Arguments in Support of Tax Havens - Report Example

Tax Havens Name: Tutor: Course: Date: INTRODUCTION A tax haven is a country, a state or a territory where some taxes are charged relatively lower or not charged at all. Corporate entities or individuals find it appealing to set up shell subsidiaries or relocate to areas where there are reduced or no taxation relative to distinctive foreign taxation. This produces a scenario where governments compete among themselves. Different authorities tend to shield various types of taxes for various categories of companies or people. Different scholars have come up with various definitions of tax havens. What makes an area to be a tax haven is the presence of a composite tax structure deliberately established to exploit, and to take advantage of international demand for engagement in tax evasion Tax haven is a country that provides foreign businesses and individuals with minimal or no tax liability in an economically or politically stable environment. Tax havens offer minimal or no financial information to overseas tax authorities. Businesses or individuals that which do not exist in a tax haven can exploit opportunities of the tax regime of these countries to evade paying taxes in their native countries. Tax havens does not require that one should live in or a business to carry out its operations outside a country so as to get a benefit from its tax policies According to Organization for Economic Co-operation and development (OECD, 2012), the following factors have to be considered so as to determine whether a jurisdiction is a haven Nominal or nil taxes: tax havens charge none or minimal taxes in some special occasions and offer themselves as a place where those who are not residents can evade high taxes in their residential countries Lack of transparency: absence of transparency in the operation of legal, legislative or administrative is another way of identifying tax havens. Preservation of personal financial position: Tax havens have administrative practices or laws through which individuals and businesses can take advantage over strict rules and other shields against inspection by overseas tax authorities. This stops transmission of information concerning tax payers who are the beneficiaries of low tax jurisdiction АRGUMЕNTS IN SUРРОRT ОF TАХ HАVЕNS There has been several arguments concerning the appropriateness of tax and many scholars have been for and against the issue of tax shield and tax have. During the time of Thatcher and Reagan, several governments having competing to reduce the taxes and reform the entire tax regime. Currently, the leading personal tax is averaged at around 40% where the corporate rates have been reduced up to 27%. This tax reduction has been caused by majorly the globalization but not ideology. Several governments are reducing the taxes in fear that investments and jobs will run away to national borders. Therefore, tax havens have provided safe refuge for those who want to run away from confiscatory tax therefore playing a positive role in the development of a country. The law makers have concluded that it is better to earn revenue with average tax rates than to impose high rate of taxes and lose everything (Desai, 2013) Tax havens have attracted many investors into the country by adjusting their tax policies. For instance, USA is considered one of the leading tax haven since it does not tax capital and interest by foreign companies and people who invest in America. In addition, corporate tax structures of America such as Nevada and Delaware companies are the leading vehicles for the foreigners to manage their investments in the country. If at all many nations enforce tax legislations that favor foreigners, it is more likely that large share of capital will flee into their countries Finally, tax havens play an important part in protecting people who are subjects to ethnic, religious, political, sexual, or racial persecution (Henry, 2012). Most of the population in the world lives in regimes that do not have enough protection of human rights, and most people who own some assets are targeted by the oppressive governments. Tax havens have enabled small countries to compete favorably with bigger nations, formulate advanced tax laws and accumulate enough capital. Furthermore, it has assisted in enhancing economic growth in the country. It is as a result of this that Britain was advised not to do away with tax havens but instead find ways of emulating them. Despite the challenges that faced tax havens in 2008, they are working hard to ensure that there is enhanced economic growth. In order to enhance the performance of tax havens, those interested in becoming tax havens should understand the nature of tax havens and promote financial openness so as to curb corruption. All these can be realized through establishment of transparency initiative so as to ensure high level of secrecy and good governance. АRGUMЕNTS AGAINST TАХ HАVЕNS On the other hand, tax havens have been criticized by those who are against. It has been realized that most of the government decline tenders from offshore entities. These tenders include health authority, civil engineering, civil contracts and education. This clearly shows that those investors whose business are majorly based on these tenders cannot have the opportunity to benefit from these tenders that can freely use the tax havens (Desai, 2013) Another major setback of tax haven is that it is difficult to identify a suitable financial center. Businessmen are always advised to look for good consultancy services before making a choice of a financial center that is suitable to offer protection for their assets and fiscal requirements. Moreover, tax havens rarely develop since most of the decisions made come from one’s own home country. These decisions are communicated later through lawyers, accountants and bankers. It can therefore be deduced that the flow of investors in certain country is a clear indication of importation of skill and development (JG., 2012). Some of the developed nations argue that tax havens have some effects on the economy since they distort patterns of investments, facilitate corruption and embezzlement of funds and also distort accumulation of funds. As a result of this, several developing countries continue to depend upon the developed countries instead of focusing on creating their democratic states and establishing their economic stability. Furthermore, tax havens prevent the existence of a democratic government since they restrict the access of vital information that can be used in business. It is therefore clear that tax havens do not only challenge the social stability