![Tax Havens: Heaven to Evade Taxes
A Mystery in Itself
[An Exploratory Research of the Study]
A Presentation by Prakash Soni
April 2016](https://image.slidesharecdn.com/taxhavens-heaventoevadetaxes-200804110202/75/Tax-Havens-Heaven-to-Evade-Taxes-1-2048.jpg)
Tax Havens: Heaven to Evade Taxes
- 1. Tax Havens: Heavento Evade Taxes A Mystery in Itself [An Exploratory Research of the Study] A Presentation by Prakash Soni April 2016
- 2. Analysis of Tax Havens 02 Basic Overview Objectives of the Project Introduction 01 Impact of Tax Havens on Indian Economy 03 Impact of Tax Havens on Global Economy 04 Inferences on Tax Havens 05
- 3. Introduction A tax havens,once described as “sunny places for shady people”, are country or territory where certain taxes are levied at a low rates or not at all. The term ‘tax haven’ does not have a comprehensive definition. This is primarily because of the comparative nature of tax benefits provided by any jurisdiction. Because of the relative nature of the advantages provided, every country may be a tax haven to some degree. A Presentation by Prakash Soni
- 4. Objective of theStudy The aim of the study is to bring out the importance and impact of Tax Havens on the booming economy. The Study is broadly divided into three main categories: • To understand the basis working of the Tax havens and how multinationals use it. • To understand its impact on the Indian Economy. • To understand its impact on the Global Economy. A Presentation by Prakash Soni
- 5. Definition Advantagesof Tax Havens Types of Tax Havens vis-à-vis Examples Effects of Tax Havens Tax Avoidance through Tax Havens Measures to Stop Abuse of Offshore Tax Havens Analysis of Tax Havens 02 Impact of Tax Havens on Indian Economy 03 Impact of Tax Havens on Global Economy 04 Inferences on Tax Havens 05 Introduction 01
- 6. All Tax Havenshave these things in Common which does not levy any tax / levies very small tax which has no controls on foreign exchange movements which has a legal system that ensures secrecy which permits foreigners to open companies & other entities which makes laws specifically designed to help “financial engineering”, “creative accounting” and “tax avoidance” Which signs DTAA with several countries & facilitates Treaty Shopping. A Presentation by Prakash Soni
- 7. Advantages of TaxHavens Levy no significant taxes or levies very minimal tax rates. Tax income refers to the income earned in the company only. Some jurisdiction have tax treaties with other contracting countries which gives them additional benefits. Provides Special Tax Incentive to Offshore Business Setups. Country can do world of good to its Economic Condition A Presentation by Prakash Soni
- 8. Types of TaxHavens vis-à-vis Examples Sl. No. Types of Tax Havens Examples 1 No corporate tax Bermuda, Cayman Island 2 Low-taxed Countries Hong Kong, Ireland, Jersey 3 Jurisdictions with no (or very few) tax treaties that offer nil (or very low) or negotiated tax regimes for offshore entities British Virgin Islands, Cook Islands, US Virgin Islands 4 No or nil tax regimes for offshore companies with the benefit of tax treaties Cyprus, Malaysia, Mauritius 5 Fiscally beneficial regimes for intermediary holding finance or licensing companies with full benefits of treaty network Austria, Belgium, Denmark, France, Germany A Presentation by Prakash Soni
- 9. Types of TaxHavens vis-à-vis Examples – Contd….. Sl. No. Types of Tax Havens Examples 6 Special tax concessions for entities engaged solely in management services and coordination activities for multinational activities Belgium, Denmark, France, Germany, Malaysia 7 Jurisdictions with fiscal incentive for new residents Ireland, Israel 8 Retirement havens for high net worth individuals Cyprus, Sri Lanka 9 Offshore jurisdictions for estate planning or asset protection trusts Bahamas, Cayman Island 10 Special incentives for shipping operations Singapore, Cyprus 11 Encourage captive insurance activities Ireland, Mauritius A Presentation by Prakash Soni
- 10. Effects of TaxHavens Money Laundering Tax Avoidance Terrorist financing Treaty Shopping Round Tripping Misuse of Corporate Vehicles Threats to stability of financial System A Presentation by Prakash Soni
- 11. Tax Avoidance throughTax Havens Whenever the topic of tax avoidance is discussed the first thing that comes in our mind is the Tax Havens. The MNCs use the tax havens in basically following manner: • Shifting of Trading Profits • Shifting of Capital Gains • Round Tripping A Presentation by Prakash Soni
