Proiect
Limba engleză
Profesor coordonator: Vințean Adriana
Student: Marcu Teodora-Ștefania
Specializarea: Management
An II, grupa a II-a
TAX HAVEN
A tax haven is a jurisdiction that
has a low rate of tax or does not levy a
tax[1] as well as offers some degree of
secrecy. Definitions vary; some
definitions focus purely on tax: for
example, one widely cited academic
paper describes a tax haven as a
jurisdiction where particular taxes,
such as an inheritance tax or income
tax, are levied at a low rate or not at all. However other definitions refer to a state,
country, or territory which maintains a system of financial secrecy, which enables
foreign individuals to hide assets or income to avoid or reduce taxes in their home
jurisdiction. "Secrecy jurisdiction" is sometimes used as an alternative to "tax
haven" to emphasise the secrecy element, and a Financial Secrecy Index ranks
jurisdictions according to their size and secrecy.
Earnings from income generated from real estate (i.e. by renting property
owned in an offshore jurisdiction) can also be eliminated in this way. If taxes (if
any) are paid in the tax haven jurisdiction, companies can avoid taxes in their home
jurisdiction because the tax had already been paid in the lower tax rate jurisdiction.
Some taxes (such as inheritance tax on the real estate, VAT on the initial purchase
price of the real estate, or transfer tax, annual immovable property taxes, and
municipal real estate taxes) cannot be avoided or reduced, as these are levied by
the country the real estate where the property is located, and hence need to be paid
just the same as any other resident of that country. The only thing that can be done
is picking a country that has the smallest rates on these taxes (or even no such
taxes at all) before buying any real estate.
Individuals or corporate entities may establish shell subsidiaries or move
themselves to areas with reduced or no taxation levels relative to typical
international taxation. This creates a situation of tax competition among
jurisdictions. Different jurisdictions may be havens for different types of taxes, and
for different categories of people or companies. Sovereign jurisdictions or self-
governing territories under international law have the power to enact tax laws
affecting their territories, unless limited by previous international treaties.
Classification
Corporations, to avoid or reduce overall taxation may use multiple types of tax
havens. Three types of tax haven types form a Dutch Sandwich:
Primary tax havens – the location where financial capital winds up.
Subsidiary shell companies there have obtained rights to collect profits from
corporate intellectual property (IP) by transfers from their parent.
Semi-tax havens – locations that produce goods for sale primarily outside of
their territorial boundaries and have flexible regulations to encourage job
growth, such as free trade zones, territorial-only taxation, and similar
inducements.
Conduit tax havens – locations where income from sales, primarily made
outside their boundaries, is collected, and then distributed. Semi-tax havens
are reimbursed for actual product costs, perhaps with a commodity markup.
The remaining profits are transferred to the primary tax haven, because it
holds rights to profits due to the corporate IP. By matching outflow to
income, they do not retain capital and their role, while crucial, remains
invisible.
Large multinational corporations may have dozen of such entities in tax haven
jurisdictions interacting with each other. Each haven can claim that it does not
satisfy definitions that attempt to place all tax havens into a single class. Even
increased transparency may not change the effectiveness of corporate tax
avoidance.
Methodology
The way tax havens operate can be viewed in the following principal contexts:
Personal residency
Since the early 20th century, wealthy individuals from high-tax jurisdictions
have sought to relocate themselves in low-tax jurisdictions. In most countries in the
world, residence is the primary basis of taxation—see tax residence. The low-tax
jurisdictions chosen may levy no, or only very low, income tax and may not levy
capital gains tax, or inheritance tax. Individuals are normally unable to return to
their previous higher-tax country for more than a few days a year without reverting
their tax residence to their former country. They are sometimes referred to as tax
exiles.
Corporate residency
Corporate persons, in contrast to natural persons, are generally locked into their
historic country, new corporations however can be established in a country of
choice. Each corporation can establish subsidiary corporations in many countries,
some for trading purposes and some with tax planning justification. That allows
them to take advantage of the variety of laws, regulations, tax treaties and
conventions in multiple countries, without overtly engaging in any questionable
activities. Only in extreme cases will they move their formal corporate
headquarters. The country of residency may choose what laws to pass to tax profits
of their corporations and the profits of corporations resident elsewhere who trade
in their country.
