TAX HAVENS

By Ranjeet R Iyer

Lets clear some basics before we actually proceed into the topic.

OFFSHORE & ONSHORE BANKS

"Onshore" - a bank that is located in your country of residence and is subject to the rules and regulations of that country. "Offshore" - a bank located in a foreign country with an obtained license. A bank's location in an offshore zone does not necessarily make it an offshore bank. Offshore banks obtain special licenses that deem them offshore entities.

EURO CURRENCY TRANSACTIONS

Transactions between 2 countries through a currency which is non-resident to both. E.g. When India and Bangladesh effect a transaction in dollars (non-resident to both), then it is known as Euro Dollar transaction

EURO AS A CURRENCY

The Euro as a currency is the official currency of the euro zone i.e. 17 of the 27 member states of the EU. The euro is the second largest reserve currency as well as the second most traded currency in the world after the United States dollar.

EURO MARKETS AND ITS RISE

Started with Euro-dollar market. Euro markets are those where currencies are deposited outside their country of origin. 1950s-Cold war between US and USSR. USSR feared US of having these assets frozen, so deposited outside. The Soviet Union deposited US dollars earned from oil revenue outside the US. Dollars were shifted to Moscow Narodny Bank, a Sovietowned bank with a British charter.

And then this British bank would deposit the money in US bank. There was no room for suspicion as to whose money was these! February 28, 1957, the sum of $800,000 was transferredfirst euro dollars! Eurodollar deposits were a cheaper source of funds because they were free of reserve requirements and deposit insurance assessments.

OTHER FACTORS FOR GROWTH OF EURO MARKETS

US economy declined during the Vietnam war. Vietnam war: North Vietnam v/s South Vietnam from 19551975. Soviet Union supported North Vietnam and US supported South Vietnam. Eventually North Vietnam won the war. In the post-war era, Americans struggled to absorb the lessons of the military intervention. Between 1965 and 1975, the United States spent $111 billion on the war.

This resulted in a large federal budget deficit. And due its economy decline, the US introduced many regulations to prevent outflow of capital. These were: Regulation-Q ceiling on interest rates. Regulation-M reserves against deposits. Insure deposits raised cost of deposits. Interest equalization tax for non-residents.

PETRO-DOLLARS

It is US $ earned by a country through sale of petroleum.

Coined by Ibrahim Oweiss to term OPEC countries. OPEC- Organisation of Petroleum Exporting Countries. OPEC was formed in 1960 at the Baghdad Conference in Iraq.

The OPEC countries were small economies with small absorbing power. To they lent the surplus funds to petroleum importing countries facing BoP deficit. These transactions were invoiced in USD i.e. US$, so the earnings were termed as Petrodollars.

So euro transactions became more intensified as dollar was exchnaged among countries which had different currencies.

BLACK MONEY

Any money that a person or organization acquires illegally, as by a means that involves tax evasion. 2 types: Retail and Wholesale! Black money has an adverse effect on a countrys economy. It can easily destabilize the financial markets of developing countries. Black money leaves a country by many ways and hawala is one such way.

BLACK MONEY AND INDIA

Indian black money is also transferred physically abroad through special flights. Source: CEO of a Mumbai based equity firm. Indias biggest tax offender Hassan Ali was arrested earlier this year. He was believed to have stashed abroad a sum of $ 8 bn i.e. Rs. 4 lakh crores!!! German government had passed on the details of eighteen Indians who had stashed their alleged ill-gotten wealth. Source: Tehelka.

DID YOU KNOW?

Indians have more undeclared money hidden away in secret accounts than rest of the globe combined! The estimate is placed at $1,456 bn or $1.4 tn i.e. Rs. 7280000,00,00,000 (Rs. 72.8 lakh crores!)

Source: Swiss Banking Association Reports Appeared in Business Line pg-8: 24th Oct 2011

THE ACTUAL TOPIC BEGINS NOW

TAX HAVENS

Definition: country or region which for both, residents and non-residents has nominal or zero income tax rates. E.g. Andorra, Bermuda(U.K), Cayman Islands(U.K), Lichtenstein, Switzerland, Netherlands, Uruguay, Ireland, Monaco, Nevis, Barbados, Seychelles etc.

CHARACTERISTICS OF TAX HAVENS

Low income tax rates.
High degree of financial freedom. Strict secrecy. Small countries.

ORIGIN AND GROWTH OF TAX HAVENS

Mainly after WW-2. Whole of Europe witnessed high-tax rates. Switzerland and Lichtenstein- neutrals. Switzerland- continued low tax rates. Switzerland and Lichtenstein- the first tax havens. Biz. Corp. found tax havens attractive. Reduced tax liabilities.

TYPES OF TAX HAVENS

Tax Havens

Zero (or no)

Low

Special

E.g. Bahamas, Bermuda.

E.g. Barbados, Cyprus.

E.g. Austria, Netherlands.

1. ZERO OR NO TAX HAVENS

No tax of any sort on any sort of income say for personal income, corporate income, estate, capital gains etc.

Fees is charged only for regulatory services.

E.g.: Bahamas, Cayman Islands and Bermuda.

2. LOW TAX HAVENS

Some tax on income of an individual or a corporation with exceptions to foreign sources. Attractive to non-residents. Some have information exchange treaties with U.S.

E.g.: Barbados, Cyprus etc.

3. SPECIAL TAX HAVENS

May have high taxes and other taxes imposed by other countries. But special industries are granted exemptions such as International Business Corporations. E.g.: Austria, Lichtenstein, Netherlands etc.

UTILITY OF TAX HAVENS

Wealth protection.
Protection against double taxation.

International Investments.
Asset protection. E-Commerce. Exemption from pinching corporate tax.

DISADVANTAGES OF TAX HAVENS

Money laundering. No accountability.

Risk of reputation.
Pitfalls. Not suitable for long-term purposes. Countries losing precious tax!

CORPORATES USING TAX HAVENS

Google Microsoft Barclays HSBC RBS and many

Source: http://www.huffingtonpost.co.uk/2011/10/11/uktax_n_1004783.html

CONCLUSION

Tax Havens may be good for individuals and corporate, but it is bad for a government! It also increases criminal activities.

BIBLIOGRAPHY (1/2)

http://en.wikipedia.org/wiki/Tax_haven http://www.offshorecompany.co.uk/taxhavens/benef its.htm http://www.financialtaskforce.org/2010/07/21/busine ss-against-tax-haven-abuse-unfair-advantage-thebusiness-case-against-overseas-tax-havens/ http://www.wisegeek.com/what-is-a-tax-haven.htm International Finance authored by Govind Sovani. http://archive.redstate.com/stories/economy/the_be nefits_of_tax_havens

BIBLIOGRAPHY (2/2)

Images from Google. Several other websites visited for consolidating and verifying information.
And of course a lot of self knowledge!