Taxing Times For Tax Havens

In the wake of the economic crisis gripping much of the world today, the activities of the tax havens have come into focus, much to their discomfiture, for their contributory role in the present crisis.   What is a tax haven? A tax haven may be an independent country, or a dependency, or an overseas territory of another country, or a principality. The general term applied to this geographical entity is “jurisdiction”. It is a place where there are either no taxes, like Municipal Tax, Wealth Tax, Sales Tax, VAT, etc, or the rates of these taxes are so low, as to attract people, especially non-residents from other countries, to take advantage of these laws, at the cost of their home country.  

For example, say, an American national working for an oil company in the Middle East repatriates his earnings to the U.S., and is liable to pay a certain amount of tax on it. However, by parking these funds in Switzerland, he does not pay any tax at all. Hence the gentleman may be tempted to open a numbered account in a Swiss Bank, and transfer his earnings to that Bank. In the process, the U.S. Government loses taxes on these funds, apart from the fact, that these funds might have, otherwise, been invested in the United States, and generally speaking, benefited America.  

This is but one example of a tax haven in operation.      

Tax Havens employ certain strategies and tactics in the form of laws, to carry on their activities, without hindrance. One of the features of a tax haven is their refusal to disclose financial information relating to accounts maintained with their Banks to foreign tax and other authorities. This presents the home country authorities, problems in tracking illegal transfers of money, tax avoidance, stashing of ill-gotten wealth, and such other offences by their citizens. The tax havens actively discourage sharing of information relating to financial transactions of their overseas clients, through administrative practices and legislation that is aimed at protecting the privacy of such clients, at the cost of their clients’ home countries.  

Yet another feature of tax havens is the lack of transparency in the legal and administrative processes, that makes it difficult for countries with a proper tax framework, to deal with such jurisdictions. These countries find themselves at a disadvantage, vis a vis, the tax havens, on account of the obvious differences in approach to the issue of taxes on the one hand, and the concept of accountability and transparency on the other.  

Tax havens, typically, do not engage in due diligence of their foreign clients, in respect of their identities, source of funds, etc, before establishing a relationship with them. Further, they do not require overseas companies to have a local presence or to have local introductions. Practically, everything is “arranged” for a price.  

Often, tax havens advertise themselves as such, through the media. One can come across advertisements of tax havens, in financial journals in different countries. It is not uncommon to encounter an advertisement of a tax haven in a particular edition of a journal, carrying critiques of tax havens!  

Future of Tax Havens: It is difficult to predict the future of tax havens at this time. Definitely, they are under pressure to “reform”. The present economic crisis has led to several countries, notably the United States, to come out strongly against these jurisdictions, and acting to discourage their activities.

It remains to be seen, what eventually happens to the tax havens, given the fact, that these jurisdictions provide an important “service” to the rich and the powerful throughout the world. 

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