- 12. Shifting of TradingProfits This is an ongoing exercise. The trading profits are transferred on a regular basis. In simple words it involves under invoicing incomes in a taxing country like India; over invoicing expenses & shifting the resultant profits to a tax haven or a tax free entity. Let us explain the concept of Shifting of Trading Profits – Transfer Pricing with help of a Hypothetical Example A Presentation by Prakash Soni
- 13. Hypothetical Example onTrading Profits Suppose A company in U.S.A. – ABC Ltd. manufactures automobile cars (cars.) It gets rubber from Malaysia, designs from Japan & Steel from India. It opens subsidiaries in Malaysia, Japan & India. Assume that the tax rates in different countries are as under: U.S.A. 50% Malaysia 30% India 30% Japan 50% The subsidiaries will sell their finished goods at 5% to 10% profit margin (what ever margin is acceptable to their host country tax authorities) to Group’s tax haven companies. Tax haven companies will sell the same goods to the US company at a margin of 100% (what ever price may be acceptable to US tax authorities.) Substantial profits will be retained in tax havens on which no taxes will be paid. US company will pay several different expenses like royalty, interest etc. to group tax haven companies & ultimately will show loss or small profit. A Presentation by Prakash Soni
- 14. Hypothetical Example onTrading Profits – Contd… A Presentation by Prakash Soni
- 15. Shifting of CapitalGains Let us see fundamental systems/themes employed for tax avoidance. The following is a mechanism established very well for past several decades: Hold your assets in the host country through a company / SPV. Hold the shares in the SPV, through a tax haven entity. Whenever a transfer is desired, don’t make any transaction in the Host country. Achieve the transfer of interest through the tax haven SPV. Note that the use of Tax Haven & incorporation of SPVs can start even before actual business starts. In simple words, shift the location/ situs of title documents outside the host country and avoid host country taxes. Judiciary goes by form and not by substance. So it is generally not a hurdle in tax avoidance. Since judiciary wants “documentary evidence”, create as many papers as necessary, and still more. A Presentation by Prakash Soni
- 16. Shifting of CapitalGains Mr. A from Hong Kong wants to invest in a substantial business in India. He forms a discretionary trust – “ABC Trust” in a tax haven – say, Cayman Island. This trust will invest in “ABC Pvt. Ltd.” – a company registered in Cayman Island. ABC Pvt. Ltd. will invest in the shares of the Indian Business company – “EFG Ltd.” This Indian company will have business and other valuable assets in India. Let us assume, EFG’s business in India prospers. In ten years, the value of business has gone up ten times. If shares in EFG are sold, there will be substantial capital gains and substantial tax in India. To avoid Indian tax, no transfer will be recorded in India. The Trustees sell the shares of ABC Pvt. Ltd. to the buyer. This would mean the shares of a Cayman company are being sold. Not the shares of an Indian company. In this sale, the seller (Mr. A) and the buyer are non-residents of India. They are transferring a foreign asset – shares in a Cayman Island company. Payment will be made outside India. Hence technically, India has no jurisdiction to tax this transaction. A Presentation by Prakash Soni
- 17. Shifting of CapitalGains – Contd. …. ABC Pvt. Ltd. Company Directors Trustee Company Cayman Island EFG Pvt. Ltd. 100% Shares in ABC Trust Indian Business India 74% Shares in Named Beneficiary Mr. X from Timbuktu Letter of Wishes in favor of Mr. A from Hong Kong A Presentation by Prakash Soni
- 18. Round Tripping Round Trippingis a market manipulation practice used to misinterpret the number of transactions occurring on any given day. Roundtrip trading artificially inflates volume and revenues, but in reality adds no profit. Enron was a company that engaged in roundtrip trading, and, by doing so, was able to increase revenues (and expenses) without changing its net income. A Presentation by Prakash Soni
- 19. Measures to StopAbuse of Offshore Tax Havens Country by Country Reporting Tax income refers to the income earned in the company only. Stopping creation of new loopholes Increase Transparency Inclusion of Limitation of benefits clause in Tax Treaties Unitary Tax Automatic information exchange Disclosure of the real life, proper final, ultimate, actual owners of Companies Making ‘willful blindness’ criminal offence A Presentation by Prakash Soni
