Dr.

SHAKUNTALA MISRA NATIONAL REHABILITATION UNIVERSITY

Lucknow

Faculty of Law

ASSIGNMENT ON

[Tax Havens]

( International taxation: Emerging jurisprudence)

Submitted by

Rupesh yadav

( 7th Semester)
Academic Session: 2021-22

Under the Supervision of

Mis. Sushmita Rajput

Faculty of law

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ACKNOWLEDGEMENTS:-

First and foremost, I am thankful to Mis. Sushmita Rajput for allotting me the topic “ Tax
Havens”. She has been very kind in providing inputs for this work, by way of suggestions
materials.
I would also like to thank my dear colleagues and friends in the university, who have helped
me with ideas about this work. Last, but not the least I thank the University Administration
for equipping the university with such good library and internet facilities, without which, no
doubt this work would not have taken the shape in correct time.

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INDEX

1. Introduction
2. History of Tax Haven
3. Tax Haven
4. Criteria for identifying tax haven
5. Method
6. How does entity make use of tax haven
7. Tax havens used by indian entities
8. Tax Haven countries
9. Conclusion
10. Bibliography

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Introduction:-

Countries like USA. India, Russia, China, etc. are considered to be the largest economies in
the world, however, it may come as a surprise to some that some of the smallest countries,
like Mauritius, Cyprus and Malta attract huge amounts of foreign investments from these
countries.
This is because these countries have such taxation regimes, that entities can reduce their tax
liability to almost nil. Just by transferring their income to related entities in such nations.
Such nations are known as tax havens.

History of Tax Havens:-

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
specialising 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 Centers 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

Tax Havens:-

A tax haven is a country that offers foreign businesses and individuals minimal or no tax
liability for their bank deposits in a politically and economically stable environment. They
have tax advantages for corporations and for the very wealthy, and obvious potential for
misuse in illegal tax avoidance schemes. Companies and wealthy individuals may use tax
havens legally as a means of stashing money earned abroad while avoiding higher taxes in
the U.S. and other nations.
Tax havens may also be used illegally to hide money from tax authorities at home. The tax
haven can make this work by being uncooperative with foreign tax authorities. In recent
times, tax havens are under increasing international political pressure to cooperate with
foreign tax fraud inquiries.

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Broadly speaking, tax havens are jurisdictions that have very low taxes and no residency
requirements for foreign entities and individuals willing to park money in their financial
institutions. A combination of lax regulation and secrecy laws enable corporations and
individuals to screen some of their income from tax authorities in other nations. The Tax
Justice Network maintains a Corporate Tax Haven Index that tracks the jurisdictions that it
says are “most complicit” in helping multinational corporations evade taxes. As of 2021, the
worst offenders were the British Virgin Islands, the Cayman Islands, and Bermuda.

LAID DOWN CERTAIN CRITERIA FOR IDENTIFYING TAX

HAVENS:

1.NIL OR NOMINAL TAX RATES.

2.INADEQUATE TRANSPARENCY IN DEALINGS AND EXCHANGE OF

INFORMATION.

3.LACK OF SUBSTANTIAL ACTIVITIES.

Method:-

The methods followed in doing business through tax heavens, broadly, are as under:

Personal residency: 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, capital gain tax and inheritance tax. Individuals who are unable to return to a
higher-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 utilizing 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
inheritance tax.

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 minimize 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

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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 schemes 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.

HOW DOES AN ENTITY MAKE USE OF A TAX HAVEN?

A shell company is one that exists legally, but only on paper, similar to a shell, which is
hollow on the inside. The OECD defines it as “A shell company is a firm that does not
conduct any operations in the economy (other than in a pass-through capacity), but it is
formally

Registered, incorporated, or legally organized in the economy. This leads to the question, as
to why such a company would be created. If it does not provide any real contribution to the
functioning of a company.

These shell companies are used mainly to transfer the income earned by the parent entity in
another country, one which Usually charges a higher rate of tax. This can best be explained
through an example.

Let’s say, there is a company called Zamadon inc. (hereinafter Zamadon USA), registered in
the USA. It earns a profit of $50 Billion in 2019. It has a wholly-owned subsidiary, with an
office in Cayman Islands, which is a well-known tax haven. This office is registered as
Zamadon Cayman Islands inc . (hereinafter, Zamadon Cayman Islands).For convenience,we
may assume that Cayman Islands is a totally tax-free nation.

