Tax Havens Impact in the Era of High Mobility of Capital

8/13/2019 Tax Havens Impact in the Era of High Mobility of Capital

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CENTRE FOR INTERDISCIPLIN RY MEXIC N BRITISH RESE RCH

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Tax Havens Impact in the Era of High Mobility of Capital

Tax haven means to pay less?

There is no the single world-accepted understanding of the tax haven phenomenon. The

majority of tax haven criteria defined by different authors and organizations have either

political context or do not deal with the core issues of these jurisdictions.

Generally speaking, tax havens are viewed as jurisdictions that allow taxpayers to pay low

or no taxes. But it is not that simple to explain their nature. In this regards, tax havens

should not be mixed with preferential tax regimes that offer special treatment only to some

categories of inbound capital as part of encouraging certain activities and investments.

Similarly, the presence in laws of the mechanisms to pay less in taxes should not be

absolutized. Tax planning as an activity aimed at reducing the tax burden by

accomplishing financial affairs in the most tax-efficient manner may take place. Sometimes

tax avoidance, normally legal way to minimize tax liability, may take the form of

unacceptable avoidance, when actions to minimize tax liabilities go against the spirit of

laws. Consequently, if there is a loophole in the legislation, it does not mean that the

jurisdiction automatically becomes a tax haven, but it means that laws are not perfect and

appropriate measures should be taken to eliminate abuses. In this respect, almost any

country can be used to reduce tax liability due to another country.

The tax haven label should not be attached also to jurisdictions with lower tax rates than

the so-called high-tax countries have. Otherwise, it will inevitably lead to the absurd,

when on the one hand a state has the sovereign power to establish its own tax system in

accordance with its own needs, including the tax rate. But on the other hand it is risking to

appear under scrutiny of the world community and even to be sanctioned. Moreover, in

these cases a high-tax country can control possible abuses by means of transfer pricing

rules, resident rules, CFC legislation, unless the jurisdiction concerned has the secrecy

laws preventing tax liabilities to be enforced by other jurisdictions.

Thus, the inherent and determinative feature of tax havens is that they provide for

taxpayers a mechanism to evade their tax liabilities due to other jurisdictions. The secrecyis the main element of this mechanism, the primary motive for choosing tax haven in order

to evade taxes. In contrast to jurisdictions with imperfect laws used for abuses, the tax

systems of tax havens are specifically and deliberately designed to provide the mechanism

to evade laws and regulations of the other jurisdictions.


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Consequences of tax havens operation

Although the damage to the state revenue is normally perceived as affecting the

antagonistic government but not people living in the country, there are significant indirect

negative effects to the latter. In the first place, tax havens affect the capacity of states to

raise revenue. As a result, a country is limited in funds to implement an effective social

policy aimed at increasing welfare of its nationals, as well as measures fostering economic

growth. Hence the tax burden is shifted from the law-breakers that evade tax liabilities onto

ordinary law-abiding individuals and businesses that comply with their tax obligations.

In addition, taxpayers exploiting tax havens can also engender problems to other

individuals and companies directly. First, the companies by means of evading taxes can

gain unfair competitive advantage over domestic competitors, small and medium size

enterprises. Secondly, tax havens erode investors trust in securities markets by

concealing the information showing what is happening inside a company, therefore, thereis no way to know the economic reality underlying a financial transaction.

Tax havens wittingly or unwittingly also serve as a shelter for other types of criminal

activities, including embezzlement, money laundering, illicit financial flows, insider trading

and even terrorism financing. This is probably the biggest problem for the world

community. It is generally known that the purpose of the financial monitoring in each

country is to prevent the flow of illegal funds. But nowadays, in order to achieve this

purpose in a highly globalized world, mechanisms of financial monitoring of all states

should be integrated and work as component parts of the single system. Tax havens that

have not introduced anti-money laundry legislation cause a disruption of this system

jeopardizing the worlds peace and security.

It is also believed that tax havens being central to the operation of global financial markets

contributed significantly to the recent world financial crises. The meeting of G20 leaders in

London in 2009 emphasized that the mix of complex financial products routed through tax

havens was the main catalyst of the crises. The very fact that an enormous amount of

funds flow through tax havens shows their significance for the operation of global financial

system.

Finally, tax havens cause far-reaching consequences for the observance of laws by

facilitating a culture of creative non-compliance. Nowadays, taxpayers perceive taxevasion as an integral and compulsory part of the tax planning process, which drives

taxpayers to look for new loopholes in laws and treaties and elaborate sophisticated tax-

evasion schemes. The new mindset says that there are no laws that could not be

circumvented. As Nick Shaxson noted tax havens are about escape escape from

criminal laws, escape from creditors, escape from tax, escape from prudent financial

regulation above all, escape from democratic scrutiny and accountability.


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According to the Declaration on Principles of International Law 1970, the document

containing the fundamental principles of contemporary international law, all states have the

duty to cooperate, in particular, in order to maintain international peace and security, to

promote international stability and progress and the general welfare of nations. Thus, tax

havens affecting to a great extent the welfare of the world community must cooperate with

other countries to eliminate the detrimental effects. Otherwise, the breach of the

fundamental principle of international law to cooperate may be considered by the world

community as an encroachment on the whole global legal order.

Valentyn KolosovLLM in International Tax, Kings College London

Economic, Financial and Development DivisionCentre for Interdisciplinary Mexican-British Research

Tax Havens Impact in the Era of High Mobility of Capital

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