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SUBMITTED TO PICME BY JUNED MEMON MBA (Finance) 2008-2009. Pai International Centre For Management Exellence.
2390-B New Modikhana Camp Pune 411 001, Maharashtra, India. Tel: 020-2644092/26430959,Telfax: 020- 26430962 Website: www.picme.org.in
This is to certify that Juned Memon student in PAI INTERNATIONAL CENTRE FOR MANAGEMENT EXELLENCE, Maharashtra Cosmopolitan Education society; Pune has completed his field work report at Pai International Centre for Management Excellence. On the topic of TAX HAVEN and has submitted the field work report in partial fulfilment of MBA of the college for the academic year 2008-2009 . He has worked under our guidance and direction. The said report is based on bonafide information.
Project guide name: Designation:
Date: Place: Pune.
Pai International Centre for Management Excellence Maharashtra Cosmopolitan Education Society
I hereby declare that the project titled “TAX HAVEN” is an original piece of research work carried out by me under the guidance and supervision of Saumya Mehta The information has been collected from genuine & authentic sources. The work has been submitted in partial fulfilment of the requirement of MBA to our college.
Signature: Name of the student
I take this opportunity to express my heartfelt gratitude towards our Director Mr.R.Ganesan who has been, is and will continue to be a source of inspiration to me. I am grateful to him for making all the necessary facilities available to me for the completion of this project. I would like to thank my guide Prof. Saumya Mehta, without whose consent and support this project would not have been completed. Finally, I would like to thank all PICME staff member and management staff and my friends for extending their great support in completion of the project successfully.
4.INDEX SR. 8. 7. 3. 6. INTRODUCTION OBJECTIVE METHODOLOGY COMPANY PROFILE LITERATURE SURVEY DATA ANALYSIS CONCLUSIONS BIBLOGRAPHY 1-4 5-6 7-14 15-17 18-21 22-32 33-34 35-36 . 1.NO. 2. PARTICULAR PAGE NO. 5.
In fact. This same guide also admits that some transactions conducted through tax havens have a beneficial tax result that is completely within the letter of US tax law. Novels like The Firm as well as constant negative media coverage and government propaganda have all caused the public to associate tax havens with shady business deals and characters of questionable nature. Given that admission. many people wonder why anyone would want to take their money offshore. In fact. the taxman would have the public believe that tax havens are used exclusively for tax evasion. including Austria. Furthermore. The reality of tax havens and those who use them could not be further from the truth.INTRODUCTION The term tax haven has come to be associated with unsavoury. Hong Kong. For example. in some tax havens there are prison sentences for anyone revealing private financial information. the primary one being relatively lower tax rates in comparison with other countries. As a result. would have everyone believe that the use of a tax haven is the same thing as tax evasion. If everyone could invest abroad and in secrecy and never pay taxes these governments would go broke. Singapore and Switzerland and lesse Governments of most industrialized nations. It is in no way illegal to take your money offshore. it becomes highly probable that many Americans are overlooking tax . the government loses control. Helvering (1935). the Cayman Islands. European principalities filled with castles and picturesque villages. the US Supreme Court stated in Gregory vs. and especially their tax collecting agencies. Tax avoidance is the legal reduction of taxes. Bank secrecy and strict privacy laws are other important characteristics of tax havens. They vary from sun-drenched Caribbean islands with palm-lined beaches to mountainous." The IRS itself defines at least 30 jurisdictions around the world as tax havens. while evasion is any illegal means of reducing or eliminating taxes. First. many tax havens impose no taxes at all on income earned by foreign individuals. In fact. There are currently over 200 jurisdictions that offer these and other special incentives to foreign investors across the globe. the wealthy have moved money offshore to protect their assets and to avoid paying taxes on gains. These governments frown on you relocating your money offshore. The Governments do everything in their power to discourage citizens from moving funds offshore because when you move your money offshore. even though the government has done its part to try to persuade you to not do so. not evade them. 293 US 465 that taxpayers can arrange their affairs so that they can make their taxes as low as possible. in the US the IRS agents' handbook carefully notes that taxpayers use havens to avoid taxes. immoral. In the US. Panama. To this end. the IRS guide concedes that US taxpayers may also use tax havens for tax planning reasons. it is important to define what a tax haven is. Since the French Revolution. Liechtenstein. and perhaps even illegal activities in the minds of many people. the IRS agents' handbook defines tax haven as "a term that generally connotes any foreign country that has either a very low tax or no tax at all on certain categories of income. but that is just not the reality of the matter. A tax haven is a foreign country or dependency that has a series of unique characteristics.
