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A Project Report ON TAX HAVEN

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:

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:

Prof.R.Ganesan Director

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.






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The term tax haven has come to be associated with unsavoury, immoral, and perhaps even illegal activities in the minds of many people. 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. As a result, many people wonder why anyone would want to take their money offshore. The reality of tax havens and those who use them could not be further from the truth. Since the French Revolution, the wealthy have moved money offshore to protect their assets and to avoid paying taxes on gains. There are currently over 200 jurisdictions that offer these and other special incentives to foreign investors across the globe. They vary from sun-drenched Caribbean islands with palm-lined beaches to mountainous, European principalities filled with castles and picturesque villages. First, it is important to define what a tax haven is. A tax haven is a foreign country or dependency that has a series of unique characteristics, the primary one being relatively lower tax rates in comparison with other countries. In fact, many tax havens impose no taxes at all on income earned by foreign individuals. Bank secrecy and strict privacy laws are other important characteristics of tax havens. In fact, in some tax havens there are prison sentences for anyone revealing private financial information. In the US, 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." The IRS itself defines at least 30 jurisdictions around the world as tax havens, including Austria, the Cayman Islands, Hong Kong, Liechtenstein, Panama, Singapore and Switzerland and lesse Governments of most industrialized nations, and especially their tax collecting agencies, would have everyone believe that the use of a tax haven is the same thing as tax evasion. These governments frown on you relocating your money offshore. If everyone could invest abroad and in secrecy and never pay taxes these governments would go broke. The Governments do everything in their power to discourage citizens from moving funds offshore because when you move your money offshore, the government loses control. It is in no way illegal to take your money offshore, even though the government has done its part to try to persuade you to not do so. To this end, the taxman would have the public believe that tax havens are used exclusively for tax evasion, but that is just not the reality of the matter. For example, in the US the IRS agents' handbook carefully notes that taxpayers use havens to avoid taxes, not evade them. Tax avoidance is the legal reduction of taxes, while evasion is any illegal means of reducing or eliminating taxes. Furthermore, the IRS guide concedes that US taxpayers may also use tax havens for tax planning reasons. 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. In fact, the US Supreme Court stated in Gregory vs. Helvering (1935), 293 US 465 that taxpayers can arrange their affairs so that they can make their taxes as low as possible. Given that admission, it becomes highly probable that many Americans are overlooking tax

havens, 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, Nauru, and Turks & Caicos Islands.

Given the information above, there are multiple reasons for using tax havens.
One of the most important tax related reasons is the formation of an offshore corporation to engage in international business activities. Since the corporation is based in the haven, the income it generates is not subject to foreign taxes and through expert planning; US taxes may be minimized or deferred. The same rule applies to investments made through an offshore corporation and any resulting profits. The most prominent of non-tax reasons for using a haven is the privacy and confidentiality they offer for business transactions. 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. Freedom from overly restrictive banking regulations is yet another attractive characteristic of many tax havens. 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. Many offshore havens also give banks greater discretion in investing funds on deposit. Although not a concern for US residents, tax havens can provide economic and political stability for individuals who live in countries where such stability is sadly lacking.

An excellent example of a well-known public figure who is publicly known to utilize tax havens to his advantage is Rupert Murdoch.
In 1985, 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. This very wise business move helped Mr. Murdoch build a global entertainment empire that includes among its many subsidiaries the 20th Century Fox studios. Mr. Murdoch's company, News Corp., earns most of its revenue from US subsidiaries, but through the use of international tax havens, Mr. Murdoch has paid corporate income taxes of one-fifth the rate of his US competitors during the 1990s. US authorities do in no way suggest that there is any impropriety in his business strategies. News Corp. has remained incorporated in Australia in spite of Mr. Murdoch's taking on US citizenship. News Corp. has mastered the use of the offshore tax haven in its many international transactions. The company reduces its annual tax bill by moving profits through multiple subsidiaries in offshore tax havens like the Cayman Islands. For example, the overseas profits from movies made by 20th Century Fox, go into a News Corp. subsidiary in the Caymans, where they are not taxed, according to one insider familiar with the transactions. Mr. 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. Mr. Murdoch provides an excellent example of the proper use of tax havens in business strategy for all to follow.