- 20. Inflow ofForeign Direct Inflows from Tax Havens The Indo-Mauritius Treaty Vodafone Case Study Impact of Tax Havens on Indian Economy 03 Impact of Tax Havens on Global Economy 04 Inferences on Tax Havens 05 Introduction 01 Analysis of Tax Havens 02
- 21. Inflow of ForeignDirect Inflows from Tax Havens Particulars Amount Invested (in US$ Millions) % of Inflow Mauritius 93,659.75 39.31% Singapore 43,172.31 18.12% United Kingdom 22,713.47 9.53% Japan 19,434.28 8.16% USA 17,262.45 7.24% Netherlands 16,817.97 7.06% Cyprus 8,444.07 3.54% Germany 8,443.84 3.54% France 4,880.47 2.05% UAE 3,446.54 1.45% Total 238,275.15 100.00% A Presentation by Prakash Soni
- 22. The Indo-Mauritian Treaty Indiasigned the Tax Treaty with Mauritius in August, 1982. The Tax Treaty provides that Capital gains arising on the sale of shares of Indian companies by investors resident in Mauritius would be taxable only in Mauritius and not in India. The usefulness of the above Treaty was not felt until 1991, when India opened up its economy to the foreign investors and liberalized its economic regime. Amongst the other countries Mauritius has been amongst the top three since the time India liberalized itself and opened up to Global Economy. As per the data published by the Indian Department of Industrial Policy and Promotion, the total inflow of Foreign Direct Investments from Mauritius in India between April 2000 to December 2015 amounted to a hefty total of US$ 93,659.75 millions which is more than 39% of the total investments made the said period. A Presentation by Prakash Soni
- 23. Treaty Shopping –Used as tool in Indo-Mauritius Treaty The term Treaty shopping in common parlance means routing investments through a particular country to avail beneficial provisions of the Tax Treaty between that country and the country in which the investment is sought to be made. The objective of Treaty shopping is to reduce source taxation typically on capital gains, dividends, interest, etc. As per Article 13(4) of the India Mauritius DTAA, capital gains arising in India to a Mauritian resident shall not be taxable in India. Such capital gains are also exempted from tax under domestic tax laws of Mauritius. Accordingly, the Indo-Mauritius DTAA coupled with favorable Mauritian domestic tax legislation makes the island nation an ideal jurisdiction for investing in India. A Presentation by Prakash Soni
- 24. Round Tripping viaMauritius Let us take an example to understand the concept of Round Tripping. Mauritius Co. will in turn invest the money received in Indian Co. through GDR, Participatory Notes, etc. Holding 100% shares Payment towards inflated invoices, for example, raised by Mauritius Co. Indian Company Mauritius Company Here, we see how the money paid for the inflated invoices raised by Mauritius Co. is again being re-invested in Indian Co. and thereby money laundering takes place. This is how the concept of Round Tripping works which is the biggest advantage taken by Indian entities of the loopholes present in the India-Mauritius Treaty. A Presentation by Prakash Soni
- 25. What makes Indo-MauritiusTreaty so ATTRACTIVE According to a clause of the Treaty, the right to levy capital gains is not with India while the capital gains tax is nil in Mauritius. So, no tax is required to be paid either in India or in Mauritius. Dividends and Interests are exempt. Many Indian and foreign based companies have set up companies in Mauritius only to avail tax exemptions. The reason they are able to do this is the rather ambiguous definition of a company’s residential status. According to the definition, a company is based in Mauritius if its “effective management” is situated there. A company can be formed in Mauritius within two weeks only. India-Mauritius Treaty had been a major cause of concern for the Indian Government because of the increasing number of Round Tripping transaction. That is what has provoked the Indian Government to take stricter steps in order to control the increasing number of round tripping transactions. A Presentation by Prakash Soni
- 26. Vodafone Union ofIndia The Vodafone Tax Case