Asset holding
Asset holding involves utilizing an offshore trust or offshore company, or a
trust owning a company. The company or trust will be formed in one tax haven,
and will usually be administered and resident in another. The function is to hold
assets, which may consist of a portfolio of investments under management, trading
companies or groups, physical assets such as real estate or valuable chattels. The
essence of such arrangements is that by changing the ownership of the assets into
an entity which is not tax resident in the high-tax jurisdiction, they cease to be
taxable in that jurisdiction.
Trading and other business activity
Many businesses which do not require a specific geographical location or
extensive labor are set up in a jurisdiction to minimize tax exposure. Perhaps the
best illustration of this is the number of reinsurance companies which have
migrated to Bermuda over the years. Other examples include internet based
services and group finance companies. In the 1970s and 1980s corporate groups
were known to form offshore entities for the purposes of "reinvoicing". These
reinvoicing companies simply made a margin without performing any economic
function, but as the margin arose in a tax free jurisdiction, it allowed the group to
"skim" profits from the high-tax jurisdiction. Most sophisticated tax codes now
prevent transfer pricing schemes of this nature.
Financial intermediaries
Much of the economic activity in tax havens today consists of professional
financial services such as mutual funds, banking, life insurance and pensions.
Generally the funds are deposited with the intermediary in the low-tax jurisdiction,
and the intermediary then on-lends or invests the money (often back into a high-tax
jurisdiction). Although such systems do not normally avoid tax in the principal
customer's jurisdiction, it enables financial service providers to provide multi-
jurisdictional products without adding another layer of taxation. This has proved
particularly successful in the area of offshore funds.It has been estimated over 75%
of the world's hedge funds, probably the riskiest form of collective investment
vehicle, are domiciled in the Cayman Islands, with nearly $1.1 trillion US Assets
under management although statistics in the hedge fund industry are notoriously
speculative.
Anonymity and bearer shares
Bearer shares allow for anonymous ownership, and thus have been criticized for
facilitating money laundering and tax evasion; these shares are also available in
some OECD countries as well as in the U.S. state of Wyoming. In a 2010 study in
which the researcher attempted to set-up anonymous corporations found that 13 of
the 17 attempts were successful in OECD countries, such as the United States and
the United Kingdom, while only 4 of 28 attempts were successful in countries
typically labeled tax havens. The last two states in America permitting bearer
shares, Nevada and Delaware made them illegal in 2007. In 2011, an OECD peer
review recommended that the United Kingdom improve its bearer share laws. The
UK abolished the use of bearer shares in 2015. In 2012 the Guardian wrote that
there are 28 persons as directors for 21,500 companies.
Money and exchange control
Most tax havens have a double monetary control system, which distinguish
residents from non-resident as well as foreign currency from the domestic, the
local currency one. In general, residents are subject to monetary controls, but not
non-residents. A company, belonging to a non-resident, when trading overseas is
seen as non-resident in terms of exchange control. It is possible for a foreigner to
create a company in a tax haven to trade internationally; the company’s operations
will not be subject to exchange controls as long as it uses foreign currency to trade
outside the tax haven. Tax havens usually have currency easily convertible or
linked to an easily convertible currency. Most are convertible to US dollars, euro
or to pounds sterling.
Incentives and benefits for tax haven countries
There are several reasons for a nation to become a tax haven. Some nations may
find they do not need to charge as much as some industrialized countries in order
for them to be earning sufficient income for their annual budgets. Some may offer
a lower tax rate to larger corporations, in exchange for the companies locating a
division of their parent company in the host country and employing some of the
local population. Other domiciles find that this is a way to encourage
conglomerates from industrialized nations to transfer needed skills to the local
population.
According to Investopedia: Although most offshore financial centers impose no
corporate income tax, their governments still financially benefit from having
thousands of companies registered in their jurisdiction. That is because tax haven
governments typically impose a registration fee on all newly incorporated business
entities like companies and partnerships. Also, companies are required to pay a
renewal fee each year to still be recognized as an operating company. There are
also additional fees that are imposed on the companies depending on the type of
business activity that they engage in. For example, banks, mutual funds and other
companies in the financial services business usually need to pay for an annual
license to operate in that industry. All of these various fees add up to create a
strong source of recurring revenue for tax haven governments. It is estimated that
the British Virgin Islands collects over $200 million each year in the form of
corporate fees.
Many industrialized countries claim that tax havens act unfairly by reducing tax
revenue which would otherwise be theirs. Various pressure groups also claim that
money launderers also use tax havens extensively, although extensive financial
and know your customer regulations in tax havens can actually make money
laundering more difficult than in large onshore financial centers with significantly
higher volumes of transactions, such as New York City or London.
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:
1. 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.
