International Tax Havens, Tax Liabilities

A tax haven is a country that offers foreign businesses and individuals minimal or no tax liability for their bank deposits in a politically and economically stable environment. They have tax advantages for corporations and for the very wealthy, and obvious potential for misuse in illegal tax avoidance schemes.

Companies and wealthy individuals may use tax havens legally as a means of stashing money earned abroad while avoiding higher taxes in the U.S. and other nations.

Tax havens may also be used illegally to hide money from tax authorities at home. The tax haven can make this work by being uncooperative with foreign tax authorities. In recent times, tax havens are under increasing international political pressure to cooperate with foreign tax fraud inquiries.

Different types of Tax Havens:

• Pure Havens: Income or Capital gains are not charged at all (example; Bermuda, Cayman Islands, Vanuatu etc.)
• Tax Havens where the state-approved rate of taxation is low due to the implementation of tax agreements between different countries regarding double taxation (example; Liechtenstein, Switzerland, Republic of Ireland etc.)
• Tax Havens where tax payers are exempted from paying taxes for cross-border transactions (example; Costa Rica, The Philippines, Panama etc.)
• Tax Havens that engage in a preferential treatment towards offshore and holding companies (example; Austria, Luxembourg, Thailand etc.)
• Tax Havens that offer exemptions for industries that have been made for the development of exports (example; Ireland, Madeira in Portugal etc.)
• Tax Havens that provide financial benefits and privileges to companies classified as ‘Offshore Companies’ (example; Bahamas, Antigua & Barbuda, British Virgin Islands etc.)
• Tax Havens that provide specific benefits to banking companies or financial companies which engage in offshore activities (example; Anguilla, Grenada, Jamaica etc.)

Reduction of Tax liability by the usage of Tax Havens also interferes with the Indian government’s efforts to implement its economic policies. Though the economic policies have been structured by the government for the benefit of the people, Tax Havens have served as a significant barrier towards the proper execution/implementation of the former. This, too, occurs due to a shortage of funds in the hands of the government.

Tax evasion by the usage of Tax Havens to store “Black Money” also dismantles the equity attribute of any tax system. In India, specifically, reduction of their tax liability by many leads to an increase in the rates of taxes as charged by the government for every assessment year (for the purpose of increasing its revenue) and the burden of that unfortunately ends up falling upon the honest tax payers. As a consequence of this, even the tax payers who always pay their taxes honestly end up engaging in practices such as tax evasion in order to reduce an already incremental burden.

Though the policies of the government aim at the redistribution of wealth and a decrease in the income/financial margin between the various economic classes of people within the country, Tax Havens have majorly constricted such efforts. Redistribution of Wealth is considered one of the most important pillars on which the Law of Taxation was developed. Today, the redistribution of wealth and reduction of income disparity is a very essential need for a country like India, where the gap between the wealthy and the poor is increasing significantly on a daily basis. Under such circumstances, the need for the proper implementation of government policies aimed at such are required in utmost urgency. However, Tax Havens and its usage to reduce tax liability restricts such policies and in fact, manages to increase the income disparity present in India. It leads to the concentration of economic power in the hands of a few, which is a threat to the economy itself. As a result of this, the rich in India become richer day by day whereas the poor in India get poorer day by day.

Tax Avoidance

Tax avoidance schemes may take advantage of low or no-income tax countries known as tax havens. Corporations may choose to move their headquarters to a country with more favorable tax environments. In countries where movement has been restricted by legislation, it might be necessary to reincorporate into a low-tax company through reversing a merger with a foreign corporation (“inversion” similar to a reverse merger). In addition, transfer pricing may allow for “earnings stripping” as profits are attributed to subsidiaries in low-tax countries.

For individuals tax avoidance has become a major issue for governments worldwide since the 2008 recession. These tax directives began when the United States introduced the Foreign Account Tax Compliance Act (FATCA) in 2010, and were greatly expanded by the work of The Organisation for Economic Co-operation and Development (OECD). The OECD introduced a new international system for the automatic exchange of tax information known as the Common Reporting Standard (CRS) to which around 100 countries have committed. For some taxpayers, the CRS is already “live”; for others it is imminent. The goal of this worldwide exchange of tax information is tax transparency, and has aroused concerns about privacy and data breaches due to the sheer volume of information that is going to be exchanged.

Expanded Worldwide Planning (EWP) is an element of international taxation created in the wake of tax directives from government tax authorities after the worldwide recession beginning in 2008. At the heart of EWP is a properly constructed Private placement life insurance (PPLI) policy that allows taxpayers to use the regulatory framework of life insurance to structure their assets. These assets can be located anywhere in the world and at the same time can be brought into compliance with tax authorities worldwide. EWP also brings asset protection and privacy benefits that are set forward in the six principals of EWP.