Since most of high industrialized nations enforce extremely high rates of income and estate taxes on the worldwide income and assets on resident citizens, expatriation has become the ultimate tax-planning tool for their citizens. For instance, a former American citizen who adopts Bahamian nationality pays zero estate tax.
There are generally significant income tax savings in renouncing U.S. citizenship. As an example, St. 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, the costs of American citizenship may eventually outweigh renunciation. Ultimately, the loss of American citizenship is not terribly burdensome. Telecommunications and convenient international airline schedules facilitate the expat life. Now with the Internet and satellite television, an expatriate can be as well informed living in San Jose as in Manhattan. Frederick Krieble, a director and former treasurer of Loctite Corp., moved to the Turks and Caicos Islands, where he runs an investment company. Expatriation is not limited to the super rich. Jane Siebels-Kilnes, a vice president of Templeton, Galbraith & Hansberger, in Nassau, followed in the footsteps of Sir John Templeton. Templeton gave up his U.S. citizenship in 1962 and moved to Nassau. As a result, Templeton saved over US$100 million on the sale of his investment management company in October 1992. Obtaining a second nationality is not quite as expensive as one may think. For example, St. Kitts-Nevis requires the purchase of US$150,000 worth of local real estate and paying US$50,000 in fees for instant citizenship. For those with time on their hands, Costa Rica offers permanent residency with a US$50,000 investment in reforestation and a passport a few years later. 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. As you can see, there are a handful of viable options for an American looking for expatriation.

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, it is now time to seriously consider the matter. Every student of American taxation is required
to memorize Judge Learned Hand's declaration, "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. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant." It is foolish to not take advantage of the tax code regulations and provisions that give one legal right to use tax havens. Only the government loses because it will be taking less of your money in taxes. Keeping more of what you earn is not such a bad outcome after all, is it?



1. To study various benefits of Tax- haven. 2. To find out distinguishing features of different Types of Tax-haven. 3. To know that all countries can enforce their own Tax laws. 4. To study the process formalities completed for acquiring the Tax-haven.




Some twenty years ago, there were only a handful of offshore, (tax havens) and to many, their use was surrounded in 'mystique'. Also, there were only a few professionals specializing in offshore practice and tax havens, and those that did, typically made use of only one or two jurisdictions. Over the last twenty years, startling advances in technology and the telecommunications revolution, have made it easier to access offshore facilities - so much so, that today's offshore industry has developed in to a major global business, spanning all quarters of the world, involving, in one way or another, approximately half of the world's financial transactions by value. Consequently, International Financial Services Centres are no longer surrounded by the 'mystique' of twenty years ago. They are used globally, twenty-four hours a day, each and every day,as an integral and important part of the world's financial system. Possibly more to the point is a little bit of history about limited companies generally, on which all off shore companies are based. From understanding this it is a small step to understanding the need and growth of 'Offshore'!

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. Whilst many of these early businesses were government backed, the demand for funding was so great that entrepreneurs started looking to the public for investment money. Many of these early enterprises were highly successful of course, leaving only happy investors, but many others failed, either through misjudgments, bad luck, incompetence or downright fraud. Sometimes, when these businesses failed, the investors were not only left nursing the loss of their original investment, but frequently faced demands for all the company's losses. Not unreasonably, faced with such mounting losses and ensuing bankruptcies, demands were made for legislation to protect stockholders and other investors.


As we approach the 21st Century, there will be major changes in world geo-politics. The current world population is increasing by 90 million a year - 15 million of whom are born in China. Presently, thirty per cent of the world's working population is unemployed. Additionally, the world's population is increasingly expecting higher standards of living and improved work opportunities. These radically changing patterns in expectations, population and wealth will continue to create political and economic instabilities. 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. Thus, one does not need a 'crystal ball' to clearly see that the offshore industry will continue with its rapid development and growth. The following political and economic trends will influence the development of the offshore industry, not only in Europe but world-wide: The spectacular growth in South East Asia. The after-effects of the collapse of the Soviet Union. The emergence of South America, India and China as economic power houses. Volatility in currency markets. For example, consider South East Asia. Today, approximately 6 million people in the ASEAN countries enjoy the equivalent of Australian middle class living standards. It is estimated that this number will have grown to 45 million by the year 2005. Therefore, 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 users of International Financial Services Centers are becoming increasingly demanding. They expect high quality service at a reasonable cost, and access to sophisticated investment services - as well as confidentiality. 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