US authorities do in no way suggest that there is any impropriety in his business strategies. media magnate Rupert Murdoch renounced his Australian citizenship and became a US citizen and so was able to comply with the US law that prohibits foreign ownership of television stations. News Corp. US taxes may be minimized or deferred. It is very difficult for the US government to obtain information about business activities that take place in offshore tax havens or to locate income from investments made through an offshore corporation. Mr. the income it generates is not subject to foreign taxes and through expert planning. An excellent example of a well-known public figure who is publicly known to utilize tax havens to his advantage is Rupert Murdoch. This very wise business move helped Mr. Although not a concern for US residents. The most prominent of non-tax reasons for using a haven is the privacy and confidentiality they offer for business transactions. there are multiple reasons for using tax havens. The company reduces its annual tax bill by moving profits through multiple subsidiaries in offshore tax havens like the Cayman Islands. Banks in many offshore jurisdictions may not have reserve requirements and so they are able to loan funds at higher rates and pay higher rates on deposits. Murdoch has taken advantage of the differing tax regimes around the globe and so has been able to make sure his companies keep more of what they earn. In 1985. Nauru. subsidiary in the Caymans. News Corp. has remained incorporated in Australia in spite of Mr. where they are not taxed. Murdoch provides an excellent example of the proper use of tax havens in business strategy for all to follow. the overseas profits from movies made by 20th Century Fox. Given the information above.havens. Many offshore havens also give banks greater discretion in investing funds on deposit. according to one insider familiar with the transactions. Murdoch build a global entertainment empire that includes among its many subsidiaries the 20th Century Fox studios. For example. private international banking and offshore investing as a fully legal means of restructuring their income and reducing their tax liability r known places such as Bahrain. Mr. but through the use of international tax havens. News Corp. tax havens can provide economic and political stability for individuals who live in countries where such stability is sadly lacking. Freedom from overly restrictive banking regulations is yet another attractive characteristic of many tax havens. One of the most important tax related reasons is the formation of an offshore corporation to engage in international business activities. Mr. . has mastered the use of the offshore tax haven in its many international transactions. Mr. Murdoch's company.. earns most of its revenue from US subsidiaries. and Turks & Caicos Islands. The same rule applies to investments made through an offshore corporation and any resulting profits. go into a News Corp. Murdoch has paid corporate income taxes of one-fifth the rate of his US competitors during the 1990s. Murdoch's taking on US citizenship. Since the corporation is based in the haven.
Since most of high industrialized nations enforce extremely high rates of income and estate taxes on the worldwide income and assets on resident citizens. St. Every student of American taxation is required to memorize Judge Learned Hand's declaration. citizenship. To demand more in the name of morals is mere cant. Obtaining a second nationality is not quite as expensive as one may think. "Over and over again courts have said that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Templeton gave up his U. for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions. Galbraith & Hansberger.000 worth of local real estate and paying US$50. Expatriation is not limited to the super rich. Now with the Internet and satellite television. an expatriate can be as well informed living in San Jose as in Manhattan. there are a handful of viable options for an American looking for expatriation. moved to the Turks and Caicos Islands.. not voluntary contributions. the loss of American citizenship is not terribly burdensome. is it? . St. Frederick Krieble.S. expatriation has become the ultimate tax-planning tool for their citizens. For those with time on their hands. a former American citizen who adopts Bahamian nationality pays zero estate tax. it is now time to seriously consider the matter. Kitts-Nevis requires the purchase of US$150. There are generally significant income tax savings in renouncing U. As a result. citizenship in 1962 and moved to Nassau. Many mid level executives and small business people nearing retirement consider expatriation as a method to ensure a high standard of living in a comfortable environment.000 in fees for instant citizenship. Keeping more of what you earn is not such a bad outcome after all. KittsNevis and the Cayman Island levy no income taxes while some other countries do not tax the foreign income of retirees. Although some may have second thoughts about expatriation for patriotic and practical reasons. a vice president of Templeton. Costa Rica offers permanent residency with a US$50. in Nassau. and all do right. a director and former treasurer of Loctite Corp. Everybody does so. Jane Siebels-Kilnes.000 investment in reforestation and a passport a few years later. the costs of American citizenship may eventually outweigh renunciation. Telecommunications and convenient international airline schedules facilitate the expat life. Only the government loses because it will be taking less of your money in taxes. As you can see. where he runs an investment company.S. As an example. Ultimately. Tax havens offer numerous opportunities and if you have not yet researched the use of one or more in both your personal and business tax planning. followed in the footsteps of Sir John Templeton. Templeton saved over US$100 million on the sale of his investment management company in October 1992. For instance. For example." It is foolish to not take advantage of the tax code regulations and provisions that give one legal right to use tax havens. rich or poor.
To know that all countries can enforce their own Tax laws.haven. .OBJECTIVE 1. 2. 3. To find out distinguishing features of different Types of Tax-haven. 4. To study the process formalities completed for acquiring the Tax-haven. To study various benefits of Tax.
when these businesses failed. They are used globally. twenty-four hours a day. their use was surrounded in 'mystique'.so much so. leaving only happy investors. demands were made for legislation to protect stockholders and other investors. Also. there were only a handful of offshore. International Financial Services Centres are no longer surrounded by the 'mystique' of twenty years ago. Many of these early enterprises were highly successful of course. each and every day. either through misjudgments. Not unreasonably. involving. typically made use of only one or two jurisdictions. the demand for funding was so great that entrepreneurs started looking to the public for investment money.as an integral and important part of the world's financial system. on which all off shore companies are based. spanning all quarters of the world. have made it easier to access offshore facilities . Sometimes. Over the last twenty years. (tax havens) and to many. there were only a few professionals specializing in offshore practice and tax havens. faced with such mounting losses and ensuing bankruptcies. bad luck. . Possibly more to the point is a little bit of history about limited companies generally. but frequently faced demands for all the company's losses. incompetence or downright fraud. in one way or another. that today's offshore industry has developed in to a major global business. but many others failed. Consequently. the investors were not only left nursing the loss of their original investment. startling advances in technology and the telecommunications revolution. Whilst many of these early businesses were government backed. From understanding this it is a small step to understanding the need and growth of 'Offshore'! Origins The concept of limited liability companies can be traced back to the early part of the 19th century and the insatiable demand for cash which the industrial revolution and its thousands of manufacturing and trading organizations spawned. and those that did.COMPANY PROFILE TAX HAVENS HISTROY Some twenty years ago. approximately half of the world's financial transactions by value.