Regulatory Mechanisms Adopted by The Government of India

In order to limit the practices of Base Erosion and Profit Shifting, the Organisation for Economic Co-operation and Development (OECD) introduced a set of action plans. These plans, collectively named as the BEPS Action Plan, were discussed and subsequently approved by all members of the G20. The BEPS Action Plan consists of 15 different action plans, each for a different issue relating to Base Erosion and Profit Shifting. India, like many other countries, have adopted these action plans in order to resolve complications arising out of the various number of issues discussed above. Provided below is the list of 15 action plans and what objective each plan is sought to achieve:

• ACTION 1 (DIGITAL ECONOMY): The primary aim of the Action 1 is to identify and address the main challenges that the digitalization of the economy poses for the existing tax laws and rules.
• ACTION 2 (HYBRIDS): The primary aim of the Action 2 is to countervail the effects of hybrid mismatch arrangements by making changes to the model tax convention and providing recommendations with regards to making changes to the various existing domestic taxation laws and rules.
• ACTION 3 (CONTROLLED FOREIGN COMPANIES): The primary aim of the Action 3 is to provide recommendations with regards to the strengthening of international as well as domestic laws/rules pertaining to Controlled Foreign Companies (CFCs). It also aims at identifying and addressing various issues relating to tax avoidance by resident corporations through a non-resident affiliate.
• ACTION 4 (INTEREST DEDUCTIONS): The primary aim of the Action 4 is to limit the base erosion practice of corporations by deducting the rate of interest as well as by introducing other financial payments. This Action Plan had been introduced by the OECD primarily in order to address issues relating to the various domestic tax laws of different countries.
• ACTION 5 (HARMFUL TAX PRACTICES): The primary aim of the Action 5 is to identify and defy various harmful tax practices. Through this Action Plan, the OECD attempted to extend its recommendations regarding the restructuring of laws to non-OECD members as well.
• ACTION 6 (PREVENTION OF TREATY ABUSE): The primary aim of the Action 6 is to prevent treaty abuse by providing recommendations to countries with regards to restructuring its domestic laws/rules in such a manner so as to prevent the granting of treaty benefits to parties in unbecoming circumstances.
• ACTION 7 (PERMANENT ESTABLISHMENT): Action 7 aims at the restructuring/redefining of the threshold to prove Permanent Establishment (“PE”) in order to put a hurdle on the practices of Base Erosion and Profit Shifting.
• ACTION 8, 9 & 10 (TRANSFER PRICING): Transfer Pricing, in simply words, can be defined as an accounting practice whereby the price that one division of a corporation charges another for its goods and services are represented. This, in turn, aids in the determination of the price of goods/services exchanged between subsidiaries, affiliates and CFCs (all which are part of the same holding company). Transfer Pricing is a very common method of tax base reduction and is commonly used by many companies. The primary and common aim of the Action Plans 8, 9 and 10 is to ensure that the transfer pricing outcomes (as represented) are proportional with the value creation of the goods/services. The same can only be done the ensuring that the value for tax is accordant to the economic activity that generates that value. The Action Plans 8, 9 and 10 are aimed at addressing issues/concerns relating to intangible assets, risks & capitals and high risk transactions respectively.
• ACTION 11 (DATA COLLECTION): The primary aim of the Action 11 is to ensure the proper collection and analysis of data relating to Base Erosion and Profit Shifting for the purpose of redressal.
• ACTION 12 (DISCLOSURES RELATING TO AGGRESSIVE TAX PLANNING): Action 12 aims at the development of mandatory disclosure rules by parties if they are engaging in aggressive tax planning (includes aggressive/abusive transactions, structures or arrangements). The same has been done in order to reduce the administrative costs relating to tax administration by the authorities.
• ACTION 13 (DOCUMENTATION OF TRANSFER PRICING): The primary aim of the Action 13 is to re-analyse and restructure the process relating to the documentation of transfer pricing arrangements in order to install a greater transparency to it.
• ACTION 14 (DISPUTE RESOLUTION): The Action 14 aims in making the existing dispute resolution mechanisms and procedures more effective and systematic in nature. Through the introduction of Action 14, the OECD has clearly shown demur upon the practice of countries to engage in mutual agreement procedures (MAPs) to resolve treaty-related disputes.
• ACTION 15 (MULTILATERAL INSTRUMENTS): Last but not the least, the Action 15 focuses on the amendment of bilateral treaty agreements in order to resolve issues arising out of Base Erosion and Profit Shifting.