IF-Tax havens

A tax haven is a state, country or territory where certain taxes are levied at a low rate or not at all.[1] Individuals and/or corporate entities can find it attractive to establish shell subsidiaries or move themselves to areas with reduced or nil taxation levels. This creates a situation of tax competition among governments. following characteristics as indicative of it:

a)      nil or nominal taxes;

b)      lack of effective exchange of tax information with foreign tax authorities;

c)      lack of transparency in the operation of legislative, legal or administrative provisions;

d)      no requirement for a substantive local presence; and

e)      self-promotion as an offshore financial center.

f)       Some features of these tax havens are:

g)      •Low rate or complete absence of income tax on foreign investment and income.

h)      •High degree of economical and political stability and a political system, which directly or indirectly encourages and fosters business activity at the center.

i)        •Strict and well enforced rules of banking secrecy.

j)        •Absence of exchange control

k)      •Availability of supporting infrastructure such as an efficient communications and transportation network.

l)        •Presence of well developed legal system and professional accounting expertise.

m)    •Investor’s confidence due to past credential.

n)      •No incidence of violence or criminal activities.

o)      These features encourage various types of business operations some of which are bonafide but most of them generate what has been termed as ‘dirty offshore funds’.

The Organisation for Economic Co-operation and Development (OECD) identifies three key factors in considering whether a jurisdiction is a tax haven:  

1.Nil or only nominal taxes. Tax havens impose nil or only nominal taxes (generally or in special circumstances) and offer themselves, or are perceived to offer themselves, as a place to be used by non-residents to escape high taxes in their country of residence.

2.Protection of personal financial information. Tax havens typically have laws or administrative practices under which businesses and individuals can benefit from strict rules and other protections against scrutiny by foreign tax authorities. This prevents the transmittance of information about taxpayers who are benefiting from the low tax jurisdiction.

3.Lack of transparency. A lack of transparency in the operation of the legislative, legal or administrative provisions is another factor used to identify tax havens. The OECD is concerned that laws should be applied openly and consistently, and that information needed by foreign tax authorities to determine a taxpayer’s situation is available. Lack of transparency in one country can make it difficult, if not impossible, for other tax authorities to apply their laws effectively. ‘Secret rulings’, negotiated tax rates, or other practices that fail to apply the law openly and consistently are examples of a lack of transparency. Limited regulatory supervision or a government’s lack of legal access to financial records are contributing factors.