Tax Havens of Offshore Financial Centers - Research Proposal Example

Running head: TAX HAVENS OR OFFSHORE FINANCIAL CENTERS TAX HAVENS OR OFFSHORE FINANCIAL CENTERS s Introduction Taxation has always been government's most potent way of generating revenue. It however remains a fact that tax, due to its forcible nature is never liked by many. This is where the idea of tax evasion, money laundering and all other forms of avoiding tax springs. There are numerous ways of utilizing the loopholes in the taxation process to your benefit. However a rather simpler or somewhat legal way is to utilize your capital in a tax haven. A tax haven can be simply be "An offshore tax haven is a nation or jurisdiction competing in an open market place for the business of 'mobile capital' by using attractive taxation regimes as a method to draw in business. You can have tax havens that charge virtually no tax at all or which just charge annual administrative sums of money for companies using its shores as a base for their operations, and you can have nations that simply charge a lower rate of taxation than competitor havens". (Barber, 2006) Background Recently some countries have emerged as evident tax havens and are attracting hefty capital inflow. Singapore, Hong-Kong, Barbdos etc are only a few to name. "In Asia, offshore interbank markets began to develop after 1968 when Singapore launched the Asian Dollar Market (ADM) and introduced the Asian Currency Units (ACUs). The ADM was an alternative to the London euro-dollar market, and the ACU rule enabled mainly foreign banks to engage in international transactions under a favorable tax and regulatory environment" (International Monetary Fund, 2000) Similarly in Europe, Luxembourg attracted investors from Germany, France and Belgium in the early 1970s (IMF, 2000) due to its low income tax rates, the lack of withholding taxes for nonresidents on interest and dividend income, and banking secrecy rules. On the same ground The Channel Islands and the Isle of Man provided very similar opportunities. Moreover Bahrain began to serve as a collection center for the region's oil surpluses during the mid 1970s, after passing banking laws and providing tax incentives to facilitate the incorporation of offshore banks. In the Western Hemisphere, the Bahamas and later the Cayman Islands provided similar facilities. Following this initial success by other countries, a number of other small countries tried to attract this business. Many had little success, because they were unable to offer any advantage over the more established centers. This did, however, lead some late arrivals to appeal to the less legitimate side of the business. "By the end of the 1990s, the attractions of offshore banking seemed to be changing for the financial institutions of industrial countries as reserve requirements, interest rate controls and capital controls diminished in importance, while tax advantages remain powerful. Also, some major industrial countries began to make similar incentives available on their home territory. For example, the U.S. established in 1981, in major U.S. cities, the so-called International Banking Facilities (IBFs). Later, Japan allowed the creation of the Japanese Offshore Market (JOM) with similar characteristics. At the same time, supervisory authorities, and to some extent tax authorities were adopting the principle of consolidation which reduced the incentives for banks to carry on business outside their principal jurisdiction. As a result, the relative advantage of OFCs for conventional banking has become less attractive to industrial countries, although the tax advantages for asset management appear to have grown in importance. In fact, reported bank intermediation on the balance sheet in IFCs has declined over the period 1992-1999, thus contributing to the overall decline in the share of bank cross-border assets intermediated through OFCs from 56 percent of total bank cross-border assets in 1992 to about 50 percent of total bank cross-border assets at end-June 1999. Following table shows a relative approach towards OFC." (IMF, 2000) Examples of Uses of Offshore Financial Centers (OFCs) Following are some ways OFC's are used. Offshore banking licenses: A multinational corporation sets up an offshore bank to handle its foreign exchange operations or to facilitate financing of an international joint venture. An onshore bank establishes a wholly owned subsidiary in an OFC to provide offshore fund administration services (e.g., fully integrated global custody, fund accounting, fund administration, and transfer agent services). The owner of a regulated onshore bank establishes a sister "parallel" bank in an OFC. The attractions of the OFC may include no capital tax, no withholding tax on dividends or interest, no tax on transfers, no corporation tax, no capital gains tax, no exchange controls, light regulation and supervision, less stringent reporting requirements, and less stringent trading restrictions. (Walter, 1991) Insurance companies: A commercial corporation establishes a captive insurance company in an OFC to manage risk and minimize taxes. An onshore insurance company establishes a subsidiary in an OFC to reinsure certain risks underwritten by the parent and reduce overall reserve and capital requirements. An onshore reinsurance company incorporates a subsidiary in an OFC to reinsure catastrophic risks. The attractions of an OFC in these circumstances include favorable income/withholding/capital tax regime and low or weakly enforced actuarial reserve requirements and capital standards. Tax planning: Wealthy individuals make use of favorable tax environments in, and tax treaties with, OFCs, often involving offshore companies, trusts, and foundations. There is also a range of schemes that, while legally defensible, rely