In popular Indian imagination, a tax haven is generally associated with Switzerland and its numbered bank accounts. But tax havens are numerous, have grown in importance, and are the routes through which half of international trade now takes place. Apart from high-net-worth individuals, tax havens are liberally used by multinationals and their army of accountants and lawyers for tax planning and transfer pricing. They are also wonderful places for money launderers.
Tax havens come in all shapes and sizes. Each has its own comparative advantage, whether in terms of cost or time taken to set up structures, discretion used, or links to particular countries. Nevertheless, they have some common characteristics such as ease of setting up companies/trusts/foundations, minimal disclosure requirements, the possibility to hide beneficial ownership, and low or no effective taxation on income or wealth.
Threats posed by tax havens
Panama fits the bill perfectly. In Panama, there are firms that can help set up a company within 48 hours and provide nominee directors/shareholders. Many international banks operate from Panama, and banking confidentiality is guaranteed. Panama follows a strict territorial system of taxation. Consequently, all foreign incomes of non-residents are not taxable. Further, Panama has no official central bank and no exchange control.
The Panama papers are raising a storm across the world. However, shorn of all the razzmatazz, the terabytes of data released by the International Consortium of Investigative Journalists do not tell us anything new about the modus operandi adopted by the high and mighty to hide their assets.
The one definitive conclusion that one can draw from the Panama papers is that those in charge of designing the rules in the fight against such tax havens also took advantage of the same for diverse motives, whether for tax avoidance/evasion, masking conflict of interest, or for corrupt practices and money laundering.
It is not as if the threats posed by tax havens are not known to regulatory authorities. The Organization for Economic Cooperation and Development never tires of proclaiming that due to its revised standard for exchange of information, the days of secrecy are over. Indian politicians and administrators say the same. As the current leaks show, the utility of such agreements in discouraging tax havens from offering their services, or for foreign clients from using their services, is rather limited.
OECD’s initial project on harmful tax practices, including the use of sanctions, came unstuck due to American opposition. While there has been improvement in the monitoring mechanism over time with a peer review process, jurisdictions carry on with business as usual even after declaring their intention to comply with OECD standards. OECD’s initial list of non-cooperative jurisdictions has been empty since 2009. Of course, following the U.S. Foreign Account Tax Compliance Act, OECD has come up with an automatic exchange of information and apparently only four jurisdictions have not committed to its standards — Bahrain, Nauru, Panama and Vanuatu. But does that mean that there are no worries about other tax havens such as the Channel Islands, the British Virgin Islands and the Cayman Islands? As the Panama papers show, the truth is far removed. ‘Don’t ask, don’t tell’ is the policy followed by many tax havens.
While examining the history of tax havens, Gabriel Zucman in his book The Hidden Wealth of Nations: The Scourge of Tax Havens has shown that action against them works only if there are credible sanctions, which he proposes in the form of trade tariffs. Considering the storm created by the Panama papers throughout the world, his proposals, including that of a global finance register of all financial securities in circulation, are worth considering at the international level.
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Dikshit Sengupta, formerly of the IRS, is now with the National Institute of Public Finance and Policy, New Delhi