From this early legislation the concept of the limited liability company grew. These companies had two important features, firstly the director's and stockholder's liabilities became limited to the amount of the share capitalization of the company, and secondly the companies were viewed as a separate legal entity, distinct from its owners. Thus the legislation ensured that should a limited company fail, for whatever reason, 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. In practice the directors and stockholders of a failed limited company simply lost their original investment. Over the years, the legal framework of limited liability companies has changed to keep pace with more modern business practice, however the basic concept still remains to this day. Ensuing legislation now gives more protection to investors and the general public, especially from companies run with intent to defraud, and tries, with some success, to ensure that those convicted or suspected of fraudulent dealings are barred from holding directorships. It is the separate legal identity aspect that makes the limited company an ideal tax planning vehicle.


Because tax rates have always varied, not only from individual to business but from country to country, there has always been an incentive to live or work in or from a lower tax area. As the wealth of both companies and individuals has increased over the years, this incentive has become the foundation for a business in its own right. The principle motivations behind the demand for offshore services from both individuals and corporations are: Tax Minimization Risk Management Cost Reduction With global instability, currency fluctuations and political uncertainties set to continue, our clients' needs will be not only to minimize their global tax exposure, but also to protect and preserve their assets and investments in safe havens. Thus, risk management has become as important a motivation for using International Financial Services Centers as international tax planning. 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.

These catalysts are:

Political and economic instability. Market globalization and deregulation. The internationalization of business. The lifting of trade barriers. A trend towards steady global economic growth. A global relaxation of foreign exchange controls. 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. More effective tax recovery. The opportunities of utilizing double taxation treaties. In 1997 some 70,000 or so offshore companies were incorporated in the various Caribbean centers. The most popular jurisdiction Delaware and the BVI whose registrar has incorporated approximately 300,000 IBC companies in the last ten years. Some 40,000 IBC's were incorporated there last year. It is estimated that 15,000 companies a year are incorporated in Hong Kong for offshore purposes and another 50,000 or so in the other offshore jurisdictions. This means that the total number of companies formed for offshore purposes exceeds 140,000 per annum. Estimates indicate that by the turn of the century a minimum of another half a million offshore companies will have been incorporated world-wide. An increasing number of countries, often but not exclusively 'third world', have seized upon this to offer companies based in high tax areas, a 'tax haven' if they move their legal identity to their own low tax shores. Not only does this save the organization tax, 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. There are now some 40/50 different offshore jurisdictions worldwide, each offering slightly different companies but all sharing a common aim - to attract international business by way of offering a low or zero tax base from which to trade.

The Client Profile

The users of offshore facilities fall primarily into the two categories of individual and corporate users. Individual users include: High net worth individuals. Expatriates and emigrants. Owners of businesses. High net worth individuals are generally those clients with disposable assets in excess of two million dollars. Expatriates are, in the main, individuals who are living away from their home countries, either on overseas contracts of employment or as retirees, 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. The category of 'owners of businesses' relates predominantly to proprietary businesses where the shares are held by family members.

Corporate users include:

Multinational companies. Conglomerates. Shipping companies. Financial institutions.


Whilst the profiles of individual users are diverse, they would include, amongst others: Individuals enjoying inherited wealth. Entrepreneurs and industrialists. Businessmen and senior executives. Entertainers and authors. Sportsmen and other personalities. Inventors, engineers and designers. Owners of intellectual property rights. Medical practitioners and other professionals. Traditionally, such users originated from Europe, North and South America and certain African and Australasian countries. Over the last decade, however, clients falling into this category have increasingly come from the Eastern European countries, the CIS, the Indian sub-continent and the booming economies which make up South East Asia and the Pacific Rim. - Individual users utilize offshore facilities for the following reasons: Tax planning. Estate and investment planning. Pre-immigration planning. Confidentiality and privacy. Security.