- 27. The Vodafone Case Whenit comes to tax havens, the second thing that comes to the mind of an Indian after Mauritius, is the Vodafone Tax case, (let’s call it the Vodafone tax scam, keeping the Indian feelings in mind) which happened not so long ago against the Indian Revenue Authorities. Vodafone recently won a rare but potentially very significant victory over Indian Tax Authorities. The Bombay High Court dismissed the government demand for the company to pay around 4000 crores of rupees (about $490 million) for a share transaction conducted in the offshore tax havens. The Vodafone Scam is briefly elucidated in the next few slides. A Presentation by Prakash Soni
- 28. HTIL •Hutchison Telecommunications InternationalLimited •Situated in Hong Kong •Holding 100% Shares in CGP Investments Holdings Ltd CGP •CGP Investments Limited •Situated in Cayman Island, Mauritius (a tax haven country) •Holding 67% Shares in HEL HEL •Hutch Essar Limited •Situated in India •Formed by Merger of HTIL and Essar Group VIH •Vodafone International Holdings •Situated at Netherland •Subsidiary of Vodafone Group Plc Companies Involved vis-à-vis Diagrammatic view of Transaction
- 29. Apparent Understanding LookAt Approach Foreign Company 1 (HTIL) Sold Foreign Company 2 (CGP) To Foreign Company 3 (VIH) Transaction Took Place Outside India in Foreign Currency There is no Territorial Nexus Resultant Capital Gain can’t be taxed in India HTIL (Cayman Island Co.) VEL Vodafone Essar Limited HEL (Indian Co.) VIH (Vodafone International Holdings) CGP (Cayman Island Co.) Sold 100% holding of CGP to VIH Renamed as A Presentation by Prakash Soni
- 30. Contention Of TheIncome Tax Dept. Contention 1 Offshore Share Transaction Result in Transfer of Shares in HEL from HTIL to VIH Indirect Transfer of Capital Asset Situated in India Controlling Interest In HEL is Capital Asset situated in India u/s 2(14) On account of transfer of shares in CGP Inv Ltd by HTIL to VIH Controlling Interest of HTIL in HEL gets extinguished Extinguishment of Right = Transfer u/s 2(47) Activates S.9(1)(i) L-4 Contention 2 A Presentation by Prakash Soni
- 31. Decision of theHigh Court The Supreme Court’s judgment clarifies the law, based on the provisions contained in the act. While delivering the judgment, the court recognized that it is important to provide certainty with regard to the interpretation of law and the maintenance of a robust judicial system, so that investors can determine the tax position of India. If the government wishes to propose a ‘limitation of benefits’ or ‘look-through’ approach, this should be a policy decision introduced either under the extent of law or the tax treaties. Way Forward • The ruling of the SC in Vodafone’s case will impact cross border M&A activities. • The ruling will also affect similar pending cases before various Courts. • Increased focus on facts, robust documentations and conduct of parties. • Need for caution in structuring cross border deals involving underlying assets in India as well as use beneficial tax treaties. A Presentation by Prakash Soni
- 32. Major TaxHavens of the World American MNCS using Tax Havens Apple turns out to be BADAPPLE Double Irish Dutch Sandwich Google using Double Irish Dutch Sandwich 'Delaware' thrives as a global tax haven The Ugland House, Cayman Islands Impact of Tax Havens on Global Economy 04 Inferences on Tax Havens 05 Introduction 01 Analysis of Tax Havens 02 Impact of Tax Havens on Indian Economy 03
- 33. Major Tax Havensaround the World A Presentation by Prakash Soni
- 34. Big MNCs ofAmerica hide their money in Tax Havens In the past year, US Companies seeking to avoid high corporate tax rates stockpiled as estimated amount of totaling to $ 2.1 trillion and it’s still counting. It is interesting to note that India’s GDP is slightly less the $ 2.1 trillion. The 30 companies with the most money officially booked offshore for tax purposes collectively operate 1,225 tax haven subsidiaries. Most of America’s largest corporations maintain subsidiaries in offshore tax havens. At least 358 companies, nearly 72 percent of the Fortune 500, operate subsidiaries in tax haven jurisdictions as of the end of 2014. Profits held by Americans overseas as of 2014 A Presentation by Prakash Soni
- 35. Apple turns outto be BADAPPLE Apple pays less than 2% tax on its foreign profits. More than any other American company, Apple holds $181.1 billion in offshore accounts. Apple would owe a hefty amount of $59.2 billion in US taxes which is thrice the budget Obama allocates to NASA annually. According to a Bloomberg report, The European Commission (EC) contends that Apple’s corporate arrangement in Ireland allows it to allegedly manipulate the tax bill in a way that calculates low profits coupled with low operating costs. Consequently, Apple is allegedly paying less to the Irish government, wherein its foreign tax rate currently stands at 18%. A Presentation by Prakash Soni
