Tax Havens or Offshore Financial Centers - Research Paper Example

TAX HAVENS OR OFFSHORE FINANCIAL CENTRES Submitted Submitted by: Steven 06/29/2009 [This page is intentionally to leave it blank] Tax Havens or Offshore Financial Centres The present study aims to define the significance of the tax havens in the growth and development of an economy. It also elaborates the criteria for the classification of different regions working as tax havens or offshore financial centres in various parts of the globe. The study also examines the use of tax havens (low-tax jurisdictions) by the multinational corporations, as well as the impact of these tax havens within divergent regions of the world. “Examples of such tax havens”, Desai et al submit, “include Ireland, Luxembourg and Switzerland in Europe, Hong Kong and Singapore in Asia, and various Caribbean island nations in the Americas.” (2004: p 2) The study makes a comparative analysis of the tax haven regions with heavy tax zones to project the differences economies examine in respect of laving taxes on the companies and firms. The present study has also been supported by the literature relevant to the topic of the research. The research also contains theoretical framework in its fold that is helpful in elucidating the topic under study. Different economies of the world at large have offered a variety of incentives to the corporations, organisations, and firms so that investment can be made within their economic set up, and economy could observe an imperative boost in the state of perfect competition created all over the globe in the aftermath of globalisation. The UK, USA, the UAE and other countries have established offshore centres for the local, national and multinational firms and brands, where the firms of sound reputation are offered considerable concessions in taxes and tolls, which encourages more and more firms make investment under rules and regulations designed by the governments for the offshore centres. “According to the Organisation for Economic Co-operation and Development”, Almeida submits, “international tax competition is lowering tax rates and making government expenditure more efficient worldwide.” (2004: p 2) Though tax havens do not exist in China and Germany in their true definition, yet there exist several low tax authorities in many countries of the world. These include Italy, the USA, Canada, China, Germany, France, Australia and others. “About a quarter of US and UK FDI”, Dharmapala notices, “is located in tax havens. By way of comparison, tax havens are home to only 0.7 per cent of the worlds population when havens are defined as in DH (2006), or just 0.2 per cent when using the OECD definition.” (2008: p 4) Since low tax rates leave indelible imprints on the economic activities of the high tax zones, different economies of the world devise policies, articulate theories and formulate strategies in order to combat with the consequences of the low tax schemes introduced and implemented by the rival economies. “In particular”, Desai et al observe, “there is a widespread concern that low-tax areas within a federation impose a fiscal externality on other countries and might attract investment that would otherwise locate in high-tax areas within the same regions.” (2004: p 5) Though researches do not describe the exact enormity and volume of the divergence among tax havens at global level, yet these havens can be categorised on the basis of regions and performances, which cost many million dollar losses in tax revenues. “The Tax Justice Network (TJN)”, Miedema (2008) writers, “an anti-tax haven lobby group, estimates that global tax authorities miss out on around $250 billion each year because people hold money off shore, calling that estimate "extremely conservative".(Quoted in globalpolicy.org) One of the most prominent advantages of the tax havens includes its capturing of the foreign investment to the economy. In addition, the availability of low-tax jurisdictions facilitates foreign investment and economic activity in high-tax jurisdictions within the same regions. The latter possibility arises if affiliates in low-tax areas offer valuable intermediate goods and services to affiliate in high tax areas, if the ability to relocate taxable profits into low-tax jurisdictions improves the desirability of investing in high-tax areas, or if low-tax jurisdictions facilitate deferral of home country taxation of income earned in high-tax countries. “High-tax countries might then benefit from tax diversity within regions, particularly if domestic governments would prefer to offer tax concessions to multi-jurisdictional businesses but are constrained not to do so by non-economic considerations.” (Desai et al, 2004: 9) The present study also estimates the use of tax havens by multinational firms, and the effect of tax haven operations on economic activities in foreign countries other than tax havens. “Countries offer”, Hines states, “low tax rates in the belief that by doing so they attract greater investment and activity than would otherwise have been overcoming.” (2004: p 2) Tax havens encourage large scale investment from national and international firms and organisations that allow corporate firms relocate taxable income out high-tax jurisdictions and to facilitate deferral of repatriation taxes, suggesting that multinational parents with differing foreign tax rate exposures can benefit from haven activities. Moreover, tax havens are utilised in order to shuffle profits from high-tax jurisdictions is concentrated amongst larger tax haven countries, and the effect of these havens on activities in non-havens is more pronounced within the regions. Further, tax havens assess comparative divergence between levels of multinational activity in havens and non-havens within a region, and determine the magnitude of difference between the volumes of investments among tax free zones and other regions of the economic jurisdiction. Consequently, the establishment of tax havens proves the high rate of investment and projection of economic activities to an imperative level. It has aptly been observed that the multinational companies having vast business activities take advantage of tax havens in all offshore regions of the world. In addition, the economies having the greatest reliance on foreign profits, are the most likely to operate in tax havens, suggesting that there are economies of scale in using havens to avoid taxes. Furthermore, multinational parent with foreign (non-haven) operations concentrated in low-tax countries (jurisdiction), and those in technology-intensive industries characterized by extensive intra firm trade (transfer pricing), are more likely than others to operate in tax havens. The examples of such great brands enjoying