How Do Companies Use Tax Havens - Assignment Example

Title: Tax Havens Name Institution Date of submission What is a tax havens? Tax havens a system on a national level where states or countries use to avoid paying the international tax. Such systems have no transparent financial and tax systems. A tax haven has secrecy and often refuse to cooperate with other jurisdictions while exchanging information. There is a lack of a transparent system that encourages companies to evade paying taxes. Non- residents' escape from taxation but residents face full taxation (Palan, Murphy & Chavagneux, 2010). Addressing this system where the state or the country evade or avoid international tax through the use of tax havens has been proposed by many presidents in the world. Some initiatives have been taken by various institutions such as Organization for Economic Cooperation and Development (OECD) to address this concern. For example, in the United States, the anti-evasion provisions such as foreign tax provision and the Hire Act (P.L. 111-147) are used to address evasion from personal tax and corporate tax (Ceriani, 2015). There are three factors that identify a tax haven within a jurisdiction. The first one is nominal taxes. Tax havens impose nominal taxes that are ostensible to offer themselves a tax evasion strategy by non-residents. The second factor is the protection of financial information. There are laws that benefits individuals and business from rules against foreign tax authorities. The third factor is the lack of transparency. Some countries are not transparent, and it makes it impossible to apply efficient laws (Keats, 2012). Companies evade tax on income such as dividends, capital gains, and interest, by mainly refusing to report foreign earned income. Companies set up shell trust and corporations to channel funds into a foreign jurisdiction. A company that shifts it profits from a high-tax to a low-tax jurisdiction, reduces its taxes with minimal effect on aspects of the company (Ceriani, 2015). How do companies use tax havens? Debt and earnings stripping allocation, hybrid entities, and Check-the-Box It has come to notice that majority of the multinational enterprises like and Apple and Google are shifting their profit artificially from high-tax to low-tax control/jurisdictions through the allocation of debt and earnings. For instance, Starbucks Company can shift debt to high-tax control. In this case, the tax on the income to the company at the international level is deferred until the earnings/income is repatriated. Therefore, the income is paid to The US as dividend and thus avoiding the United States taxes Antoine (2002), refer to the act of deferring the income as Subpart F income. These are hybrid entities that have been treated differently with different jurisdictions to reduce international evasion. The new regulations introduced boosted the use of hybrids entities in the United States. For instance, the check-the-box regulation introduced in the late 1990s ensured that all firms paid taxes on their incomes. Foreign sources income in the United States pays very little tax. Also, the evidence indicates that the foreign firms try to shift their profits to evade taxes (Keats, 2012). Through transfer pricing Companies can also shift profits profit income from high-tax to low-tax control/jurisdictions through pricing of the products between the affiliates. During analysis, the properly reflected income of the company often has the same prices for the products sold by the related companies. When the affiliates lower the prices of the products in high-tax jurisdictions while raising the price of purchases, the income of the will is shifted. For example, the European countries are complaining about Google for shifting prices to the affiliates since it has evaded tax to up to about 12.5% (Antoine, 2002). Contract manufacturing Contract manufacturing happens when the location of a subsidiary company is in the low-tax country. For example, the Google Company have had many subsidiaries in the developing countries where they have low-tax jurisdictions. In this case, the subsidiaries contract with Google Company in the United States as a contract manufacturer so as to produce its products at a fixed mark-up. The success of this tax haven depends on the ability of the structure to qualify for an exemption (McDonnell, 2014). Cross crediting Multi-corporations in the United States receiving income from low-tax jurisdiction country can evade tax through cross-crediting. Cross crediting is possible through using excess foreign taxes on one type of income to offset the United States. The excess tax could be due on another income. For example, Apple Group can maximize the profits/benefits regarding the total limit of the foreign tax credit. This technique uses the excess credits to offset the United States tax due on the taxable income (McDonnell, 2014). The use of tax haven is not justified The use of tax havens is not justice for some reasons. One is that it helps those people who are rich to hide money that could have been useful in the development of schools, roads, hospitals and other public services. Tax evasion implies that the tax havens reduces the targeted revenue of a country. As a result, the government will not have enough money to finance basic services efficiently. Tax widens the gap between the rich and the poor havens. The poor pay all the taxes that is required while the rich saves all their money in offshore banks. The cost of livelihood becomes difficult for low-income earners as the rich who escape paying taxes determine the market prices. There is a wide gap that exist between the rich and the poor in the United States because of tax havens (Yoon Oh, 2014). Dictators exploit natural resources of developing countries. It was through tax havens that Equatorial Guinea had to suffer from massive exploitation by Nguema Obiang. He obtained his wealth through misappropriation, extortion, theft and embezzlement of public funds. Financial secrecy and unwillingness to share information subject unsuspecting nations to lose massively. To the exploiters, tax havens are justified to the exploited tax havens are not justified (McDonnell, 2014). Tax havens room for criminals to hide their dirty dealings. Offshore trust, companies, and foundations encourage tax evaders to engage in ill gains because they lack proper registration. For example the scandal of Bernie Madoff infamous Wall Street financier (Yoon Oh, 2014). Tax havens subjects the poor to pay taxes that could have been paid by the rich. SABMiller, for example, has 65 tax haven companies. The tax havens it a significant lead over the competitors. Sellers of SABMiller at a local stall pay more taxes as an income proportion. The only way the government can solve this is by strengthening legislation on tax in developing countries. This way developing countries will be able to deal multinational taxation. The government can as well introduce a unitary taxation. Multinationals, when taxed as a single unit, will eliminate profit shifting (Yoon Oh, 2014). Banks dodge rules and regulations. Shadow banking has flourished due to the emergence of new players in the financial system internationally. This type of bank failure is potential for an economic crisis that can damage the global scale. Statistics indicates that the amount of money located Dublin is channelled using obscure conduits amounting to 1.6 trillion euros, this is more than ten times the direct investment in Ireland. Tax havens undermine regulations. All banks require accounting standards. To prevent an economic crisis risk need to be audited by firms that are independent and should be assessed by a credit rating agency that is independent (McDonnell, 2014). REFERENCES Antoine, R. (2002). Confidentiality in offshore financial law. Oxford: Oxford University Press. Ceriani, V. (2015). The Fight against Tax Evasion and Avoidance. ECONOMIA PUBBLICA, (3), 201-209. doi:10.3280/ep2014-003011 Keats, R. (2012). A Canadian's best tax haven. North Vancouver, B.C.: Self-Counsel Press. McDonnell, S. (2014). Tax Havens and Sovereignty in the Pacific Islands by Anthony B Van Fossen. The Contemporary Pacific, 26(2), 563-566. doi:10.1353/cp.2014.0050 Palan, R., Murphy, R., & Chavagneux, C. (2010). Tax havens. Ithaca, N.Y.: Cornell University Press. Yoon Oh,. (2014). Tax Avoidance and tax evasion through tax haven entities. Journal Of IFA, Korea, 30(1), 137-177. doi:10.17324/ifakjl.30.1.201402.004 Read More