Thus. These radically changing patterns in expectations. • Volatility in currency markets.15 million of whom are born in China. Presently. Additionally. not only in Europe but world-wide: • The spectacular growth in South East Asia. consider South East Asia. For example. thirty per cent of the world's working population is unemployed. It is estimated that this number will have grown to 45 million by the year 2005.as well as confidentiality.THE FUTURE OF COMPANY AND TAX HAVEN As we approach the 21st Century. • The after-effects of the collapse of the Soviet Union. India and China as economic power houses. there will be major changes in world geo-politics. one does not need a 'crystal ball' to clearly see that the offshore industry will continue with its rapid development and growth. Therefore. the world's population is increasingly expecting higher standards of living and improved work opportunities. and access to sophisticated investment services . approximately 6 million people in the ASEAN countries enjoy the equivalent of Australian middle class living standards. population and wealth will continue to create political and economic instabilities. Today. Tomorrow's offshore users will be looking for centers that can compete with today's onshore financial centers in the following areas: • Regulation • Communications • Specialization • Credibility • Infrastructure • Stability • Expertise • Flexibility . it is not surprising that South East Asia will become the world's paramount market. not only for consumer goods but also for financial services. The following political and economic trends will influence the development of the offshore industry. They expect high quality service at a reasonable cost. Governments in both the developed and the developing world will have no option but to continue to levy high taxes to meet these expectations and the associated costs of providing new and improved infrastructure. • The emergence of South America. The users of International Financial Services Centers are becoming increasingly demanding. The current world population is increasing by 90 million a year .
however the basic concept still remains to this day. our clients' needs will be not only to minimize their global tax exposure. It is the separate legal identity aspect that makes the limited company an ideal tax planning vehicle. Thus. From this early legislation the concept of the limited liability company grew. to ensure that those convicted or suspected of fraudulent dealings are barred from holding directorships. The principle motivations behind the demand for offshore services from both individuals and corporations are: • Tax Minimization • Risk Management • Cost Reduction With global instability. These companies had two important features. . the directors and stockholders of the company were limited in their financial liability to the failed company and its investors and creditors to the amount of the share capital they owned. the legal framework of limited liability companies has changed to keep pace with more modern business practice. As the wealth of both companies and individuals has increased over the years. with some success. distinct from its owners. The political and economic catalysts that influenced the growth of the offshore industry in the eighties and nineties will continue to influence growth in the next two decades. but also to protect and preserve their assets and investments in safe havens. risk management has become as important a motivation for using International Financial Services Centers as international tax planning. and secondly the companies were viewed as a separate legal entity. not only from individual to business but from country to country.THE LIMITED LIABILITY COMPANY. there has always been an incentive to live or work in or from a lower tax area. Over the years. currency fluctuations and political uncertainties set to continue. firstly the director's and stockholder's liabilities became limited to the amount of the share capitalization of the company. Ensuing legislation now gives more protection to investors and the general public. Thus the legislation ensured that should a limited company fail. for whatever reason. especially from companies run with intent to defraud. this incentive has become the foundation for a business in its own right. OFFSHORE LIMITED COMPANY Because tax rates have always varied. and tries. In practice the directors and stockholders of a failed limited company simply lost their original investment.
000 or so offshore companies were incorporated in the various Caribbean centers. Estimates indicate that by the turn of the century a minimum of another half a million offshore companies will have been incorporated world-wide.to attract international business by way of offering a low or zero tax base from which to trade. Not only does this save the organization tax.000 or so in the other offshore jurisdictions. it ensures that the 'haven' country gets both a revenue from registration fees (to its government) and employment and income for its citizens by way of formation agents and their own businesses.000 per annum. each offering slightly different companies but all sharing a common aim . Some 40. • More effective tax recovery. often but not exclusively 'third world'. • Market globalization and deregulation. • The internationalization of business.000 IBC's were incorporated there last year. • The lifting of trade barriers. • A global relaxation of foreign exchange controls. This means that the total number of companies formed for offshore purposes exceeds 140. • A trend towards steady global economic growth.These catalysts are: • Political and economic instability. The most popular jurisdiction Delaware and the BVI whose registrar has incorporated approximately 300.000 IBC companies in the last ten years. There are now some 40/50 different offshore jurisdictions worldwide. It is estimated that 15. . In addition to political and economic catalysts there are also global tax related catalysts that continue to influence the growth of the offshore industry These include: • High tax regimes. • The opportunities of utilizing double taxation treaties. An increasing number of countries. a 'tax haven' if they move their legal identity to their own low tax shores. In 1997 some 70.000 companies a year are incorporated in Hong Kong for offshore purposes and another 50. have seized upon this to offer companies based in high tax areas.
individuals who are living away from their home countries. • Owners of businesses. • Expatriates and emigrants. Corporate users include: • Multinational companies. whereas emigrants are individuals who have permanently moved from one country to another in pursuit of a better quality of life and/or business interests. either on overseas contracts of employment or as retirees. . The category of 'owners of businesses' relates predominantly to proprietary businesses where the shares are held by family members. Expatriates are. • Shipping companies. in the main. Individual users include: • High net worth individuals. • Financial institutions. High net worth individuals are generally those clients with disposable assets in excess of two million dollars. • Conglomerates.The Client Profile The users of offshore facilities fall primarily into the two categories of individual and corporate users.