tax havens include the Coca-Cola Company, Microsoft Corporation, Honda Car, Marlboro Tobaccos, Virgin Atlantic and others, while the economies offering tax havens include the UAE, UK, USA and France etc. “People across all taxpaying groups in the Australian tax system are becoming increasingly involved in international business and investment. Most dealings with tax havens are within the law. Some tax havens, including those that have large value dealings with Australian taxpayers, have developed particular niche markets. Others are highly regarded as offshore financial centres.” (ato.gov.au) This analysis of the uses of havens – for both income reallocation and deferral of repatriation taxes – does not identify the effect of havens on overall levels of economic activity in non-havens. Countries are often concerned both about lost tax revenue and about lost investment that might arise because of the presence of tax havens. It is conceivable (though seldom contemplated) that havens facilitate investment in non-havens by reducing the cost of capital for such investments, by providing the means to reduce tax obligations, or by facilitating the provision of complementary activities nearby. Though the UK offers few tax havens in its jurisdiction, yet tax rates are very high in the country. “The tax is far too high (40%* at the top end), which means in effect that if you make a lot of money youll end up with quite a lot of it going to fund the UK government and allowing it to spend your money on what IT thinks is best.“ (zyra.org.uk) The difficulty confronting empirical analysis of the impact of affiliates located in tax havens is that all aspects of a firm’s regional activity are in some sense simultaneously determined. Foreign tax rates change infrequently and often in rough proportion to each other, making it difficult to use such tax changes to identify their impact on economic activity elsewhere in a federation. Fortunately, it is possible to use differing rates of economic growth between countries to estimate the degree to which tax haven activity and economic activity in countries other than tax havens influence each other. This evidence indicates that haven and non-haven activity are complementary, implying that policies that encourage the establishment of tax haven affiliates also indirectly encourage activities outside of tax havens in the same regions. In short, which tax havens permit firms to redirect profits and tax revenue away from non-havens within regions; they also appear to facilitate economic activity in non-havens. Research Question and Objectives: The proposed research aims to discover answers to the following queries: 1. Whether or not the economic regions consider the establishment of financial centres or tax havens as the part of successful economic strategy? 2. What are the problems being experienced by other economies in presence of these regions? 3. What strategies can be implemented to minimise the problems faced by other countries? 4. Which of the factors create the demand for these tax havens or financial centres? The Objectives Established for the Present Study include: 1. To determine the distinguished characteristics the tax havens or offshore centres maintain. 2. To establish the problems being experienced by other countries with an effective tax system and develop suitable methods of eliminating these problems. 3. To determine the strategies that can be implemented in order to reduce the effects of these tax havens. 4. To determine the factors creating demand for these tax havens or financial centres. Methodology: Universe: As the present study looks for estimating the advantages and disadvantages of tax havens, the economies of the countries containing tax havens in various states of the USA will be compared with the economies of the countries, which are not offering tax havens to the investors, companies and firms. In addition, the volume and magnitude of the economies of the UK and France will also be considered in the present research. The researcher will obtain data from the annual budget of these economies along with the quarterly reports published by these countries mentioning tax volume and rate of investment. In addition, the managers belonging to top five brands working in New York will also be interviewed in order to prepare a comprehensive research report on the topic under study. Sampling: Quota/non-probability sampling will be implied to represent different economies and companies for the present study. The research will be focused on the nature and degree of investments made in various tax havens, and the advantages of the tax havens will be compared with the taxes collected within the jurisdiction of tax haven regions and non-tax haven regions. Tool for Data Collection: Interview-schedule and case study will be applied as research tools to gather the data from the respondents. Interview schedule will be helpful in conducting interviews of the relevant personnel of the selected corporate firms, while case study will be supportive in respect of analysing the economic sectors of the countries under study. Pre-testing: Pre-testing will be conducted, in order to draw out the errors and flaws, existing in the interview schedule. At first, three individuals and one organisation will be ere interviewed to observe whether the interview-schedule fulfils the requirements of the study or not. Changes could be made in questions as soon as the pre-testing is over. LIST OF REFERENCES: 1. Almeida, Aloisio. (2004) Tax Havens: An Analysis of the OECD Work with Policy Recommendations. Ford School of Public Policy (Retrieved from http://www.receita.fazenda.gov.br/Publico/estudotributarios/TrabAcademicos/Textos/AloisioTaxHavens.pdf) 2. Dharmapala, Dhammika. (2008) What Problems and Opportunities are Created by Tax Havens? Oxford Review of Economic Policy 24(4):661-679; doi:10.1093/oxrep/grn031 (Retrieved from http://oxrep.oxfordjournals.org/cgi/content/abstract/24/4/661?HITS=10&sortspec=relevance&hits=10&maxtoshow=&FIRSTINDEX=0&resourcetype=HWCIT&fulltext=slemrod&searchid=1&RESULTFORMAT) 3. Desai, Mihir A., Foley, C. Fritz & & Hines Jr., James R. (2004) Economic Effects of Regional Tax Havens pp 2-19 (Retrieved from http://www.bus.umich.edu/OTPR/WP2004-9.pdf) 4. Hines Jr., James R. (2004) Do Tax Havens Flourish? University of Michigan and NBER. (Quoted in http://www.itio.org/pdf/taxhavens_flourish.pdf) 5. Miedema, Douwe. (2008) Tax Havens of the World (Quoted in http://www.globalpolicy.org/component/content/article/172/30128.html) 6. Tax Havens and Tax Administration (Quoted in http://www.ato.gov.au/corporate/content.asp?doc=/content/46908.htm&page=7&H7) 7. The Advantages and Disadvantages of Living in the UK. (Quoted in http://www.zyra.org.uk/taxhaven.htm) Read More