International Tax Havens : An Insight

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Raj Ranjan, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur


Difference between tax avoidance and tax evasion:

Tax avoidance reduces the tax burden without infringement of the legislature. It involves taking benefit of the loopholes in the law. Arrangement for tax avoidance is made prior to the occurrence of tax liability. It is completely legal and practiced by business organisations world-wide.

Whereas an unlawful act, done to avoid tax payment is known as Tax Evasion. It involves the deliberate concealment of material facts. The arrangements for it, are made subsequent to the occurrence of the tax liability. It is a criminal Activity. It is practiced by individuals and businesses mainly.

These are thought up by lawyers and accountants and are exploited by them and their bankers for commercial gains. The main players who promote what they call “tax injustice” are Accountants, Lawyers, Banks, Transnational corporations, Tax haven governments, Tax avoiders and tax evaders.

Businesses use the means of transfer pricing, tax treaties, indirect benefit of transfers as well as interest deductibility as a means to exploit international tax havens. Many of the international tax havens have a secrecy law, where they are not obliged to disclose the name of its account holders.

The idea started well back during French Revolution, when Britishers used to stack French money, the money of France’s aristocracy. This was further advocated by USA during Vietnam War, when it had to generate dollars, as it was spending more than generating it. Hence to stabilise their currency, they colluded with major bank firms such as CitiBank to get the money of Mexican drug peddlers into US economy. The secrecy clause enshrined in Swiss laws, make Swiss banks as a major international tax haven. Few other examples of international tax havens are British Virgin Islands, Cayman Islands, Mauritius, Singapore, Panama etc.

All this money is the money,that the government should have due tax collections from. With individuals avoiding tax, direct revenues of the government decreases. With major economic policies thrusting on increased government spending, reduced direct taxes forces government to increase indirect taxes such as service tax, VAT etc. The indirect tax is a direct burden for everyone in the economy. Also other angle is that this money could be used for social welfare and upliftment of the society as a whole. But instead it is creating increasing inequity in wealth distribution. Rich is getting richer at the cost of the poor.

Most of the developed countries have tax-treaties with developing countries. Organisations of these developed economies take advantage of these tax treaties and avoid regular tax and stash wealth into tax haves. As a result money is pumped out of the system from developing economies to developed economies.


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