Will Tax Havens Fall Prey to Global Momentum on Anti-Abuse Tax Initiatives?



Tax havens have faced closer scrutiny since the last global financial crisis. The current crisis will only increase the pressure on such jurisdictions and the taxpayers taking advantage of them. Anshu Khanna of Nangia Andersen LLP in San Francisco argues use of tax havens carries reputational risk for corporate taxpayers.

In the wake of the global financial crisis of 2007-2008, tax havens became a controversial topic as political leaders zeroed in on low-tax jurisdictions as a source of fiscal instability that aggravated the crisis.

For years, governments globally have been grappling with extensive profit-shifting from multinational firms. This involves companies moving profits to subsidiaries in low or no-tax jurisdictions to reduce their tax burden, even when their business operations are elsewhere. In the process, they’ve exacerbated income inequality, increased global financial instability, and allowed multinational corporations and their shareholders to pocket trillions of dollars in what they should have paid in taxes.

Worldwide economies are struggling with tax revenues down sharply, and governments will turn over rocks to reduce deficits. Further, to ensure that they get a fair share of taxes, they have instituted conditions on paying out dividends, buying back shares, and executive bonuses. We already saw countries like India, Brazil, Mexico, Spain, France, and Turkey, Indonesia rapidly introduce digital taxes to harness additional revenues from the surging digital economy thereby targeting tech giants that have long been subject to regulatory scrutiny and resultant fines for their tax affairs. The new taxes were levied to account for the value generated by companies with digital models through their users/customers even if they didn’t have a physical presence.

With the mounting pressure from International organizations like the OECD and the G-20, tax havens may find it difficult to sustain their carefree existence. Some of the key initiatives already making tax havens difficult to sustain their charmed existence are:

Base Erosion and Profit Shifting (BEPS)

BEPS was OECD’s effort to realign taxation with economic substance/real economic activity without disrupting the long-held international consensus supporting the arm’s-length principle. BEPS is the most expansive internationally coordinated effort aimed at preventing tax avoidance, giving recommendations aimed at preventing perceived tax abuses (some specifically aimed at preventing arbitrage schemes). It changed the discourse about tax avoidance, with multiple countries signing binding international instruments.

Information Exchange/Mutual Support Agreements

The OECD-initiated and G-20-embraced Global Forum on Transparency and Exchange of Information for Tax Purposes. Growing numbers of Tax Information Exchange Agreements and Mutual Legal Assistance Treaties between tax havens and other countries would take away tax havens’ competitive advantage. Many tax havens like Mauritius, Singapore and UAE have signed agreements to avoid double non-taxation and committed to facilitate effective exchange of information for tax purposes.

Unitary Tax

In 2019, the OECD initiated idea of “unitary taxation with formulary apportionment.” It refers to the taxation of a multinational firm as a single entity, apportioning profits to each country it operates based on the worldwide consolidated accounts, according to a formula reflecting real economic activity, (a mix of sales/employment/tangible assets etc.). This simpler and fair method should cut out tax havens.

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Source: Bloomberg Tax

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