Most modern corporations, be they medium sized companies pursuing international expansion, multinational companies, conglomerates, shipping companies or financial institutions, 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. Holding companies, foreign direct investment companies, mixing vehicles, 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. Treasury management operations would typically include cash management, capital raising exercises, the provision of finance to subsidiaries and risk management. Corporate treasurers often apportion their cash resources between their subsidiaries. This process, known as 'netting', is regularly undertaken from an offshore center. Many corporate users have favoured establishing a physical presence in offshore centers, which, in addition to treasury management, are utilized for: Regional headquarters. Marketing, trading and administration centres. Re-export, trans-shipment and pre-positioning. Manufacturing and assembly plants. Transportation and distribution. Free ports, export processing and special economic zones have continued to attract corporate users. Mauritius, which has in excess of 700 companies operating in its Export Processing Zone, the Isle of Man and Madeira have all been successful in attracting multinational and large companies to establish physical presences. The individual and corporate users of offshore services are, diverse, matched only by the wide range of benefits that offshore centres offer.



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.

Research as process involves defining problems, hypothesis, formulation and organization and evaluating data, deriving deductions, interferences and conclusion after careful testing.

1. 2. 3. 4. It extends, verifies or corrects knowledge. It enables us to have a better understanding of our world. It aids in purposive planning. Research initiates, formulates, deflects and clarifies theory.


Data is of primarily of two kinds. 1. Primary data 2. Secondary data.

Secondary data may be defined as data that has been collected earlier for some purpose other than the purpose of the present study. Any data that is available prior to the commencement of the research project is secondary data it is called historic data


It acts as a reference for the present study. The secondary data can be a useful benchmark, which the findings of the study can be tested. At times it may be the only source of 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. They are-

1. Interviewing. 2. Published source of data in the form of books of accounts.

It is most commonly used method of data collection. 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.


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, legally earned, is now concealed from the authorities in order to avoid taxation. So this could be drug money, kickbacks, or what is called black money. The trusts and offshore jurisdictions are a part of this very business. One way to conceal such money is to put it in the name of other nominal owners, such as employees or relatives. This is often done in the case of assets that are immovable such as feudal property in land. Liquid assets can be taken completely out of the jurisdiction, so that the local authorities may not, even should they so desire, seize it. Typically, a private banker will meet a prospective client on an introduction from another client, a lawyer or accountant, or the local branch of the international bank he works with; and set up arrangements with him in Bombay or Lagos. Thereafter, the money is transferred abroad, by havala or other method such as payments from overseas offices of the firm controlled by the Third World account holder. In this process, 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. Yet what is termed money laundering is curiously only used to describe drug and terrorist money.

The international agencies, the Financial Action Task Force in particular, focus on them to the exclusion of the major business of money laundering, which is capital flight, taking criminal and tax evading money out of the jurisdiction of the sovereignties where the money has been made. Actually if one looks at the sums of money involved in recent acts of terror against the state -- as distinct from the terror practised by the state -- one sees the sums involved are trivial. 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; and the London bombers spent just a few thousand pounds if that, assembling materials that are widely available. And terrorists are relative newcomers, who have skilfully employed widely available services. Terrorists and drug lords use havala but they also use the main money centre banks, trusts and tax havens- all of which are effectively unsupervised and not monitored. Money laundering of course is central to the narcotics trade but as Alexander Cockburn has shown, America is often encouraging the very people who are shipping drugs. (Indeed, 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, supported by both America and the Indian Government even as a warrant for his arrest lies in Bombay.)

So I wish to argue that this is a meaningless definition. Money laundering should be properly seen as the concealment and transmission of funds involved in any crime in any jurisdiction. The most important such crime is the enabling of capital flight, 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; where democracy is inadequate and there is insufficient control of the machinery of the state by the people. This is as true of India as Nigeria as Russia or China. 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, agency commissions and other corrupt earnings which are so important in the fortunes of third world elites. Curiously, flight occurs because flight capitalists apprehend government action to seize assets but can only take place if the threatened action never takes place; 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.
Now the reason that this description is not adopted by international agencies is, I wish to submit, that it is the West that benefits from such theft; especially the United States and the United Kingdom; which is why the international institutions the US dominates, the Fund and Bank have so long campaigned for convertibility, and claimed controls to be counterproductive, and welcomed returning capital flight as evidence of the success of a countrys policies. This is of a continuity with the transfers of the multinationals, effected in various ways; and of a continuity with colonial drain.


