Tax Heaven A Tale of Fiscal Paradise । Tanvirul Islam
A tax haven is a country that offers foreign people and businesses a minimum tax liability.There exists more than sixty ‘tax heaven’ countries around the world, which have favorable tax laws and greater flexibility.The list of countries which offer tax havens includes Andorra, the Bahamas, Belize, Bermuda, the British Virgin Islands and the Cayman Islands.
Almost half of global trade passes through offshore tax heavens and estimated one-third of the global assets reside there. This is roughly around $30 trillion, of which $2.46 trillion was held in Switzerland alone. That is a staring amount of money, equivalent to around 40% of the entire value of goods and services produced each year in the global economy. In Cayman Islands, total population is only 60,000; but more than 90,000 registered companies exist there! A 2014 report shows that, the country held banking assets worth $1.4 trillion. Ridiculously, size of the Cayman Islands’ GDP is only a few billion.
Tax havens are not obligated to disclose customer information to foreign taxing authorities. These countries are not only used to preserve money and create wealth, but also used to secure assets from others. For example, a criminal does not want the authorities to know the extent of his wealth. Most tax havens have reputable banks to attract business. Their main boasting feature is flexibility. If prospective individual or corporation is powerful enough, they bend their laws as to the needs of such powerful individual or corporations.
A conservative estimate shows that, Canada losses more than $6bn tax revenue every year because of tax heaven. This loss cost every tax payer of Canada. Just to give an idea, $6bn is enough for setup 2 lakh child care center or buy 18 super hornet fighter jets.
If one Canadian wants to move money to abroad, he has not need to pay tax in Canada and it’s all perfectly legal. But this moving of money to tax heaven is not always done legally and secrecy of tax heaven paves the way for this. This secrecy can be used to launder money, hide money or conceal illegal activities. Despite knowing the effect of all of this, Canada keep open the door to avoid taxes.Tax heavens like Bermuda, Cayman Islands, the British Virgin Islands and some others have very attractive tax deal with Canada. Till 2009, Canada dealt with more than 24 tax heavens and compelled them to share information, like list of Canadian account holders who have accounts and money there. So there is less secrecy, but it makes opportunity for Canadian companies to make profit in those countries and bring home tax free.
Individuals and businesses use several ways to avoid tax using tax heavens. In case of corporations, they adopt corporate tax shifting. To do so, a business registers it’s headquarter in a tax heaven; rather than the country in which it actually makes its sales. For example: corporate tax rate of the UK is 19%, where Switzerland has only 8.5% tax rate. So, UK businesses can avoid a significant tax by just moving the head quarter into Switzerland. Interestingly, the business can be run free of tax liability, if it shift headquarter into Cayman Island, where corporate tax rate is 0%.
Registration process is easier and a building single room at a cost of $1000 is enough for this purpose. Another $500 is required to hire a third person as nominee director. His name will be appeared in paper and no one will able to trace the real owner. Moreover, that nominee director can work as a director for thousands of company around the world!
Companies use another technique, where they move their patent to the lower tax countries. Then, valuable assets of companies belongs to the branch that existing in low tax country. For example: a US (Tax rate: 35%) business can move its patents to Ireland (Tax rate: 12.5%).So, Irish branch can charge the US company to access the patents. Profits made in the US can easily be funneled to Ireland as a payment for patents. When the money reaches Ireland, the tax bill became almost one-third.
Individual can avoid huge burden of tax by simply becoming resident of a lower tax country.Here people have to face insignificant formal procedure and can shift their global income to a tax heaven country. Alternatively, using TRUSTs can ensure the same benefit without being a resident. This allows a person (called as ‘beneficiary’) to move the assets into ‘trust’; where TRUSTs are managed by appointed trustees. Trustees can be local officials in the tax haven, or partners in a local law firm, or accountancy firm. Here beneficiaries would be the person who placed the asset to trust. With the trustee’s permission, assets within the trust can be given to beneficiaries at any time. Very often the trustees have very little real control over what happens the assets. Instead, they just paid by the owner of the assets to put their name in the trust and appear as if they are in control of it all.
You may wonder that, how is it possible to keep lower or Zero tax rate in a country! This comes with a politically and economically stable environment of that tax heaven country. They generally charge high customs or import duties to cover the losses in tax revenues.Tax havens may charge a fee for new registration of companies and renewal charges to be paid every year. By attracting foreign individuals or businesses, even if they are only charged a nominal tax rate, the country may earn more in tax revenues than it would otherwise. Also, the country may benefit from corporate investments in business operations that offer jobs to the country’s residents.
Modern corporate tax havens like Ireland, the United Kingdom and the Netherlands have become more popular for U.S. corporate tax inversions. Alphabet’s Google moved $18.14bn to a Bermuda company in 2016, saving at least $3.4bn in taxes that year. In this case, Google uses “Double Irish, Dutch Sandwich” technique to shield the majority of its international profits from taxation. First it set up a company in Ireland (company 1) and shift intellectual properties (IP) from US. Then the company shifts the control of Ireland Company to a Bermuda company. Ireland government allows this shifting, if the first company has another company in Ireland. So, First company sets up another one (Ireland company 2).
Affiliates of Google collect advertising and other revenue from Asia, Africa and Europe. Finally all of this goes to Ireland Company 2, as royalty of IP. If the company wants to shift profit to Company 1, then withholding tax is applicable. To evade this, Company 2 send the revenue to Netherland Company. As both of the countries are member of European Union, no tax is applicable in shifting revenue. The revenue again goes to Ireland Company 1 and again no tax applicable here. Then all the money sends to Bermuda Company, the so called controller of Ireland Company, where corporate tax rate is 0%. This “Double Irish, Dutch Sandwich” technique is most prominently used by tech companies like Google, Facebook and Apple.
It is impossible to get accurate estimates for the size of financial assets held in tax havens, because of secrecy. Here are two of the best-known estimates. In a 2012 report for the Tax Justice Network (an advocacy group, concern about tax avoidance and tax heaven), James Henry estimate between $21-32 trillion worth of financial assets in tax havens. Henry in 2016 produced a raising the estimate to $24-36 trillion. This is almost one-third of the global assets.Tax justice network estimated that, corporate and personal tax avoidance, due to tax heaven, cost governments $700bn (corporate tax $500bn and personal tax $200bn) a year which causes from loss of tax receipt.The London School of Economics researcher Gabriel Zucman, Using a very different, narrower method, estimates about $7.6 trillion is held in tax havens.He also finds that, 30% of wealth in Africa is hidden offshore. He calculates an annual loss of $14bn in tax revenue. That would build plenty of schools and hospitals.
On corporation tax avoidance, there are broadly two potential solutions.One would be for governments around the world to collaborate and agree to tax a multinational company’s profits on the basis of a fair international formula; based on their sales, investments and employee numbers in various countries.This would effectively shut down tax havens, where no substantive economic corporate activity actually takes place.The other solution is for governments to unilaterally tax a multinational’s revenues, while making allowance for its local costs, investments and exports.
Not all of that money will be held off-shore in order to dodge tax in anillegal way. But it’s fair to assume that a large proportion of it is done to gain illegal benefit. This hidden money results in a “huge” lost tax revenue—a “black hole” in the economy—and many countries would become creditors instead of being debtors if the money of their tax evaders would be taxed.
The writer is currently pursuing BBA at University Of Dhaka