All you wanted to know about tax havens

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Let’s admit it. Most of us get a little thrill out of finding new ways to save taxes. This is exactly what corporate biggies such as Google, IBM and Amazon have been doing too. They’ve been cleverly routing their global profits through subsidiaries set up in destinations called tax havens. This has been going on for long. But, having been denied their fair share of taxes, governments are now cracking the whip.

What is it?

Tax havens are countries that have low or near-zero tax rates, especially for some kinds of transactions. Switzerland, Singapore, Hong Kong and Mauritius are the popular ones. But the list includes others such as Luxembourg, British Virgin Islands, Cayman Islands, the Netherlands and Bermuda too.

Multinationals set up their holding companies in these locations which then invest in operations located at other high-tax locations. So, even as the company carries out its real business in a high-tax regime such as the US or India, it’s able to dodge the taxman by showing a large share of profits as emanating from a tax haven.

But it’s not just companies; tax havens have something on offer for rich individuals too, promising complete confidentiality. Now you’re wondering — if everything about tax havens is so clandestine, why haven’t they been banned at the outset? Well, this is not how things were meant to be. When tax havens first sprang up, they came up in small countries endowed with limited natural resources or other competitive advantages. Such nations saw near-zero tax rates as a good way to attract reluctant foreign capital. But with corporations and affluent individuals taking advantage of the secrecy to save taxes, the whole thing went awry.

Why is it important?

Irked by tax revenue losses, governments have now begun to come down heavily on the menace of tax havens, threatening to revoke tax treaties and demanding more disclosures from them. In India, the phenomenon of routing black money to tax havens has given birth to what is called round-tripping. Foreign direct inflows from Mauritius, India’s second biggest source, totalled $4.5 billion during April-Feb of the last fiscal. But is the tiny island nation really such as industrial powerhouse? Not really. Cynics suspect a large part of the investment flowing in from Mauritius is actually Indian money sent abroad and routed back to avoid taxes. If it’s Mauritius for us, it’s British Virgin Islands for UK and Luxembourg for Russia.

The worry is that the anonymity that tax havens offer allows other kinds of illegal activity to flourish too. The world over billions made through illegal routes such as drug trafficking and arms smuggling are said to be laundered through tax havens.

Why should I care?

Tax havens help large corporations, foreign investors and other big guys sidestep Indian tax laws. Obviously, that’s why, salary earners like us end up paying more than our fair share of taxes. It’s however another matter if you’re rolling in money and want to keep your money safe from the public glare. Then tax havens are your best friend.

Bottom line

The temptation to cheat at taxes is as old as civilisation. If global governments succeed in laying low the current crop of tax havens through new rules and disclosures, be sure new routes will be springing up very soon.

Published on May 12, 2014
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