TAX HAVENS

 A country that offers foreign individuals and

businesses little or no tax liability in a politically and economically stable environment.
 Tax havens also provide little or no financial

information to foreign tax authorities.
 Individuals and businesses that do not reside a tax

haven can take advantage of these countries' tax regimes to avoid paying taxes in their home countries.
 Tax havens do not require that an individual reside in

or a business operate out of that country in order to benefit from its tax policies.

TAX HAVENS
 Tax havens are countries with low corporate income

tax rates and low withholding tax rates on passive income.
 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.

TAX HAVENS
 In its December 2008 report on the use of tax havens

by American corporations, the U.S. Government accountability office was unable to find a satisfactory definition of a tax haven but regarded the following characteristics as indicative of it:  nil or nominal taxes;  lack of effective exchange of tax information with foreign tax authorities;  lack of transparency in the operation of legislative, legal or administrative provisions;  no requirement for a substantive local presence; and  self-promotion as an offshore financial centre.

TAX HAVENS
 Tax havens were once useful as locations for a MNC

to establish a shell company.
 However, pressure from foreign governments that

want to collect all the tax revenue they believe they are entitled to has caused some tax haven countries to sign tax information exchange agreements (TIEAs) and mutual legal assistance treaties (MLAT) that provide foreign governments with formerly secret information about investors' offshore accounts.
 The Tax Reform Act of 1986 greatly diminished the

need for and ability of U.S. corporations to profit from the use of tax havens.

TAX HAVENS
 Most tax havens have a double monetary control

system which distinguish residents from non-resident as well as foreign currency from the domestic one. In general, residents are subject to monetary controls but not non-residents. A company, belonging to a nonresident, when trading overseas is seen as nonresident in terms of exchange control.
 It is possible for a foreigner to create a company in a

tax haven to trade internationally; the company‟s operations will not be subject to exchange controls as long as it uses foreign currency to trade outside the tax haven.

 Tax havens usually have currency easily convertible

or linked to an easily convertible currency. Most are

TAX HAVENS
 Reasons for nations to become tax havens:
 Some nations may find they do not need to charge as

much as some industrialized countries in order for them to be earning sufficient income for their annual budgets.
 Some may offer a lower tax rate to larger corporations,

in exchange for the companies locating a division of their parent company in the host country and employing some of the local population.
 Other domiciles find this is a way to encourage

conglomerates from industrialized nations to transfer needed skills to the local population.
 Some countries simply find it costly to compete in many

other sectors with industrialized nations and have found a low tax rate mixed with a little self-promotion can go a long way to attracting foreign companies.

TAX HAVENS
 Many industrialized countries claim that tax havens

act unfairly by reducing tax revenue which would otherwise be theirs.
 Many tax havens are thought to have connections to

"fraud, money laundering and terrorism.
 While investigations of illegal tax haven abuse have

been ongoing, there have been few convictions.
 Various pressure groups also claim that money

launderers also use tax havens extensively, although extensive financial and know your customer regulations in tax havens can actually make money laundering more difficult than in large onshore

CONTROLLED FOREIGN CORPORATION
 Controlled foreign corporation was created under the

“TAX REFORMS ACT OF 1986” in order to create a new type of foreign subsidiary.

 It is a corporate entity that is registered and conducts

business in a different jurisdiction or country than the residency of the controlling owners. Control of the foreign company is defined, in the U.S., according to the percentage of shares owned by U.S. citizens.

CONTROLLED FOREIGN CORPORATION
 Controlled

foreign corporation (CFC) laws work alongside tax treaties to dictate how taxpayers declare their foreign earnings. A CFC is advantageous for companies when the cost of setting up a business, foreign branches or partnerships in a foreign country is lower even after the tax implications, or when the global exposure could help the business grow.

 The tax treatment is much less favorable in case of

„Controlled Foreign Corporation‟. The result is that the foreign tax credits are unlikely to be completely used.

CONTROLLED FOREIGN CORPORATION
 The CFC structure was created to help prevent tax

evasion, which was done by setting up offshore companies in jurisdictions with little or no tax. Each country has its own CFC laws, but most are similar in that they tend to target individuals over multinational corporations when it comes to how they are taxed. For this reason, having a company qualify as independent will exempt it from CFC regulations.

CONTROLLED FOREIGN CORPORATION
 Countries differ in how they define the independence

of a company. The determination can be based on how many individuals have a controlling interest in the company, as well as the percentage they control. For example, minimums can range from fewer than 10 to over 100 people, or 50% of voting shares, or 10% of the total outstanding shares.

FOREIGN SALES CORPORATION
 A defunct provision in the U.S. federal income tax

code which allowed for reduction in taxes on income derived from sales of exported goods.
 The code required the use of a subsidiary entity in a

foreign country which existed for the purposes of selling the exported goods.
 The FSC evolved from 1971 tax legislation which

provided benefits for domestic international sales corporations.

FOREIGN SALES CORPORATION
 A foreign sales corporation is a foreign corporation

established as an affiliate of a U.S. corporation for the purpose of buying from a U.S. corporation property for use or resale abroad.
 They can be used to lower taxes paid by the U.S.

MNC in two ways.
 A portion of the total foreign trade income of a FSC is

exempt from U.S. taxation (the remaining portion is fully taxable).  The second benefit is that the transfer price between the FSC and the U.S. MNC does not have to be an “arms length” price. Transfer pricing can be used to shift income between the FSC and the U.S. MNC

FOREIGN SALES CORPORATION
 The tax provision was disputed by several countries

on the grounds that is constituted an export subsidy that was not allowed under a certain international trade treaties. The foreign sales corporation was eliminated by the Extraterritorial Income Exclusion Act in 2000 which introduced new rules for income not subject to U.S taxation.