Tax havens

 The ancient Roman city of Kaunos implemented a clever tactic- tax incentives. This was unheard of in ancient kingdoms. It abolished import taxes for cargo brought through the city. Fast forward to the present time, about 8.8 trillion dollars are kept in tax havens across the world in off-shore accounts. So let us see what are tax havens, how they work and their effect on global economy?

It is a place that requires no taxation or very little of it for people and businesses to park their money, so that they can avoid paying taxes in their country. These tax havens are highly secretive about their account holders so the tax authorities will not be able to access the information. Only heaven can be better than these havens for the ultra rich. Today there are around 55 tax havens spread across the globe, prominent among these are Ireland, Caribbean Islands, Switzerland, Singapore, Netherlands, Puerto Rico, Luxemburg etc.

How do the ultra rich people and companies do this? One way to do it is – Let’s say I am the CEO of my company named ZZ. I want avoid paying the millions of dollars of taxes in my country. I will create a shell company in places like Bermuda, one that exists only on paper in one of the tax havens. Taxes are zero percent or almost nil and my identity is also secret. Then I will open an account in the name of that shell company in Switzerland. My company ZZ now pays for services taken from that shell company like consulting. I will then send the payment to their Swiss bank account. The taxable income in my country is reduced for all the payment I have made for fictional services I have taken from that shell company. Suppose I had to give 20 percent tax in my country. By sending my money to that shell company I am able to reduce my profit and therefore my tax liability. That Shell Company in Bermuda is making millions from me but does not have to pay taxes, and that money is sent to the Swiss bank account where again it is safe from government noose. When I need money I just need to take a loan from that shell company. So from wherever I earn money around the world, I am able to save paying taxes and keep that money.

All big companies around the world use some variant of this tactics to avoid paying taxes. Google in 2015 send 15 billion of its profit to its shell company in Bermuda, where it has to pay zero tax. Similarly Apple has about 250 billion offshore in Ireland and if they had not done so then it would have to pay the US government 76 billion in taxes. This amount is good enough to end world hunger for 1 year and also buy around 100,000 average sized homes in US. Nike holds around 12 billion in Bermuda, thus saved paying 4 billion in taxes.

The top 50 biggest US companies have a total earning of about 4 trillion a year but hold about 105 billion in off shore accounts. Some of these names include Chevron, Microsoft, Wal-Mart, Exxon, and General Electric. That amount comes to about 3000 dollars per US citizen. For US this money is out of their tax net. This is all about money but other than this there are thousands of priceless arts, gold and even yachts, real estate registered in Cayman Islands, Luxembourg, Singapore and other such tax havens. It is estimated that the tax loss is around 175 billion annually across the globe. This 170 billion is about 1 percent of the total revenue raised by governments worldwide. 1 percent might sound less globally but the developed nations bear a much higher rate of loss. Europe has about 11 percent of its revenue in such off shore havens. Both the developed and developing nations need this money for developing the economy and infrastructure of their respective countries. The wealthiest are the only beneficiary of these tax havens, while it burdens those who are not rich enough to hide their money.

But all this can be prevented if countries across the globe came together. The creation of Organisation of Economic co-operation and development (OECD) is a step in this direction where signatories have agreed to share information about financial movements through bank accounts to tax authorities. In 2017 the EU published a list of blacklisted countries which included Trinidad and Tobago, Guam, Samoa and the Virgin Islands but did not include the major tax havens like Ireland, Luxembourg, Cayman Islands, Netherlands, and Malta etc.

The majority of the people living in these tax havens do not gain anything out of it and it only helps the ultra rich. If this money goes out of Switzerland, it won’t hurt its economy. The middle class is ready to pay the taxes and so these ultra rich people should also have a moral obligation to pay their due to the society from where it has earned that wealth.