INVESTING IN TAX HAVEN JURISDICTIONS

What is Tax Haven?

‘Tax Haven’ is an offshore jurisdiction where taxes levied are normally low or sometimes even no taxes are levied for foreign investors, as compared to any other country. The main advantage of a Tax Haven is that it helps in saving tax for the company which is investing in a Tax Haven and ultimately saves the money of the investing Foreign Company. It will positively affect the growth of the company as well as the nation as a whole.

The jurisdictions, which are Tax Havens, are Luxembourg, Isle of Man, Mauritius, Ireland, Monaco, Bermuda, Bahamas, Cayman Islands, Jersey, Switzerland, Panama, etc.

Who can Use Tax Havens?

Any individual who wants to protect his/her assets, a businessperson who is interested in setting up a business in a market for trading and investment, a company that is looking towards maximizing profit, an investor who wants to invest in international companies and is looking forward to removing tax burden can opt for the same with low or nil taxation and can obtain the benefit by investing in offshore tax-havens.

How to obtain benefits from a Tax Haven jurisdiction?

Tax Haven jurisdictions provide Tax benefits and to obtain such benefits the foreign investor has to get the company/corporate entity registered within the jurisdiction of a Tax Haven jurisdiction. The process is not difficult and is comparatively easy as the main aim of a Tax Haven jurisdiction is to provide Tax benefits to the Foreign investing Company.

There are two options for obtaining the benefit of Tax Haven jurisdiction namely by setting up either an Offshore Company or Offshore Trust.

Offshore Company

The offshore company is more suitable for those who want to take benefit of the Tax Haven country in respect of the business with an aim of imposition of minimum taxation on the company and such benefits are available to an Offshore Company.

Offshore Trust

In the case of Offshore Trust, it is opted by individuals who want to use the jurisdiction of a Tax Haven country to obtain safeguard in entrusting their assets in a Tax Haven country from excessive taxes and/or any other danger.

What are the Merits and Demerits of Tax Haven?

Merits:

  1. Benefit for the entity/individual as the investment made to the Tax Haven jurisdictions is either low tax or free from tax in respect of the investment.
  2. It provides a greater level of privacy and non-disclosure.
  3. Another benefit is that the saving of Tax is completely legal.
  4. It helps in the growth of the investing individual/Company and benefits the nation.
  5. Tax havens benefit the economy and encourage companies and businesspersons to invest in Tax Haven jurisdictions.
  6. No strict rules and regulations in respect of Tax implementation in Tax Haven jurisdictions.

Demerits:

  1. There is a lack of transparency in respect of the transactions taking place with Tax haven jurisdictions.
  2. As there is a lack of transparency, there are chances for the occurrence of illegal activities.
  3. Another aspect in respect of the chances of illegal activities is there has been strict scrutiny on the investors on Tax Haven by the Local Authorities by the local regulatory authorities by taking place investigative measures.
  4. As there are chances of illegal activities, reputable banks consider tax haven companies as high-risk clients.

India’s response towards tax havens and tax evasion in General: –

To counter the individuals and entities who take the benefits of tax haven jurisdictions and avoid paying tax in India, the country has been proactively implementing various measures. In this regard, India as part of the G20 group has joined the Organisation for Economic Co-operation and Development [OECD] to proactively work on the Base Erosion and Profit Shifting [BEPS] project. The OECD defines BEPS as the tax planning strategies that exploit gaps and mismatches in tax rules to make a profit ‘disappear’ for tax purposes or to shift profits to locations where there is little or no real activity but taxes are low, resulting in little or no overall corporate tax being paid. The OECD in collaboration with G20 has released BEPS action plans (15 action plans) delineating measures to counter such tax evasions.

India has been taking steps to incorporate these measures provided in the BEPS action plans including amendments in domestic law and also in International treaties including Double Taxation Avoidance Agreements(DTAA).

An example of one such change can be found in the amendment to DTAA between India and Luxembourg in October 2019, wherein the DTAA was modified to be in line with the BEPS Action Plan of the OECD, thereby greatly circumscribing the scope of tax evasion through foreign investment in Luxembourg which is one of the important destinations resorted for the sake of tax evasion by individuals and entities at large including Indians. A report by Tax Justice Network has ranked Luxembourg at 6th place in the world in the category of the biggest enablers of financial secrecy which indicates the gravity of the milieu. To counter the tax evasion resorted to by individuals and entities who look for the safe haven of Luxemburg the amended Article 7 of the DTAA now explicitly provides for the “Principal Purpose Test”, which delineates that the principal purpose of foreign investment or setting up a company in another state is analyzed for the purpose of taxation and if such purpose is for bad faith then the appropriate penal measures to negate that tax evasion will be resorted to.

DTAA between India and United Arab Emirates(UAE):-

Further to prevent the resort of individuals and entities towards tax havens and to encourage compliance, Double Taxation Avoidance Agreements(DTAAs) is being entered into by India with multiple countries, whereby the circumscription of profits because of double taxation, hitherto a commonplace are being avoided. One such DTAA is being entered into between India and UAE in 1993, to avoid double taxation with respect to the following among others:-

  1. Article -6 delineates that the tax can be levied on revenue generated from immovable property or alienation thereof in the resident country of the Assessee;
  2. Revenue derived from personal services etc.

The enforcement of measures with respect to the BEPS Action plans to counter-resort to tax havens and tax evasion combined with the proactive DTAAs may provide some respite to the tax authorities by increasing tax compliance.

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