• Inventors. • Estate and investment planning. such users originated from Europe. the Indian sub-continent and the booming economies which make up South East Asia and the Pacific Rim. Over the last decade. • Confidentiality and privacy. however. • Entertainers and authors. • Owners of intellectual property rights. . amongst others: • Individuals enjoying inherited wealth.INDIVIDUAL USERS Whilst the profiles of individual users are diverse. . • Pre-immigration planning.Individual users utilize offshore facilities for the following reasons: • Tax planning. North and South America and certain African and Australasian countries. • Security. • Medical practitioners and other professionals. • Sportsmen and other personalities. engineers and designers. • Businessmen and senior executives. they would include. the CIS. clients falling into this category have increasingly come from the Eastern European countries. Traditionally. • Entrepreneurs and industrialists.
which. in addition to treasury management. the provision of finance to subsidiaries and risk management. • Re-export. foreign direct investment companies. . This process. capital raising exercises. shipping companies or financial institutions. The individual and corporate users of offshore services are.CORPORATE USERS Most modern corporations. • Manufacturing and assembly plants. • Transportation and distribution. mixing vehicles. be they medium sized companies pursuing international expansion. Mauritius. matched only by the wide range of benefits that offshore centres offer. conglomerates. Holding companies. Corporate treasurers often apportion their cash resources between their subsidiaries. are market driven and many have been able to establish and maintain their competitive edge by efficiently structuring aspects of their operations through offshore centres. known as 'netting'. are utilized for: • Regional headquarters. is regularly undertaken from an offshore center. • Marketing. royalty companies and treasury management companies are but a few examples of the types of companies that have been established by corporate users in offshore centres. Many corporate users have favoured establishing a physical presence in offshore centers. Free ports. the Isle of Man and Madeira have all been successful in attracting multinational and large companies to establish physical presences. multinational companies. trading and administration centres. diverse. trans-shipment and pre-positioning. Treasury management operations would typically include cash management. export processing and special economic zones have continued to attract corporate users. which has in excess of 700 companies operating in its Export Processing Zone.
RESEARCH METHODOLOGY .
METHODS OF DATA COLLECTION Data is of primarily of two kinds. Secondary data. 1. Research initiates. 2. Primary data 2.MEANING OF THE RESEARCH Research may mean the first small step in an endeavour to understand better the change occurring and at times forced upon we as individuals or as society. deflects and clarifies theory. deriving deductions. formulates. formulation and organization and evaluating data. hypothesis. 4. It aids in purposive planning. interferences and conclusion after careful testing. It enables us to have a better understanding of our world. verifies or corrects knowledge. Research as process involves defining problems. . OBJECTIVE OF RESEARCH 1. It extends. 3.
Secondary data may be defined as data that has been collected earlier for some purpose other than the purpose of the present study. It is two ways purposive communication Between the interviewer and the respondent aimed at obtaining and recording information pertinent To the subject matter of the study. . They are- 1. Published source of data in the form of books of accounts. SOURCES OF SECONDARY DATA Published Sources Unpublished sources Data collection methods can be classified as follows Observation Interviewing Experimentation Simulation Projective techniques In this project two methods of collection were used. Any data that is available prior to the commencement of the research project is secondary data it is called historic data USES OF SECONDARY DATA It acts as a reference for the present study. INTERVEIWING It is most commonly used method of data collection. At times it may be the only source of data. 2. The secondary data can be a useful benchmark. Interviewing. which the findings of the study can be tested.
LITERATURE SURVEY .
one sees the sums involved are trivial. and the London bombers spent just a few thousand pounds if that. agency commissions and other corrupt earnings which are so important in the fortunes of third world elites. the biggest business by volume and profit in private banking: the theft of the resources of countries in a state of crisis where citizenry is helpless. The international agencies. seize it. that it is the West that benefits from such theft. is now concealed from the authorities in order to avoid taxation. Curiously. The trusts and offshore jurisdictions are a part of this very business. and set up arrangements with him in Bombay or Lagos. One way to conceal such money is to put it in the name of other nominal owners. kickbacks. the money has been undoubtedly been laundered in the sense that it has been concealed in legitimate business activity such as export or import remittances so that it is untraceable. trusts and tax havens. flight occurs because flight capitalists apprehend government action to seize assets but can only take place if the threatened action never takes place. or the local branch of the international bank he works with. by havala or other method such as payments from overseas offices of the firm controlled by the Third World account holder. assembling materials that are widely available. focus on them – to the exclusion of the major business of money laundering. The most important such crime is the enabling of capital flight. This is often done in the case of assets that are immovable such as feudal property in land. the money is transferred abroad. Yet what is termed money laundering is curiously only used to describe drug and terrorist money. Typically. In this process.) So I wish to argue that this is a meaningless definition. So this could be drug money. (Indeed. Money laundering should be properly seen as the concealment and transmission of funds involved in any crime in any jurisdiction. especially the United States and the United Kingdom. where democracy is inadequate and there is insufficient control of the machinery of the state by the people. I wish to submit. . Liquid assets can be taken completely out of the jurisdiction. illegal capital flight and tax evasion does occur in advanced capitalist countries but much less than in Third world countries that can neither institute effective controls nor simply transfer surplus openly as the colonial administrations of those very countries once did. who have skilfully employed widely available services. the Fund and Bank have so long campaigned for convertibility. Actually if one looks at the sums of money involved in recent acts of terror against the state -.all of which are effectively unsupervised and not monitored. America is often encouraging the very people who are shipping drugs. This is as true of India as Nigeria as Russia or China. And terrorists are relative newcomers. such as employees or relatives. This is of a continuity with the transfers of the multinationals. Now the reason that this description is not adopted by international agencies is. and claimed controls to be counterproductive. which is capital flight. Thereafter.as distinct from the terror practised by the state -. supported by both America and the Indian Government – even as a warrant for his arrest lies in Bombay. Terrorists and drug lords use havala but they also use the main money centre banks. a lawyer or accountant. there is the curious case of a senior Indian policeman involved in smuggling drugs who has now been happily relocated in New York with the United Nations. a private banker will meet a prospective client on an introduction from another client. which is why the international institutions the US dominates. Money laundering of course is central to the narcotics trade but as Alexander Cockburn has shown. taking criminal and tax evading money out of the jurisdiction of the sovereignties where the money has been made. and welcomed returning capital flight as evidence of the success of a country‟s policies. Such capital flight is in different ways the proceeds of theft: either tax evasion by the rich in a country such as India where the tax base is derisory. or bribes.Money Laundering and Capital Flight Kannan Srinivasan Private banking is the international business of the solicitation and management of wealth that is either illegally generated or that. or what is called „black‟ money. the Financial Action Task Force in particular. and of a continuity with colonial drain. effected in various ways. legally earned. even should they so desire. The Nine Eleven Commission speaks of less than half a million dollars over several years – a sum that will never show up on any radar screen. so that the local authorities may not.