The Patriot Act as well as other legislation seems to make foreign criminal acts illegal in the United States. Yet as Raymond Baker points out, the Patriot Acts definition of specified unlawful activity provides the loophole needed for money laundering operations. He argues that for crimes committed in the U.S., the definition is very extensive. For crimes committed outside the U.S., it's very restricted, essentially to drug trafficking, terrorism, corruption, bank fraud and some treaty violations. Foreign tax evasion and handling the proceeds of foreign tax evasion is not a specified unlawful activity under U.S. law (email by Baker to author, 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. Yet the proceeds of all but 15 such crimes are exempt by US law, including the Patriot Act 2001, if the crimes are committed overseas. These include such acts as racketeering, securities fraud, credit fraud, forgery, embezzlement of private funds, burglary, trafficking in counterfeit and contraband goods, slave trading and prostitution. 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. This amounts to an invitation to those who profit by such crimes to bring their money to the US.



A tax haven is a place where certain taxes are levied at a low rate or not at all. Individuals and firms can find it attractive to move themselves to areas with lower tax rates. This creates a situation of tax competition among governments. Different jurisdictions tend to be havens for different types of taxes, and for different categories of people and/or companies. There are several definitions of 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, and exploit, 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.Similarly, others have suggested that any country which modifies its tax laws to attract foreign capital could be considered a tax haven. 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. One argument in favor of tax havens is that they help pressure developed countries to reduce their tax rates.


To a certain extent, the founding concept of a tax haven appeared as an economic response to the principle of taxes. For instance, in Ancient Greece, 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. In the middle Ages, Hanseatic traders who set up business in London were exempt from tax. The U.S. is not new to tax haven users. In 1721, American colonies traded from Latin America to avoid English taxes. The use of differing tax laws between two or more countries to try and mitigate tax liability is probably as old as taxation itself. 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. Others suggest that the Hanseatic League first embraced the concept of tax competition as early as 1241, 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). Various countries claim to be the oldest tax haven in the world. For example, the Channel Islands claim their tax independence dating as far back as Norman Conquest, while the Isle of Man claims to trace its fiscal independence to even earlier times. Nonetheless, the modern concept of a tax haven is generally accepted to have emerged at an uncertain point in the immediate aftermath of World War.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. However, the Bermudian claim is debatable when compared against the enactment of a Trust Law by Liechtenstein in 1926 to attract offshore capital.Most economic commentators suggest that the first "true" tax haven was Switzerland, followed closely by Liechtenstein. During the early part of the twentieth century, Swiss banks had long been a capital haven for people fleeing social upheaval in Russia, Germany, South America and elsewhere. However, in the years immediately following World War I, many European governments raised taxes sharply to help pay for reconstruction effort following the devastation of World War I. By and large, Switzerland, having remained neutral during the Great War, avoided these additional infrastructure costs and was consequently able to maintain a low-level of taxes. As a result, there was a considerable influx of capital into the country for tax related reasons. It is difficult, nonetheless, to pinpoint a single event or precise date which clearly identifies the emergence of the modern tax haven.