In order to provide some functionality to Zamadon Cayman Islands, Zamadon USA sells all
intellectual property to Zamadon Cayman Islands. This is then licensed back to Zamadon
USA, for which Zamadon Cayman Islands charges $50 Billion. As a result, the entire income
of Zamadon USA is transferred to a jurisdiction which is totally tax free, thus saving them a
huge amount of money. This is basically how entities make use of tax Havens.

In reality however, the structure of the transaction is not that simple. These transactions are
almost always governed by a Multilateral Instrument between different countries, in order to

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prevent evasion of tax. Further, other considerations such as transfer pricing concerns, arm’s
length price, issues related to permanent establishment, etc. are also present in order to
prevent such gross evasion of tax.

WHAT ARE THE TAX HAVENS USED FOR BY INDIAN

ENTITIES?

1:MAURITIUS

2:BRITISH VIRGIN ISLANDS

3:CAYMAN ISLANDS

4:LUXEMBOURG

ARE TAX HAVENS LEGAL?

1.GLOBAL BLACK HOLES

Illegal systems designed to appease the wealthy,Rather than promote development

2-PIL=SOVEREIGNTY

Sovereign nation has the sole power to regulate its internal affairs and its legal system.Thus,
this system of creating a tax haven is not illegal by itself.

3-CREATING SC IS EASY

In the era of vast globalization, creating offshore shell companies is very easy, and many
corporations make use of such tax havens to shift

Their profits to such tax havens with the sole motive of evading taxes.

Tax havens countries:-

Switzerland

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Switzerland ranks number one in the list of top 10 tax havens. One-third of the world’s
private fortune resides in Swiss banks. Banking is the pillar of its economy – 11% of GDP in
2006 as against 5.8 percent in 1990. In Switzerland, bank secrecy is among the strictest in the
world. It is also because of the fact that the bank accounts operated in the country are also
managed and operated on a massive scale. The share of assets and investments made in
Switzerland by resident and non-resident clients is roughly equal. Various tax
exemptions/reductions are available to Swiss companies doing business abroad, or foreign
persons resident in Switzerland.

Germany
Germany has made easy for the people to open offshore bank accounts which led to the
increasing number of bank accounts opened by people so that they can evade their taxes but
the good thing is that the country has implemented more and more stricter policy to reduce
the problem. As per the Tax justice network report, Germany got a score of 669.8 for its
Financial Secrecy Index value, and a Secrecy Score of 57. It is the third world largest
exporter of goods having the largest economy in Europe.

Singapore
Singapore also was known as the lion city. Singapore is considered the best-suited option for
the opening of offshore bank accounts. This is one of the major reasons why Singapore was
graded with a Financial Secrecy Index value of 1,118 and a Secrecy Score of 71 by the Tax
Justice Network. Singapore has the world’s eleventh largest foreign reserve because of its
location, skilled workforce, low tax rates, advanced infrastructure.

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Conclusion:-

Efforts are being made by international organizations like the Organization for Economic Co-
operation and Development (OECD)and even countries to prevent tax evasion through
exploitation of international laws. The introduction of the BEPS Action Plan and consequent
amendment of DTAAS to form MLIs is a great step forward in preventing tax evasion.

However, while efforts are being made to curb the practice of Base Erosion and Profit
Shifting, it is very difficult to plug all the loopholes as the sovereignty of the nations cannot
be tampered with.

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Bibliography:-

• https://www.investopedia.com/terms/t/taxhaven.asp
• https://indianexpress.com/photo-news/india/panama-papers-india-full-coverage-names-list-
documents-companies/
•.https://www-indiatimes-
com.cdn.ampproject.org/v/s/www.indiatimes.com/amp/trending/social-relevance/best-tax-
haven-countries-in-the-world-543364.html?
amp_js_v=a6&amp_gsa=1&usqp=mq331AQKKAFQArABIIACAw%3D
%3D#aoh=16396241354049&referrer=https%3A%2F%2Fwww.google.com&amp_tf=From
%20%251%24s&ampshare=https%3A%2F%2Fwww.indiatimes.com%2Ftrending
%2Fsocial-relevance%2Fbest-tax-haven-countries-in-the-world-543364.html

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