embezzlement of private funds. burglary. slave trading and prostitution. For crimes committed outside the U. He argues that for crimes committed in the U. “the definition is very extensive..THE PATRIOT ACT The Patriot Act as well as other legislation seems to make foreign criminal acts illegal in the United States. if the crimes are committed overseas. securities fraud. including the Patriot Act 2001. This amounts to an invitation to those who profit by such crimes to bring their money to the US. Yet as Raymond Baker points out. forgery. law” (email by Baker to author. essentially to drug trafficking. the Patriot Act‟s definition of „specified unlawful activity‟ provides the loophole needed for money laundering operations. trafficking in counterfeit and contraband goods. th . 28 April 2005) Anti-money laundering legislation in the United States identifies "predicate offences" where a person knowingly handles the proceeds of any of 200 classes of crime if committed domestically. it's very restricted. These include such acts as racketeering. corruption..S. bank fraud and some treaty violations. Yet the proceeds of all but 15 such crimes are exempt by US law. credit fraud.S. Foreign tax evasion and handling the proceeds of foreign tax evasion is not a specified unlawful activity under U. So it is perfectly legal for an American private banker to knowingly solicit the deposit of a South Asian trafficker in women or in illegal immigrants.S. terrorism.
DATA ANALYSIS .
Different jurisdictions tend to be havens for different types of taxes.WHAT IS TAX HAVEN? A tax haven is a place where certain taxes are levied at a low rate or not at all. others have suggested that any country which modifies its tax laws to attract foreign capital could be considered a tax haven. a worldwide demand for opportunities to engage in tax avoidance.." The Economist points out that this definition would still exclude a number of jurisdictions traditionally thought of as tax havens.. The Economist has tentatively adopted the description by Geoffrey Colin Powell (former Economic Adviser to Jersey): "What . identifies an area as a tax haven is the existence of a composite tax structure established deliberately to take advantage of. This creates a situation of tax competition among governments. and for different categories of people and/or companies. and exploit.Similarly. Individuals and firms can find it attractive to move themselves to areas with lower tax rates. There are several definitions of tax havens. One argument in favor of tax havens is that they help pressure developed countries to reduce their tax rates. . According to other definitions the central feature of a haven is that its laws and other measures can be used to evade or avoid the tax laws or regulations of other jurisdictions.
. the Bermudian claim is debatable when compared against the enactment of a Trust Law by Liechtenstein in 1926 to attract offshore capital. followed closely by Liechtenstein. For example. It is difficult.S. the founding concept of a tax haven appeared as an economic response to the principle of taxes.HAVEN To a certain extent.Bermuda sometimes optimistically claims to have been the first tax haven based upon the creation of the first offshore companies legislation in 1935 by the newly created law firm of Conyers Dill & Pearlman. In the middle Ages. the Channel Islands claim their tax independence dating as far back as Norman Conquest. Switzerland. many European governments raised taxes sharply to help pay for reconstruction effort following the devastation of World War I. nonetheless. is not new to tax haven users. American colonies traded from Latin America to avoid English taxes. the modern concept of a tax haven is generally accepted to have emerged at an uncertain point in the immediate aftermath of World War. Nonetheless. Others suggest that the Hanseatic League first embraced the concept of tax competition as early as 1241. to pinpoint a single event or precise date which clearly identifies the emergence of the modern tax haven. having remained neutral during the Great War. some of the Greek Islands were used as depositories by the sea traders of the era to place their foreign goods to thus avoid the two-percent tax imposed by the citystate of Athens on imported goods. while others argue that the tax status of the Vatican City was the earliest example of a tax haven (the first Papal States being recognised in 756). During the early part of the twentieth century. Germany. However. The use of differing tax laws between two or more countries to try and mitigate tax liability is probably as old as taxation itself.ORIGINS OF TAX. avoided these additional infrastructure costs and was consequently able to maintain a low-level of taxes. while the Isle of Man claims to trace its fiscal independence to even earlier times. in Ancient Greece. It is sometimes suggested that the practice first reached prominence relating to the use (or avoidance of) the Cinque ports and later the staple ports in the twelfth and fourteenth centuries respectively. in the years immediately following World War I. The U. Hanseatic traders who set up business in London were exempt from tax. However. In 1721. South America and elsewhere. As a result. Swiss banks had long been a capital haven for people fleeing social upheaval in Russia. For instance. Various countries claim to be the oldest tax haven in the world. there was a considerable influx of capital into the country for tax related reasons.Most economic commentators suggest that the first "true" tax haven was Switzerland. By and large.