Presently, the growth of tax havens is primarily due to the considerable growth of offshore banking. This expansion is also due to the globalisation of the world's businesses. Indeed, they look for new markets and cheap labour. Midway through the twentieth century, when most of the world's colonies attained their emancipation and independence, they, for the most part, developed their own tax and trade regimes thus creating certain economic disparities around the world. Such disparities, however, are not enough for a nation to qualify itself as a tax haven. In brief, a favourable, overall national environment is needed to spur a definition as a tax haven. In general, 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. Discretion is the main tax havens attraction. It is therefore very delicate for countries tax authorities to measure or compare tax avoidance. Nevertheless, 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 taxs loss of revenue but also on the country. The use of modern tax havens has gone through several phases of development subsequent to the interwar period. From the 1920s to the 1950s, tax havens were usually referenced as the avoidance of personal taxation. The terminology was often used with reference to countries to which a person could retire and mitigate their post retirement tax position. However, from the 1950s onwards, there was significant growth in the use of tax havens by corporate groups to mitigate their global tax burden. 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), and a smaller jurisdiction with a low tax burden. Thus, corporations, by structuring the group ownership through the smaller jurisdiction, could take advantage of the double taxation treaty, thereby paying taxes at the much lower rate. Although some of these double tax treaties survive, in the 1970s, most major countries began repealing their double taxation treaties with microstates to prevent corporate tax leakage in this manner. In the early to mid-1980s, 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). These vehicles were usually called "exempt companies" or "International Business Corporations". However, in the late 1990s and early 2000s, 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". Under pressure from the OECD, most major tax havens repealed their laws permitting these ring-fenced vehicles to be incorporated, 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.


It is difficult to establish a countrys economic and politic stability at a precise point in time. Evaluating its politic risks for the coming years is even more difficult. Nevertheless, a countrys political stability is a very important specification to look for when choosing a tax haven, especially for long term users. Some stable countries are easily foreseeable. They are those attached to economically powerful countries: Monaco, Liechtenstein, Channel Islands, Bermuda, Andorra, etc. Others, even though independent are stable: Switzerland, Luxembourg, Holland. The Bahamas closest island is fifty miles off the coast of Florida and its culture is heavily influenced by the United States of America. It is an archipelago composed of 700 islands, of which twenty-two islands are inhabited with human settlements. The country's demographics are composed of approximately 75% of subSaharan African descent and 25% white and other decent. The economy is capitalistic in nature, drawing from its colonial British history. However the division of wealth of the residential population is sharp, even though its GNP is one of the highest in the Caribbean. Nonetheless, the Bahamas has had political stability since independence was granted by the British Crown in 1973. The country's proximity to the US has fostered considerable economic growth in the tourism industry. 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. The CFCE (Centre Franois du Commerce Exterior) created a data bank to those wishing to trade or invest in foreign countries. Private specialist cabinet also provide this kind of information using different methods and specialised in geographic areas. These specialist cabinets are: Data Resources Incorporated (DRI), World Political Risk Forecast (WPRF), Multinational Risk Inc., BERI periodically produces a 'Political Risk Review'. The monthly UK magazine Euro money


The Organisation for Economic Co-operation and Development (OECD) identifies three key factors in considering whether a jurisdiction is a tax haven, 1. No or only nominal taxes. Tax havens impose no or only nominal taxes (generally or in special circumstances) and offer themselves, or are perceived to offer themselves, as a place to be used by non-residents to escape high taxes in their country of residence. 2. Protection of personal financial information. 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 prevents the transmittance of information about taxpayers who are benefiting from the low tax jurisdiction. 3. Lack of transparency. A lack of transparency in the operation of the legislative, legal or administrative provisions is another factor used to identify tax havens. The OECD is concerned that laws should be applied openly and consistently, and that information needed by foreign tax authorities to determine a taxpayers situation is available. Lack of transparency in one country can make it difficult, if not impossible, for other tax authorities to apply their laws effectively. Secret rulings, negotiated tax rates, or other practices that fail to apply the law openly and consistently are examples of a lack of transparency. Limited regulatory supervision or a governments lack of legal access to financial records is contributing factors. 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). Its later work has therefore focused on the single aspect of information exchange. This is generally thought to be an inadequate definition of a tax haven, 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. In deciding whether or not a jurisdiction is a tax haven, the first factor to look at is whether there are no or nominal taxes. If this is the case, the other two factors whether or not there is an exchange of information and transparency must be analysed. Having no or nominal taxes is not sufficient, by itself, 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, if so, to determine the appropriate tax rate.

Although tax havens are traditionally linked with images of prosperity. There have also been notable failures.