2. Transfer pricing rules, standardization of which has been greatly helped by
the promulgation of OECD guidelines.
3. Restrictions on deductibility, or imposition of a withholding tax when
payments are made to offshore recipients.
4. 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.
5. Exit charges, or taxing of unrealized capital gains when an individual, trust
or company emigrates.
However, many jurisdictions employ blunter rules. For example,
in France securities regulations are such that it is not possible to have a public bond
issue through a company incorporated in a tax haven.
Also becoming increasingly popular is "forced disclosure" of tax mitigation
schemes. Broadly, these involve the revenue authorities compelling tax advisors to
reveal details of the scheme, so that the loopholes can be closed during the
following tax year, usually by one of the five methods indicated above. Although
not specifically aimed at tax havens, given that so many tax mitigation schemes
involve the use of offshore structures, the effect is much the same.
Anti-avoidance came to prominence in 2010/2011 as nongovernmental
organizations and politicians in the leading economies looked for ways of
reducing tax avoidance, which plays a role in forcing unpopular cuts to social and
military programs. The International Financial Centres Forum (IFC Forum), a trade
organisation for companies located in the British Overseas Territories and Crown
Dependencies, has asked for a balanced debate on the issue of tax avoidance and
an understanding of the role that the tax neutrality of small international financial
centres plays in the global economy.
Tax Justice Network Report 2012
A 2012 report by the British Tax Justice Network estimated that between
US$21 trillion and $32 trillion is sheltered from taxes in unreported tax havens
worldwide. If such wealth earns 3% annually and such capital gains were taxed at
30%, it would generate between $190 billion and $280 billion in tax revenues,
more than any other tax shelter. If such hidden offshore assets are considered,
many countries with governments nominally in debt are shown to be net creditor
nations. However, despite being widely quoted, the methodology used in the
calculations has been questioned, and the tax policy director of the Chartered
Institute of Taxation also expressed skepticism over the accuracy of the
figures. Another recent study estimated the amount of global offshore wealth at the
smaller—but still sizable—figure of US$7.6 trillion. This estimate included
financial assets only: "My method probably delivers a lower bound, in part because
it only captures financial wealth and disregards real assets. After all, high-net-
worth individuals can stash works of art, jewelry, and gold in 'freeports,'
warehouses that serve as repositories for valuables—Geneva, Luxembourg, and
Singapore all have them. High-net-worth individuals also own real estate in foreign
countries." A study of 60 large US companies found that they deposited $166
billion in offshore accounts during 2012, sheltering over 40% of their profits from
U.S. taxes.
Criticism
Tax havens have been criticized because they often result in the accumulation
of idle cash which is expensive and inefficient for companies to repatriate. The tax
shelter benefits result in a tax incidence disadvantaging the poor outside the tax
haven. Many tax havens are thought to have connections to fraud, money
laundering and terrorism. While investigations of illegal tax haven abuse have been
ongoing, there have been few convictions. Lobbying pertaining to tax havens and
associated transfer pricing has also been criticized.
Some politicians, such as magistrate Eva Joly, have begun to stand up against
the use of tax havens by large companies. She describes the act of avoiding tax as a
threat to democracy. Accountants' opinions on the propriety of tax havens have
been evolving,as have the opinions of their corporate users, governments, and
politicians, although their use by Fortune 500 companies and others remains
widespread. Reform proposals centering on the Big Four accountancy firms have
been advanced. Some governments appear to be using computer spyware to
scrutinize some corporations' finances.
Effect of developing countries
Illicit capital flight from the developing world is estimated at ten times the size
of aid it receives and twice the debt service it pays. About 60 per cent of illicit
capital flight from Africa is from transfer mispricing, where a subsidiary in a
developing nation sells to another subsidiary or shell company in a tax haven at an
artificially low price to pay less tax. An African Union report estimates that about
30% of sub-Saharan Africa's GDP has been moved to tax havens. One tax analyst
believes that if the money were paid, most of the continent would be "developed"
by now.
G20 tax haven 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 2 April
2009 can be viewed on the OECD website. The four tiers were:
1. Those that have substantially implemented the standard (includes most
countries but China still excludes Hong Kong and Macau).
2. Tax havens that have committed to – but not yet fully implemented – the
standard (includes Montserrat, Nauru, Niue, Panama, and Vanuatu)
3. Financial centres that have committed to – but not yet fully implemented –
the standard (includes Guatemala, Costa Rica and Uruguay).
4. Those that have not committed to the standard (an empty category)