most major tax havens repealed their laws permitting these ring-fenced vehicles to be incorporated. However. most major countries began repealing their double taxation treaties with microstates to prevent corporate tax leakage in this manner. are not enough for a nation to qualify itself as a tax haven. in the late 1990s and early 2000s. overall national environment is needed to spur a definition as a tax haven. Thus. The use of modern tax havens has gone through several phases of development subsequent to the interwar period. The terminology was often used with reference to countries to which a person could retire and mitigate their post retirement tax position. Indeed. corporations. developed their own tax and trade regimes thus creating certain economic disparities around the world. These vehicles were usually called "exempt companies" or "International Business Corporations". they. when most of the world's colonies attained their emancipation and independence. From the 1920s to the 1950s. could take advantage of the double taxation treaty. This strategy generally relied upon there being a double taxation treaty between a large jurisdiction with a high tax burden (that the company would otherwise be subject to). some countries such as the US published reports and statistics showing the economic impact and the expansion of tax havens. This tax avoidance phenomenon has impact in terms of tax‟s loss of revenue but also on the country. there was significant growth in the use of tax havens by corporate groups to mitigate their global tax burden. the growth of tax havens is primarily due to the considerable growth of offshore banking. from the 1950s onwards. for the most part. most tax havens changed the focus of their legislation to create corporate vehicles which were "ring-fenced" and exempt from local taxation (although they usually could not trade locally either). Although some of these double tax treaties survive. they look for new markets and cheap labour. . by structuring the group ownership through the smaller jurisdiction. In general. In brief. essential elements such as a stable political and economic government. as well as a strong network of communication facilities are needed for a nation to identify itself as a tax haven. the OECD began a series of initiatives aimed at tax havens to curb the abuse of what the OECD referred to as "unfair tax competition". Discretion is the main tax havens‟ attraction. but concurrently they amended their tax laws so that a company which did not actually trade within the jurisdiction would not accrue any local tax liability. Nevertheless. It is therefore very delicate for countries‟ tax authorities to measure or compare tax avoidance. thereby paying taxes at the much lower rate. This expansion is also due to the globalisation of the world's businesses. tax havens were usually referenced as the avoidance of personal taxation. in the 1970s. however. However. In the early to mid-1980s. Such disparities. Midway through the twentieth century. and a smaller jurisdiction with a low tax burden. a favourable.DEVELOPMENTS Presently. Under pressure from the OECD.
Channel Islands. Andorra. It is an archipelago composed of 700 islands. The CFCE (Centre François du Commerce Exterior) created a data bank to those wishing to trade or invest in foreign countries. Liechtenstein. The country's demographics are composed of approximately 75% of subSaharan African descent and 25% white and other decent. Nevertheless. These specialist cabinets are: Data Resources Incorporated (DRI). Bermuda.. even though independent are stable: Switzerland. It is difficult to establish a country‟s economic and politic stability at a precise point in time. World Political Risk Forecast (WPRF). Private specialist cabinet also provide this kind of information using different methods and specialised in geographic areas. Holland. They are those attached to economically powerful countries: Monaco.ECONOMIC AND POLITICAL STABILITY. Others. etc. BERI periodically produces a 'Political Risk Review'. drawing from its colonial British history. With a thriving legal industry and strong adherence to the rule of law the banking industry is recognized as stable and reliable by the OECD. of which twenty-two islands are inhabited with human settlements. especially for long term users. Evaluating its politic risks for the coming years is even more difficult. Luxembourg. a country‟s political stability is a very important specification to look for when choosing a tax haven. The economy is capitalistic in nature. The Bahamas closest island is fifty miles off the coast of Florida and its culture is heavily influenced by the United States of America. Some stable countries are easily foreseeable. However the division of wealth of the residential population is sharp. Multinational Risk Inc. even though its GNP is one of the highest in the Caribbean. The country's proximity to the US has fostered considerable economic growth in the tourism industry. Nonetheless. The monthly UK magazine Euro money . the Bahamas has had political stability since independence was granted by the British Crown in 1973.