Beirut formerly enjoyed a reputation as the only tax haven in the Middle East. However, its reputation took a severe dent after the Intra Bank crash of 1966, and the subsequent political and military deterioration of Lebanon destroyed any notion of the necessary stability for a successful tax haven. Liberia enjoyed a prosperous ship registration industry. The fact that the ship registration business still continues is partly a testament to its early success, and partly a testament to moving the national Shipping Registry to New York City, but the series of violent and bloody civil wars in the 1990s and early 2000s severely damaged confidence in the jurisdiction. 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. 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.

At the risk of gross oversimplification, it can be said that the advantages of tax havens are viewed in four principal contexts:

Personal residency. Since the early twentieth century, wealthy individuals from high-tax jurisdictions have sought to relocate themselves in low-tax jurisdictions. In most countries in the world, residence is the primary basis of taxation. In some cases the low-tax jurisdictions levy no, or only very low, income tax. But almost no tax haven assesses any kind of capital gains tax, or inheritance tax. 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. Asset holding. Asset holding involves utilising a trust or a company, or a trust owning a company. The company or trust will be formed in one tax haven, and will usually be administered and resident in another. The function is to hold assets, which may consist of a portfolio of investments under management, trading companies or groups, physical assets such as real estate or valuable chattels. 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, they cease to be taxable in that jurisdiction. Often the mechanism is employed to avoid a specific tax. For example, a wealthy testator could transfer his house into an offshore company; he can then settle the shares of the company on trust for himself for life, and then to his daughter. On his death, the shares will automatically vest in the daughter, who thereby acquires the house, without the house having to go through probate and being assessed with inheritance tax. (Most countries assess inheritance tax (and all other taxes) on real estate within their jurisdiction, regardless of the nationality of the owner, so this would not work with a house in most countries. It is more likely to be done with intangible assets.) Trading and other business activity. Many businesses which do not require a specific geographical location or extensive labour are set up in tax havens, to minimise tax exposure. Perhaps the best illustration of this is the number of reinsurance companies which have migrated to Bermuda over the years. Other examples include internet based services and group finance companies. In the 1970s and 1980s corporate groups were known to form offshore entities for the purposes of "reinvoicing". These reinvoicing companies simply made a margin without performing any economic function, but as the margin arose in a tax free jurisdiction, it allowed the group to "skim" profits from the high-tax jurisdiction. Most sophisticated tax codes now prevent transfer pricing scams of this nature. Financial intermediaries. Much of the economic activity in tax havens today consists of professional financial services such as mutual funds, banking, life insurance and pensions. Generally the funds are deposited with the intermediary in the low-tax jurisdiction, and the intermediary then on-lends or invests the money (often back into a high-tax jurisdiction). Although such systems do not normally avoid tax in the principal customer's jurisdiction, it enables financial service providers to provide multi-jurisdictional products without adding an additional layer of taxation. This has proved particularly successful in the area of offshore funds.

Simply stated, a tax haven is any country whose laws, regulations, traditions, and, in some cases, treaty arrangements make it possible for one to reduce his overall tax burden. This general definition, however, covers many types of tax havens, and it is important that you understand their differences. - No-Tax Havens - Countries that have no income, capital gains, or wealth (capital) taxes, and in which you can incorporate and/or form trust. The governments of these countries do earn some revenue form corporations; "no-tax" means that what you pay is independent of income derived trough a company. These states may impose small fees on documents of incorporation, a small charge on the value of corporate shares, annual registration fees, etc. Primary examples are Bermuda, Bahamas, and Cayman Islands. - No-Tax-on-Foreign-Income Havens - Countries that impose income taxes, both on individuals and corporations, but only on locally derived income. They exempt form tax any income earned form foreign sources that involve no local business activities apart form simple "housekeeping" matters. For example, in such a haven there is often no tax on income derived form export or local manufactured goods. - The no-tax-on-foreign - income havens break down into two groups. There are those that allow a corporation to do business both internally and externally, taxing only the income coming form internal sources, and those that require a company to decide at the time of incorporation whether it will be one allowed to do local business, with the consequent tax liabilities, or one permitted to do only foreign business and thus be exempt form taxation. Primary examples in these two sub-categories are Panama, Jersey, Guernsey, Isle of Man and Gibraltar. - Low-Tax Havens - Countries that impose some taxes on all corporate income, wherever earned. However, 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. Cyprus is a primary example. The British Virgin Islands is another, but no longer has a tax treaty with the U.S. - Special Tax Havens - Countries that impose all or most of the usual taxes, but either allow special concessions to special types of companies (such as a total exemption form tax on shipping companies, or movie production companies) or allow very special flexible corporate arrangements offered by Liechtenstein. To understand the precise role of tax havens, it is important for you to distinguish two basis sorts of income: (1) return on labor and (2) return on capital. The first kind of return is what you get from your work: salary, wages, fees for professional services, and the like. The second kind of return relates, basically, to the return from your investments: dividends on shares of stock; interest on bank deposits, loans and bonds; rental income; royalties on patents. It is the second kind of income, income from an investment portfolio, which tax havens are useful for. Forming a corporation trust in a tax haven can make the second form of income totally tax free, or taxed so low that you will hardly notice. Certain types of businesses can be effectively based in tax haven. If you publish a newsletter, for 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. If your income comes form copyright royalties, perhaps on the computer program you invented, the Netherlands is famed as a base for sheltering royalty income.


