.org www.freedomandprosperity.org www.worldbank.org www.un.org

Submitted by: Mamita Shrestha(10118)/ MBA Fall 2010/ Reviewed by: Ashish Singh(10102)

Analysis of Tax Havens


ANNEX I

Table no. 1.1 Nine out of thirteen richest jurisdictions are tax havens S.N 1 2 3 4 5 6 7 Nations uxembourg Bermuda Liechtenstein United States Norway Channel Islands Switzerland S. N 8 9 10 11 12 13 Nations Hong Kong Denmark Iceland San Marino Netherlands United Kingdom

Table no. 1.2 Nations and their tax adopted year Nation France Germany Italy Year 1911 1920 1864 Nation England Sweden Belgium Year 1842 1902 1922

Submitted by: Mamita Shrestha(10118)/ MBA Fall 2010/ Reviewed by: Ashish Singh(10102)

You might also like