on complexity and ambiguity, often involving types of trusts not available in the client's country of residence. Multinational companies route activities through low tax OFCs to minimize their total tax bill through transfer pricing, i.e., goods may be made onshore but invoices are issues offshore by an IBC owned by the multinational, moving onshore profits to low tax regimes. Tax evasion and money laundering There are also individuals and enterprises who rely on banking secrecy to avoid declaring assets and income to the relevant tax authorities. Those moving money gained from illegal transaction also seek maximum secrecy from tax and criminal investigation. Asset management and protection Wealthy individuals and enterprises in countries with weak economies and fragile banking systems may want to keep assets overseas to protect them against the collapse of their domestic currencies and domestic banks, and outside the reach of existing or potential exchange controls. If these individuals also seek confidentiality, then an account in an OFC is often the vehicle of choice. In some cases, fear of wholesale seizures of legitimately acquired assets is also a motive for going offshore. In this case, confidentiality is very important. Also, many individuals facing unlimited liability in their home jurisdictions seek to restructure ownership of their assets through offshore trusts to protect those assets from onshore lawsuits. Some offshore jurisdictions have legislation in place that protects those who transfer property to a personal trust from forced inheritance provisions in the home countries. (Financial Stability Forum's Working Group on Offshore Financial Centers Report (April 2000)) Objective The objective of this thesis is to elucidate some tax planning strategies used by international firms and to put more light on some illegal issues concern by OECD and G20 for tax evasion, money laundering and information sharing confidentiality. Scope The following tasks shall be taken by the thesis: 1. An overview of how Tax Havens work, including charts and references from financial institutions to vividly explain their working and strategies. 2. To describe the problems faced due to the competitive tax havens and offshore financial centers by the resident countries. The issues of capital flowing offshore. 3. Techniques used to evade tax and concern by OECD and G20. Including money laundering and other tax avoidance techniques. 4. The measures taken to curb such practices and make good use of tax facilities, and the future challenges by the OECD including: Recently OECD has put up the following future plan (OECD, 2009) 1. Achieving a swift and effectual execution of standard: Many of these commitments will require some legislative changes and also the negotiation of specific bilateral agreements in order to become successful and the OECD stands ready to assist jurisdictions in their implementation. 2. Speeding up the negotiations of tax information exchange agreements (TIEAs). Small tax havens lack the resources to enter into negotiations with a large number of countries. The OECD's2002 Model Agreement on Exchange of Information on Tax Matters sets out an option for multilateral rather than bilateral TIEAs that the OECD intends to explore over the coming weeks. The OECD is also examining how the Nordic experience of multilateral negotiations leading to simultaneous bilateral agreements could be adopted more widely. 3. Extending the scope and role of the OECD's action: The OECD Global Forum currently encompasses more than 80 jurisdictions and carries out self reviews and peer reviews to assess progress in implementation of the standard. The time has now come to re-examine the membership, the architecture and the role of the Global Forum in setting standards and evaluating progress. The Global Forum will undertake more robust reviews, to strengthen the implementation of the standard. Methodology: The methods best suited to thoroughly complete the report and also do justice to its content, would include gathering data from reliable resources. The data collected would be based on the objectives of the report and would be current. Moreover, point of view of different professional would be asked for and accounted in the report. This will give a fair idea of how a professional or a business man sees the OFCs compared to what the government has to say about it. Therefore governments' point of views regarding the OFC will be included. References Assessing offshore financial centers: filling a gap in global surveillance.. (2003, September 1). Finance & Development , 103. Barber, H. (2006). Tax Havens Today: The Benefits and Pitfalls of Banking and Investing Offshore. New York, NY: Wiley. Deneault., & Alain. (2007). Tax Havens and Criminology. Global Crime, 8(3), 260-270. Financial Stability Forum's Working Group on Offshore Financial Centers Report (April 2000) Garner, D. E., Mckee, D. L., & Mckee, Y. A. (2000). Offshore Financial Centers, Accounting Services and the Global Economy. Westport: Quorum Books. Offshore Financial Centers. (2001, February 1). FBI Law Enforcement Bulletin,The, 259. Tax Research UK What is a tax haven. (n.d.). Retrieved June 25, 2009, from http://www.taxresearch.org.uk/Blog/2007/07/23/what-is-a-tax-haven/ Walter, I. (1991). The Secret Money Market: Inside the Dark World of Tax Evasion, Financial Fraud, Insider Trading, Money Laundering, and Capital Flight. New York: HarperCollins. What is an Offshore Tax Haven. (n.d.). Retrieved June 25, 2009, from http://www.shelteroffshore.com/index.php/offshore/more/what_is_an_offshore_tax_haven/ Following G20 OECD delivers on tax pledge (2009, April). Retrieved June 25, 2009, from http://www.oecd.org/document/57/0,3343,en_2649_34487_42496569_1_1_1_1,00.html Top of Form Bottom of Form Read More