tax havens: current state, pros and cons by: maria gabriela calderon, arnaldo busutil and anturuan...
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Tax Havens: Current State, Pros and Cons
By: Maria Gabriela Calderon , Arnaldo Busutil and Anturuan StallworthApril 12, 2011
Tax Havens Overview
Tax Havens Defined:
Countries that levy low taxes or no taxes at all.Governments of tax haven countries compete with one another to gain customers.
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Tax Havens: Current State, Pros and Cons
Tax Havens Overview cont.
Characteristics:1) No taxes / nominal taxes
2) Defective transfer of communication with foreign authorities.
3) Lack of transparency
4) No requirement for a substantive local presence
5) Self-promotion as an offshore financial center – states that provide financial services to corporations are known as offshore financial centers.
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Tax Havens: Current State, Pros and Cons
Tax Haven Strategies
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1) Change official domicile location to offshore jurisdiction
Lower rate of taxation.
However, offshore companies often cannot do business within the domiciled location.
2) Offshore jurisdiction can offer a zero tax rate to the company or individual.
3) A ‘tax holiday’ is offered for a period of time.
After relocation the company is given favorable introductory tax rates.
Benefits of Tax Havens
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4 Frameworks:
1) Personal Residency - Relocation to low-tax jurisdictions. In most countries residence is the primary basis of taxation. Almost no tax haven assesses capital gains tax or inheritance tax.
2) Asset Holding - Utilizing a trust, company or a trust owning a company to shelter assets.
Company or trust is formed in 1 tax haven, and administered and resident in another.
Function is to hold assets for investments, trading companies or physical assets such as real estate.
Employed to avoid a specific tax.
Benefits of Tax Havens cont.
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3) Trading and Ordinary Business Activities - Businesses which don’t req. specific geographical location or extensive labor able to minimize tax exposure.
4) Financial Intermediaries – Funds are deposited with the intermediary and the intermediary lends /invests the money, often back into a high-tax jurisdiction.
Professional financial services i.e. mutual funds, banks and life insurance companies.
Enables providers to provide multi-jurisdictional products without adding an additional layer of taxation.
Modern Tax Havens
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Although modern tax havens have both real and perceived benefits, doing business with such entities carries its own difficulties.
Creates competition among countries that seek greater investment, trade, and international recognition.
In April of 2009, The European G-20 Union enacted a crackdown on activities of tax havens because of perceived problems.
Occurred after many countries pledged some $7 trillion to shore up international banking markets.
Modern Tax Havens (cont.)
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Overview of modern Tax Havens Pros and cons
OECD and Regulations
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OECD Defined Standards of Transparency and Exchange of Information Global Forum Tax Information Exchange
Current State
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Richer economies
Money away from “real economies”
Business supervision
How to discourage tax havens?
The global financial storm
Sources
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International Accounting, Sixth Edition, 20008 Choi, Frederick and Meek, Gary Business Ideas Source. (2008, July 27). Offshore Banks: Offering Low Tax Services with Confidentiality. Retrieved July 14, 2010, from Complete
Guarantee: http://completeguarantee.net/ Henry, J. S. (2010). Corralling the Pirate Banks. Forbes , 18. Offshore - Company. (2010). Offshore Services : Offshore Tax Havens : Tax Competition . Retrieved from Offshore Company:
http://www.offshorecompany.co.uk/taxhavens/competition.htm Wikipedia. (2010, July 7). Tax Haven: Methodology. Retrieved July 17, 2010, from Wikipedia, The Free Encyclopedia :
http://en.wikipedia.org/wiki/Tax_haven BBC News. (2009). Switzerland eases banking secrecy. Retrieved June 29, 2010, from http://news.bbc.co.uk/2/hi/business/7941717.stm Crawford, A. & Donahue, P. (2009). European G-20 nations seek crackdown on tax havens (Update1). Bloomberg.com. Retrieved July 2, 2010, from
http://www.bloomberg.com/apps/news?pid=newsarchive&refer=home&sid=arqqvejukth Singh, M. (2010). Taking a look at tax havens. Investopedia.com. Retrieved June 29, 2010, from http://www.investopedia.com/articles/tax/09/tax-
havens.asp Organization for Economic Cooperation and Development, Tax Haven Criteria, retrieved from
http://www.oecd.org/document/63/0,3343,en_2649_33745_30575447_1_1_1_37427,00.html The Economist (February 22, 2007), A survey of offshore finance: Places in the sun retrieved from http://www.economist.com/node/8695139?
story_id=8695139 The Economist (February 28, 2009) Tax havens under pressure: Whiter than white retrieved on July 10th from The Economist (June 18th, 2009), Britain’s Offshore Financial Centers Race for Respectability, retrieved from
http://www.economist.com/node/13863399 The Economist (February 27th, 2009), Off-shore financial centers: Secret piggy-banks, retrieved on July 10th, 2010 from The Economist (February 22nd, 2009), The less obvious uses of tax havens, retrieved from http://www.economist.com/node/8695233
Thank You
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