With the financial year coming to an end, taxpayers would be scrambling to invest to get maximum benefits. However, before rushing to do so, they should be aware of all the sections that allow advantages. Here's some help. Section 80C The most important section that saves you a lakh every year. Ideally, the right time to invest in instruments under this section is the first week of April and, not February 2009 or March 2009. There are several reasons for this. The most vital being, the interest that will be earned on returns on the investment for the entire year and yet, tax saving will occur on the entire amount. For example, if a taxpayer had invested Rs 70,000 in his public provident fund before April 5, he would earn 8 per cent tax-free interest of Rs 5,600 for the entire 2009. If the same money is invested in the last week of March, there would be no income for the financial year 2008-09. The second important aspect of tax related investments is the choice of the investment instrument. For tax payers in the highest tax bracket of 30 per cent (income over Rs 500,000), 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. Yet another attractive instrument under Section 80C is Equity Linked Savings Scheme over Infrastructure related bonds or IPOs. ELSS offers tax-free returns compared to taxable returns of Infrastructure bonds. Hence, the yield higher comparable post-tax returns. 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. In another words, ELSS offers triple benefit. First, the tax deduction at the time of investment (this could be as high as Rs 34,000 on an investment of Rs 100,000 for a taxpayer). Two, the income during the tenure being exempt under section 10(35). Finally, the entire amount on withdrawal after three years, including the surplus over the initial investment of Rs 100,000, is completely tax-exempt. Section 80D There is yet another tax benefit, which could be explored by a taxpayer in the higher brackets. This section permits deduction up to Rs 15,000 per year for medical insurance premium on a policy covering the tax payer, the spouse, the dependent parents and children. For senior citizens, the deduction can go up to Rs 20,000 per year. Insurance companies have come up with several innovative policies under section 80D that could be considered. Section 80E Taxpayers, who are going for higher education, can avail of a deduction under Section 80E for interest payment on an education loan. There is no ceiling on the quantum of deduction, since the deduction is linked

to the interest payable on such loans. This deduction is linked to the year the repayment of loan starts and is available for eight succeeding assessment years.

Section 80GG Finally, a deduction under section 80GG, in respect of rent paid for residential house. This is one deduction, which many tax payers are not aware of. The deduction is available to any individual, 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 2,000 per month over the actual rent paid, whichever is lower.



A tax haven is a foreign country or dependency that has a series of unique characteristics, the primary one being relatively lower tax rates in comparison with other countries. In fact, many tax havens impose no taxes at all on income earned by foreign individuals. Bank secrecy and strict privacy laws are other important characteristics of tax havens. In fact, in some tax havens there are prison sentences for anyone revealing private financial information. In the US, 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." The IRS itself defines at least 30 jurisdictions around the world as tax havens, including Austria, the Cayman Islands, Hong Kong, Liechtenstein, Panama, Singapore and Switzerland and lesse



I have prepared the report of Tax havens with the help of following reference book and websites. How to save Tax haves-2008/2009 Website: 1. 2.