A look at Tax Havens.

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Panama was highlighted so many times by Media that everyone surely googled about it 1o times! The black money trail and Governments repeated assurance of efforts to bring money back to India, makes me question what exactly the charade is all about. There exists myths about benefits of offshore tax havens, for people who have stashed money in to it and for the havens themselves.

Media (with bit of Government support, I suppose) has associated havens with unsavoury, immoral, and perhaps even illegal activities in the minds of many people. It does divert attention of the citizens from plaguing matters to some fancy clandestine account which is not reachable. Now tax havens are synonymous for shady business deals and characters of questionable nature. But in reality the façade we read are deceptive.If  the money is diverted to other countries to save taxes, then it is not illegal, it is “tax planning”/ “tax avoidance”. If income earned and accrued in India is smuggled to different accounts without paying duties it is “Tax Evasion” and those are the accounts tax sleuths should target. There is a thin line between Tax Avoidance and Tax Evasion which the media has beautifully ignored to share.

Tax havens are used as legal method for tax planning. In reality, Switzerland’s famous banking secrecy law of 1934 was triggered by a French tax-evasion scandal involving several wealthy elites, and Swiss secrecy wound up protecting a ton of Nazi loot. I know you won’t trust me, but there is a judgement passed by the US Supreme Court has as far back as in 1935 stated in Gregory vs. Helvering (1935), 293 US 465 that taxpayers can arrange their affairs so that they can make their taxes as low as possible. Also, the following declaration by Judge Learned Hand  will put the issue of tax heavens in proper perspective,

Over and over again courts have said  that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.”

Similar sentiments have also been expressed by the Indian Supreme Court in Union of India v. Azadi BachaoAndolan [2003] 263 ITR 706 (SC).

I do agree that the tax havens have led to income gap to increase as the vulnerable sect of people are not using this benefits and are continued to be smothered by tax authorities whereas, the elites are skirting away by hop skipping through Tax havens and Treaties.

Now you may ask what is the need for Tax Havens?

  1. Protection from lawsuits:

Thousands of law suits are filed every day. The excessive sum used to penalize the business sometimes could drive them away from business. There is a crew of ex-spouse, disgruntled employees, ex-business partners or predatory attorneys awaiting to file suit on attractive target. By takin shelter of a tax haven an individual or corporation can shift its asset base to safe country and thus become a smaller target, reducing its exposure to frivolous lawsuits

  1. Financial Privacy

Financial Privacy is a myth now. All our transactions are sniffed by Big boss sitting in trendy governmental office. Worst are the case when they are shared between corporates to extract profits (Read Indian telecoms and Credit card Companies). By moving the financial transactions to the tax havens we create a black box which no one can breach. (I wouldn’t like people know what I do with my money, even though it is buying a tooth pick!)

  1. Regulatory Advantages

No matter how many times government states that business regulations are eased, yet  the red tape exists is and business is throttled by its coil. Offshore jurisdictions are intentionally business friendly and have regulations that are straight forward, simple to understand and inexpensive to comply with.

  1. Maximisation of Income by routing investments

There are only 3 questions that need to be answered as regards maximization of income: –

(1) Where is the best return?

(2) Is the risk of investment within my comfort zone?

(3) What can I do to legally maximize my net return after tax?

P. S The article is the personal opinion of the author.

Pic Courtesy: http://i2.cdn.turner.com/money/dam/assets/151005095308-offshore-tax-havens-780×439.jpg

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