A lack of transparency in the operation of the legislative. legal or administrative provisions is another factor used to identify tax havens. This prevents the transmittance of information about taxpayers who are benefiting from the low tax jurisdiction. Tax havens impose no or only nominal taxes (generally or in special circumstances) and offer themselves. but is politically expedient because it includes the small tax havens (with little power in the international political arena) but exempts the powerful countries with tax haven aspects such as the USA and UK. If this is the case. or are perceived to offer themselves. as a place to be used by non-residents to escape high taxes in their country of residence. the first factor to look at is whether there are no or nominal taxes. negotiated tax rates. the other two factors – whether or not there is an exchange of information and transparency – must be analysed. to characterise a jurisdiction as a tax haven. The OECD recognises that every jurisdiction has a right to determine whether to impose direct taxes and. 1. 3. In deciding whether or not a jurisdiction is a tax haven. Lack of transparency. „Secret rulings‟. . if so. Its later work has therefore focused on the single aspect of information exchange. However the OECD found that its definition caught certain aspects of its members' tax systems (most developed countries have low or zero taxes for certain favoured groups). to determine the appropriate tax rate. and that information needed by foreign tax authorities to determine a taxpayer‟s situation is available. 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 is generally thought to be an inadequate definition of a tax haven. for other tax authorities to apply their laws effectively. by itself. 2. Lack of transparency in one country can make it difficult. Having no or nominal taxes is not sufficient. Protection of personal financial information. Limited regulatory supervision or a government‟s lack of legal access to financial records is contributing factors. The OECD is concerned that laws should be applied openly and consistently. or other practices that fail to apply the law openly and consistently are examples of a lack of transparency.THE OECD AND TAX HAVENS The Organisation for Economic Co-operation and Development (OECD) identifies three key factors in considering whether a jurisdiction is a tax haven. No or only nominal taxes. if not impossible.
There have also been notable failures. and the subsequent political and military deterioration of Lebanon destroyed any notion of the necessary stability for a successful tax haven. its reputation took a severe dent after the Intra Bank crash of 1966. and partly a testament to moving the national Shipping Registry to New York City. Beirut formerly enjoyed a reputation as the only tax haven in the Middle East. A number of Pacific based tax havens have literally closed up shop (although not formally) in response to OECD demands for better regulation and transparency in the late 1990s. Liberia enjoyed a prosperous ship registration industry. . However. but the series of violent and bloody civil wars in the 1990s and early 2000s severely damaged confidence in the jurisdiction.FAILURES Although tax havens are traditionally linked with images of prosperity. Tangier enjoyed a brief but colourful existence as a tax haven in the period between the end of effective control by the Spanish in 1945 until it was formally reunited with Morocco in 1956. The fact that the ship registration business still continues is partly a testament to its early success.
a wealthy testator could transfer his house into an offshore company. On his death. he can then settle the shares of the company on trust for himself for life. it allowed the group to "skim" profits from the high-tax jurisdiction. In most countries in the world. Asset holding involves utilising a trust or a company. residence is the primary basis of taxation. so this would not work with a house in most countries. trading companies or groups.) Trading and other business activity. Asset holding. income tax. and will usually be administered and resident in another. Many businesses which do not require a specific geographical location or extensive labour are set up in tax havens. The essence of such arrangements is that by changing the ownership of the assets into an entity which is not resident in the high-tax jurisdiction. which may consist of a portfolio of investments under management. These reinvoicing companies simply made a margin without performing any economic function. they cease to be taxable in that jurisdiction. The company or trust will be formed in one tax haven. Other examples include internet based services and group finance companies. and the intermediary then on-lends or invests the money (often back into a high-tax jurisdiction). The function is to hold assets. But almost no tax haven assesses any kind of capital gains tax. Much of the economic activity in tax havens today consists of professional financial services such as mutual funds. Although such systems do not normally avoid tax in the principal customer's jurisdiction. banking. who thereby acquires the house. regardless of the nationality of the owner. (Most countries assess inheritance tax (and all other taxes) on real estate within their jurisdiction. Perhaps the best illustration of this is the number of reinsurance companies which have migrated to Bermuda over the years. it can be said that the advantages of tax havens are viewed in four principal contexts: Personal residency.METHODOLOGY At the risk of gross oversimplification. physical assets such as real estate or valuable chattels. but as the margin arose in a tax free jurisdiction. It is more likely to be done with intangible assets. Most sophisticated tax codes now prevent transfer pricing scams of this nature. and then to his daughter. or a trust owning a company. For example. This has proved particularly successful in the area of offshore funds. Individuals who are unable to return to a high-tax country in which they used to reside for more than a few days a year are sometimes referred to as tax exiles. wealthy individuals from high-tax jurisdictions have sought to relocate themselves in low-tax jurisdictions. life insurance and pensions. Often the mechanism is employed to avoid a specific tax. . it enables financial service providers to provide multi-jurisdictional products without adding an additional layer of taxation. Generally the funds are deposited with the intermediary in the low-tax jurisdiction. to minimise tax exposure. In some cases the low-tax jurisdictions levy no. Since the early twentieth century. Financial intermediaries. without the house having to go through probate and being assessed with inheritance tax. the shares will automatically vest in the daughter. or inheritance tax. or only very low. In the 1970s and 1980s corporate groups were known to form offshore entities for the purposes of "reinvoicing".