- 36. The Double IrishDutch Sandwich The Double Irish with a Dutch Sandwich is a tax avoidance technique employed by certain large corporations, involving the use of a combinations of Irish & Dutch subsidiary companies to shift profits to low or no tax jurisdictions. The double Irish with a Dutch sandwich technique involves sending profits first through one Irish with a Dutch company and finally to a second Irish company headquartered in a tax havens. This technique has allowed certain corporations to dramatically reduce their overall corporate tax rates. The International Monetary Fund (IMF) says that so many companies exploit complex avoidance schemes, and so many countries offer devices that make them possible. Nonetheless, the “Double Irish Dutch Sandwich”, an avoidance scheme popularly associated with Google, gives useful flavor of the practical complexities. A Presentation by Prakash Soni
- 37. Google using DoubleIrish Dutch Sandwich Google moved 10.7 billion Euros ($12 billion) through the Netherlands to Bermuda in 2014 as part of a structure which allows it to earn most of its foreign income tax free. Accounts for Google Netherlands Holdings show that the unit transferred almost all its revenue, mainly royalties from an Irish affiliate called non-US revenue is channelized, to a Bermuda-based, Irish registered affiliate called Google Ireland Holdings. Microsoft also taking the advantage of the Tax Havens Microsoft reported operating 10 subsidiaries in tax havens in 2007; in 2014, it disclosed only five. During this same time period, the company increased the amount of money it held in offshore from $7.5 billion to $ 108.3 billion, on which it says it would owe $34.5 billion in U.S. taxes. That implies that the company has paid a tax rate of just 3% to foreign government on those profits, indicating that most of the cash is booked to tax havens. Microsoft ranks 3rd for the amount of cash it keeps offshore. A Presentation by Prakash Soni
- 38. 'Delaware' thrives asa global tax haven In New Zealand, sheep outnumber people. Stanford boasts more bikes than students and employees. In Delaware, it’s the number of corporations that top the populations. Delaware has over 1 million business entities but only 917,002 inhabitants. Its occupants, on paper, include giants like American Airlines, Apple, Bank of America, Berkshire Hathaway, Cargill, Coca- Cola, Ford, General Electric, Google, JPMorgan Chase and Wal-Mart. These companies do business across the US and around the world. Here at 1209 North Orange, they simply have a drop box. The Ugland House, Cayman Islands There is no greater symbol of the excesses of the world of corporate tax havens than the Ugland house, a modest five-story office building in the Cayman Islands that serves as the registered address for 18,857 companies. During 2008 US presidential campaign, Barack Obama criticized Caribbean tax havens. He mentioned the Ugland House, Cayman Islands, that is the registered home of more than 18,000 U.S.-based corporations, saying, “That’s either the biggest building in the world or the biggest tax scam on record.” But as the example of 1209 North Orange St. demonstrates, the same activity is going on in President Obama’s backyard. A Presentation by Prakash Soni
- 39. Inferences onTax Havens Inferences 05 Impact of Tax Havens on Indian Economy 03 Impact of Tax Havens on Global Economy 04 Introduction 01 Analysis of Tax Havens 02
- 40. Inferences on TaxHavens The topic of tax havens is very unique and relevant looking at the present global economic condition. While some people are confused whether its a ‘haven’ or a ‘heaven’, the multinationals are having its utmost utilization. They are literally hunting for an opportunity to get their funds routed through a tax havens and latching onto its benefits and get the tax relief. For some countries it has a good impact while for developing and poor countries, they have to take its other side. India too has its impact. Whether it is for a good to its economic condition, seeing the inflow of FDI through tax havens like Mauritius, Cayman Islands, etc. is a different discussion. In world where people are more concerned about tax avoidance over any other heavenly things, TAX HAVENS have proven to be a blessing in disguise for the them. A Presentation by Prakash Soni
- 41.