Tax haven refers to the countries where tax levied is just negligible. The concept of tax haven dates back to the 1920s, where only Switzerland, Panama, and Liechtenstein were the only tax-havens. And now, there are more than fifteen tax haven countries in the world.
Some of these are –
a. The Cayman Islands
b. Hong Kong
c. The Bahamas
e. The British Virgin Islands
Did you know – Amazon did not pay any tax in the year 2017 and 2018?
Apple made profits of $74 billion from 2009-2012 on worldwide sales (excluding the Americas) and paid virtually nothing in taxes to any country.
How is this possible you may think? When other ordinary people all over the world are toiling all day. At the end of every year, a huge portion of their hard-earned money is taken away from them. How come Amazon got away so effortlessly?
Well, the answer is very simple – through a tax haven. Though tax credit is also the reason. But, in this blog, we will mainly talk about tax haven and how big corporations transfer their profit. All these efforts are done just to avoid tax systems in their home countries.
These huge tech giants are very smart and resourceful. Companies like Amazon, Google, Facebook, Microsoft, and Flipkart take the advantage of tax haven countries to avoid tax.
Let’s learn more about tax heaven countries in detail.
Features of a Tax Haven country
- NOMINAL OR NO TAX – Tax haven countries are famous for offering negligible and no tax policies to foreign businesses. In these countries companies usually come to escape the rigorous taxation systems of their own countries. They even provide tax rebates on already negligible tax percentages.
- NO EXCHANGE OF INFORMATION – It is very rare for the government of the tax haven to share personal financial information with foreign tax authorities. This is due to the laws or practices that prevent foreign tax authorities from inspecting such data.
- LACK OF TRANSPARENCY – There is always something extra with a tax haven. Legislative, legal and administrative systems are unpredictable. There is a possibility of secret rulings by some secret manager. Even, some secret negotiations on tax rates are left opaque for others.
How does tax haven work?
Suppose you have a business; it’s reaching its boom. You are earning loads of money but the taxation in your country is a bummer. Like in India, tax charges can go as high as 40%. In such cases, if you want to save your tax costs, there is one thing you might do. You can open a subsidiary of your business in a tax haven country. Like Cayman Island. Then transfer all your assets in its name. Also, perform all your services in the name of your subsidiary company and not in the name of your parent company.
Now you are saved from this cruel taxation system. With just the initial investment amount which I am sure will be less than the tax amount, you are saved from paying tax in millions. Such a system of tax avoidance is totally legal.
What is in it for the tax haven countries?
These countries take a very small amount of tax from corporates. Then how do they manage the spending on development? What are they gaining from attracting corporates? Aren’t they in any kind of loss?
Now, the answers for all these questions are as follows:
- Increase in employment by inviting huge corporate businesses.
- Despite the fact that most offshore financial centers have no corporate income tax, their governments still profit financially from having hundreds of companies registered there. This is because tax haven countries normally charge all newly formed business entities, a registration fee. In addition, each year, businesses must pay a renewal fee to the government.
- They charge other indirect taxes like custom duty, and that too on a very high percentage.
- Several tax havens have a thriving tourism business. It attracts hundreds of thousands, if not millions, of visitors each year. In the form of exit taxes, this high level of tourism provides an additional cash source for several of these countries. A departure tax is something which people give upon leaving the country.
In conclusion, unlike other countries, tax haven countries abstract money in a very unconventional way. To compensate for the loss of potential income tax revenue, their governments collect annual registration fees from incorporated firms. They also charge a huge customs duty on imports’ bulk.
Impact of tax haven on the world economy
According to the estimates, tax havens cost governments between $500 billion and $600 billion per year. It is a huge loss in corporate tax revenue through legitimate and illegal means. Low-income economies account for about $200 billion of that lost revenue. A bigger share of GDP than advanced economies. Moreover, they receive more than the $150 billion or so in foreign development assistance each year. In 2017, Fortune 500 businesses alone retained an estimated $2.6 trillion offshore. And these figures are a minor portion of the total. Tax havens are frequently detrimental to developing economies. It is terrible for the economy when multinational corporations evade paying taxes in developing countries. Tax revenue accounts for a major portion of the economy in emerging countries. As a result, instead of the country it actually belongs to, tax money is diverted to tax havens.
The tax which could have been used up in making schools, colleges, roads, etc. is all gone. It is hard for the whole country. But it is harder for underdeveloped and developing countries. It’s like the citizens as well as the government of such countries are robbed of their money by some Richie Rich people to become richer. Seriously, who is benefiting here? These multinational companies enter a country. They sell their products, increase their customer reach, and do not even pay the rightful tax amount. Just because our international law allows this.
This whole system of transferring your profit into tax havens is totally legal, but is it ethical?
Tell us about your views in the comment box.
Also read: SIP: The Power of Investing
Reference article – Tracking Global Tax Haven