both on individuals and corporations. and it is important that you understand their differences. This general definition. regulations. most have double-taxation agreements many the high-tax countries that may reduce the withholding tax imposed on income derived from the high-tax countries by local corporations. royalties on patents. Primary examples in these two sub-categories are Panama. The British Virgin Islands is another.The no-tax-on-foreign . etc. with the consequent tax liabilities.TYPES OF TAX-HAVEN Simply stated. which tax havens are useful for. The second kind of return relates. for example. or movie production companies) or allow very special flexible corporate arrangements offered by Liechtenstein. If you publish a newsletter.S. Bahamas. These states may impose small fees on documents of incorporation. . They exempt form tax any income earned form foreign sources that involve no local business activities apart form simple "housekeeping" matters. . it is important for you to distinguish two basis sorts of income: (1) return on labor and (2) return on capital.Countries that have no income. annual registration fees. It is the second kind of income. rental income. a small charge on the value of corporate shares. covers many types of tax havens. loans and bonds. and Cayman Islands.income havens break down into two groups. Guernsey. For example.No-Tax-on-Foreign-Income Havens . basically. in some cases. taxing only the income coming form internal sources. Forming a corporation trust in a tax haven can make the second form of income totally tax free. To understand the precise role of tax havens.Special Tax Havens . .Countries that impose income taxes. Cyprus is a primary example. you might be able to set up the entire operation in a totally tax free country such as the Bahamas or the Cayman Islands. .Countries that impose some taxes on all corporate income. Isle of Man and Gibraltar. The first kind of return is what you get from your work: salary. There are those that allow a corporation to do business both internally and externally. fees for professional services. . or one permitted to do only foreign business and thus be exempt form taxation. Primary examples are Bermuda. income from an investment portfolio. but no longer has a tax treaty with the U. the Netherlands is famed as a base for sheltering royalty income. and. treaty arrangements make it possible for one to reduce his overall tax burden. Certain types of businesses can be effectively based in tax haven. The governments of these countries do earn some revenue form corporations. in such a haven there is often no tax on income derived form export or local manufactured goods. interest on bank deposits. and those that require a company to decide at the time of incorporation whether it will be one allowed to do local business. to the return from your investments: dividends on shares of stock.No-Tax Havens . perhaps on the computer program you invented. however. but either allow special concessions to special types of companies (such as a total exemption form tax on shipping companies. traditions. "no-tax" means that what you pay is independent of income derived trough a company. a tax haven is any country whose laws. but only on locally derived income. . However.Low-Tax Havens . and the like. wages. wherever earned.Countries that impose all or most of the usual taxes. or taxed so low that you will hardly notice. and in which you can incorporate and/or form trust. Jersey. capital gains. or wealth (capital) taxes. If your income comes form copyright royalties.
Section 80D There is yet another tax benefit. tax saving will occur on the entire amount.TOP FIVE TAX HAVENS With the financial year coming to an end. PPF offering 8 per cent "tax free" return is far superior to National Savings Certificates VIII series offering 8 per cent "taxable" interest or five-year bank deposit offering 8per cent to 9 per cent taxable interest. This section permits deduction up to Rs 15. the spouse. Here's some help. the yield higher comparable post-tax returns.000). In another words. there would be no income for the financial year 2008-09. This deduction is linked to the year the repayment of loan starts and is available for eight succeeding assessment years. For senior citizens. Section 80E Taxpayers. Ideally. the interest that will be earned on returns on the investment for the entire year and yet. the deduction can go up to Rs 20. For tax payers in the highest tax bracket of 30 per cent (income over Rs 500. Finally. ELSS offers tax-free returns compared to taxable returns of Infrastructure bonds.000 for a taxpayer). he would earn 8 per cent tax-free interest of Rs 5. the tax deduction at the time of investment (this could be as high as Rs 34. Choosing a growth option instead of dividend can help get tax-free returns after three years under Section 10(38) of the Income tax Act. they should be aware of all the sections that allow advantages.600 for the entire 2009. if a taxpayer had invested Rs 70. is completely tax-exempt. However. who are going for higher education. the dependent parents and children. There are several reasons for this.000 per year for medical insurance premium on a policy covering the tax payer. . ELSS offers triple benefit. which could be explored by a taxpayer in the higher brackets. There is no ceiling on the quantum of deduction.000 on an investment of Rs 100. The second important aspect of tax related investments is the choice of the investment instrument. the entire amount on withdrawal after three years. For example. since the deduction is linked to the interest payable on such loans. The most vital being. Insurance companies have come up with several innovative policies under section 80D that could be considered. If the same money is invested in the last week of March. First. including the surplus over the initial investment of Rs 100. taxpayers would be scrambling to invest to get maximum benefits.000 in his public provident fund before April 5. Hence. Two. Section 80C The most important section that saves you a lakh every year.000 per year. before rushing to do so. can avail of a deduction under Section 80E for interest payment on an education loan. not February 2009 or March 2009. Yet another attractive instrument under Section 80C is Equity Linked Savings Scheme over Infrastructure related bonds or IPOs. the right time to invest in instruments under this section is the first week of April and. the income during the tenure being exempt under section 10(35).000.
Section 80GG Finally. who has income from salary or from any other source and the quantum of deduction is excess of actual rent paid over 10 per cent of total income or 25 per cent of total income or Rs 2. which many tax payers are not aware of. in respect of rent paid for residential house.000 per month over the actual rent paid. whichever is lower. a deduction under section 80GG. . The deduction is available to any individual. This is one deduction.
CONCLUTION A tax haven is a foreign country or dependency that has a series of unique characteristics. the Cayman Islands. Panama. Bank secrecy and strict privacy laws are other important characteristics of tax havens. including Austria. Liechtenstein. Singapore and Switzerland and lesse . in some tax havens there are prison sentences for anyone revealing private financial information. In fact. In the US." The IRS itself defines at least 30 jurisdictions around the world as tax havens. Hong Kong. In fact. the primary one being relatively lower tax rates in comparison with other countries. many tax havens impose no taxes at all on income earned by foreign individuals. the IRS agents' handbook defines tax haven as "a term that generally connotes any foreign country that has either a very low tax or no tax at all on certain categories of income.
BIBLOGRAPHY I have prepared the report of Tax havens with the help of following reference book and websites. www.taxhavens.standard. www.bussiness. How to save Tax haves-2008/2009 Website: 1.com 2.com .
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