THE LEGALITY AND ECONOMIC CONSEQUENCES OF TAX HAVENS

 THE LEGALITY AND ECONOMIC CONSEQUENCES OF TAX HAVENS

 **Author: Suhavi Kaur, a Student of                        University Institute of legal studies

          

                                                                                         The term "tax haven" comes from the English term "tax haven", which refers to countries or territories with a minimum or no taxation. These are countries with non-standard, very advantageous tax regimes focused on attracting foreign capital to their territory. In other words , any nation or territory that imposes the least amount of taxes possible on foreign citizens and corporations is referred to as an Offshore Financial Center or Tax Haven.

Tax Havens offer tax benefits without requiring businesses to operate outside of their borders or to people who live there. Therefore, places with clearly defined geographic jurisdictions that purposefully enact laws to facilitate transactions involving people outside of the said jurisdiction are known as Tax Havens. A legal veil of secrecy is provided in order to make it difficult to identify the beneficiaries, with the goal of avoiding taxation or regulations. 

Tax Havens are used by both individuals and institutions. Although they both use it to reduce their tax obligations and the methods are similar, their motivations for doing so differ just a little, and they carry it out using offshore trusts and companies.

Tax havens are used for a variety of purposes, in particular to achieve tax savings, exploit anonymity, and protect assets and hide wealth. Tax savings may or may not mean tax evasion. Sometimes it is about tax avoidance. Many authors defined a tax evasion as a tax reduction, which is a criminal offense. However, advanced tax jurisdictions consider not only tax evasion but also tax avoidance unacceptable. 

In addition to the term 'tax haven', the term 'the offshore financial center' (THOFC) is often used which means a country "off the coast" to designate smaller islands outside the territories - off the coasts of developed countries. Over time, these islands, especially from the United States and the United Kingdom, began offering various kinds of benefits to investors from developed countries around the world in order to attract foreign capital to their territory. Offshore centers are therefore countries that, in addition to a special tax regime, also offer other services and exceptional trading and business conditions for investors on their territory, which include quality infrastructure and a stable legal environment.

Benefits of Tax Havens:

1. Higher Employment Opportunities: Developing economies can potentially achieve a higher employment level by attracting businesses to establish themselves in tax havens.

2. Stimulation of Economic Activities: Tax haven operations stimulate various economic activities, including construction (primarily of commercial buildings), tourism, and attracting retired residents.

3. Financial Sector Growth: Tax havens often have a robust financial sector that generates employment opportunities and additional demand for services within the economy.

4. Free and Open Foreign Exchange System: The presence of a large financial sector helps maintain a free and open foreign exchange and payments system, contributing to economic stability.

5. Readily Accessible Financial Market: Tax havens with accessible financial markets can underwrite government bond issues, making funds available for public investment and economic development.

Consequences of tax havens in national and international context:

In response to these ICIJ publications, 300 world economists from more than 30 countries around the world have declared that tax havens distort the functioning of the world economy. However, the negative consequences of their existence are much wider. These are not only economic, but also social and security implications in a national and international context, which overlap, interact, multiply their effects in a negative synergic effect.

1. Territories used for criminal activities:  These territories have been used by criminals for money laundering in addition to tax planning and these areas are soaked in by the dirty money economy of the world (drugs, prostitution, kidnapping, financial fraud, terrorism, trade in arms and strategic raw materials). This is reason why these territories are a real threat for stability in the world.

2. Impact on domestic budgets and state needs: The decrease in revenues for domestic budgets has resulted in insufficient funding for critical state needs such as education, healthcare , pandemic response, public sector support, environmental protection, development programs, science, research, business support, job creation, wealth redistribution, and the mitigation of inequalities. Furthermore, tax havens have a detrimental impact on both the global and national economies, contributing to economic and financial instability.

3. Lack of financial transparency: When a country's finances are not transparent, it becomes easier for illegal money, like that from crime, to mix with legitimate money from businesses and investments. This mixing can harm the foundations of democracy and civilization because it allows financial power to influence politics in a secretive way, which is not good for democracy and society.

4. Impact on developing countries: Tax havens are a big problem for developing countries, according to top economists. Developing nations lose around €160 billion to tax havens. For instance, an Australian mining company saved so much money in taxes in Malawi that it could have paid for 39,000 teachers or 8,500 doctors. In the Democratic Republic of Congo, where many children are malnourished, companies like Glencore and Gertler invest huge sums in offshore companies, making big profits. All of this has serious consequences for society.

5. Limited Employment opportunities for nationals: Institutions in the financial sector, a significant contributor to employment, often prefer to hire expatriates for higher positions, limiting job opportunities for nationals.

Thus, all of these problems pose a significant threat to our society, and that's why we must take action against tax havens. As Fazio wrote during the COVID-19 crisis,” those who don't pay their taxes aren't just committing a crime; they're committing a very serious one – it's like contributing to murder when there aren't enough hospital beds and ventilators."