but also the global economy Although tax havens have played a critical role in the developments of small states, it has also caused more harm than good to the poor states. Some people have reported that tax havens are full of unfairness and injustice since their main interest is to frustrate the ordinary citizens. Tax havens frustrate the common citizens by forcing them to meet the bills of multinational corporations. It is as a result of tax injustice that saw the bankruptcy of tax havens in 2008. In addition, derivative trading and off-balance sheet lending resulted to the bankruptcy of tax havens in 2008 which later promoted the economic recession (Desai, 2013). Corruption has been one of the hindrances on the performance of tax havens since this made them loose a lot of money in 2008. The bank accounts of most of the tax havens consisted of bribery, terrorism, drug dealing, illegal betting and money laundering. There were a lot of plunders that involved leaders like Gaddafi, Mubarak and Ben Ali. Most people do not understand the need of paying rates so as to keep unidentified bank accounts. All the actions made several individuals to move their funds to other places like Caymans, Turks and Caicos Poor leadership is one of the factors that led to the collapse of tax havens in 2008. Most of the leaders of the tax havens did not have enough insight about the value of promoting economic growth but instead were interested in satisfying their own self interest. Most of these directors did all these by exploiting the poor nations and that is the reason as to why tax havens have been regarded as the main sources of unfairness and are designed to benefit only developed countries. Despite the exploitation of poor countries, the directors also misappropriated the tax haven funds therefore leading to bankruptcy (Dharmapala, 2008). Tax havens are believed to have to have reduced the effectiveness of marginal rate of capital tax thus, creation of investments and savings. Because of taxes that accompany business operations in tax, havens have smaller rates. Businesses that are in this state can freely access public goods in their native countries. As a result of this, the base reduces for taxation for those who are not havens. This lure the government to shift the tax burden on tax so as to increase the revenues. The shift factors go from mobile factors to those immobile i.e. property, consumption and labor. Therefore, progressivity and redistribution is ignored. This is a major setback of tax haven in a certain system of a country. One of the reasons to financial distortion is the idea of tax havens. This can be indirectly stimulated distortions and flow of investments in the international trade pattern and welfare. There is an assumption that a state or a country where tax haven exist may run shot of material that boosts investments therefore leading to high output level and also net exports. This is directly opposite with non-haven countries which have a large number of labor forces and strong business sector (Clark, 2012). There is large financial capital as compared to resources which are often limited. It has been argued that capitals in the tax havens have illegality element especially when it comes to transactions. High secrecy in tax havens has prevented other nations from knowing when they are gaining or losing while investing in tax havens. Countries that have good governance usually benefit from being tax havens than poorly managed states since they are able to attain high flow of investments and economic stability. This therefore explains some of the reasons as to why small countries do not want to be tax havens. Small countries have realized that venturing into tax havens could lead to economic instability. In order to ensure good governance of tax havens, states are required to create programs where citizens can have enough information on different political issues. Furthermore, nations should have good governance institutions and flexible public servants. Nevertheless, there has been high level of inconsistencies in the governance of tax havens. Several scholars have argued that tax havens have been misused by most investors to hide their assets. Investors also use tax havens to launder funds, evade taxes and avoid financial commitments (Clark, 2012). Financial transparency is one of the most important factors to small countries that could like to get some benefits from tax haven. On the contrary, corruption has been among the leading challenges facing small countries. There has been no transparency in the way money flow between companies and governments. Therefore countries that want to be tax havens must establish transparency initiatives in the industries so as to promote transparency and accountability. Many countries compete amongst themselves by reducing their tax rates so as to attract foreign investments. The reductions of these taxes have strained the government expenditure. Even though tax havens have attracted foreign investors and ensure mobility of investments, unnecessary competition has been experienced due to poor tax policies and structures put by successive governments. Conclusion The extents to which tax havens benefited small countries depend upon various factors. One of the factors is how tax haven is governed. There are several characteristics that distinguish tax haven and non-tax haven. Several researches have shown that tax havens have assisted several states in ensuring that there is accountability, control of corruption, rule of law, political stability and government effectiveness. Tax havens have succeeded in benefiting small countries as a result of good governance. There have been few cases of poorly governed tax havens in small states due to the fact that small countries have political patterns totally different from those of developed countries. Tax havens have been proved to perform highly under the control of the World Bank. References Cameron, D., 2011. Tax avoiding foreign firms. NY: Reuters. Clark, A., 2010. Welcome to tax-dodge city. London: The Guardian. Clark, A., 2012. Tax haven clampdown yields cash but secrecy still thrives. NY: Reuters. Desai, F.a.H., 2013. The demand for tax haven operations. Journal of Public Economics, 90(2), p.514. Dharmapala, D.u.H.J..J.R., 2008. Which Countries Become Tax Havens. NY: Sage. Doggart, C., 2002. Tax Havens and Their Uses. Cambridge: Cambridge university. Henry, J.S., 2012. Offshore Financial Centersy. International Monetary Fund background , 2(1), pp.23-26. JG., G., 2012. Tax Havens: International Tax Avoidance and Evasion. London: Sage. Organization for Economic Co-operation and development, 2012 Read More