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A Good Time to Expose Tax Havens?

“We fuss about them, howl that the activity is illegal, but we don’t shut them down, because the town fathers are in there with their pants around their ankles. Tax havens cannot exist without the consent of the countries whose transactions they accept.” – Lee Sheppard

In 2013, the World Bank estimated that an annual expenditure of USD 3.4 billion would have let developing countries build a tough pandemic-prevention capability. We could have definitely avoided the cost and consequences. A global outbreak could have been much less likely. Yet this was overlooked and the expenditure wasn’t made. As of now, economies are struggling and the tax revenues have reduced sharply.

The foreseeable future you ask? Saudi Arabia has already thought of introducing income tax in the near future. The oil-rich country has suffered the biggest economic decline in the last 30 years. 

But is it enough to introduce or increase the taxes?

There is something called OFCs or Offshore Financial Centers. They usually go by the name- ‘tax-havens’. These places are estimated to have USD 36 trillion stacked up in cash, gold, and securities, not including tangible assets such as real estate, art, and jewels. For comparison, India’s total tax revenue is USD 0.17 billion a year. These OFCs are all over the world- Switzerland, Hong Kong, the Cayman Islands, the British Virgin Islands, the Bahamas, the Isle of Man, Luxembourg, Lichtenstein, Ireland, Singapore, Panama, Trinidad and Tobago, Seychelles, and Vanuatu.

For years, OFCs have allowed corporations and individuals to shelter tremendous fortune from taxation. The Panama Papers investigation revealed that 140 politicians from more than 50 countries, as well as celebrities, drug dealers, arms traffickers, and others, had secret accounts in the country. And Panama is but one of scores of tax havens around the world. Five countries alone account for more than 50% of the aggregate foreign funds parked with the Swiss banks.

India comes 47th in the Financial Secrecy Index published by the Tax Justice Network and has its very own term for financial secrecy called Benami. Singapore (rank 5), Mauritius (rank 51), and Netherland (rank 8) are the top three destinations for Indians to park their money.  More than 50% of the country’s FDI equity inflows and outflows are routed through these countries. They account for 59% of FDI inflows and 55% FDI outflow. If other tax havens are added to the list, their contribution to the total FDI would go up substantially. Moreover, the top ten jurisdictions from which India receives FDI inflows accounted for 87% of the total inflows between April 2000 and December 2019.

share of tax havens in india's FDI; inflows and outflows

The money held by the tax havens falls into two important categories. First the money held by wealthy individuals. It includes more than 70%of the financial wealth held by the citizens of the U.A.E., nearly 50% of the Russian wealth, and an average of 15% in Continental Europe.

The second category of money held in OFCs is the tax savings of multinational corporations. They use creative accounting mechanisms. And unlike the practices of individuals, what multinationals do is often legal. By increasing profits through tax avoidance, multinational increase the value of their stock. The taxes saved are used to subsidize the shareholders of the company. A good example of this is the Sweetheart Deal between Apple and Ireland.

This diminishes the tax revenue in countries where it otherwise would be paid by up to USD 600 billion every year. This includes USD 200 billion forfeited by developing countries, which can least afford it.

Some governments recently have taken the first step to identify offshore accounts and recover the taxes owed by individuals. Israel’s largest bank, Bank Hapoalim, and its Swiss subsidiary recently agreed to pay a fine of over USD 874 million for sheltering USD 7.6 billion in Americans’ assets.

The U.S. House of Representatives recently introduced a bill to counter money laundering and improve U.S. tax enforcement. This has resulted in the disclosure of 47 million accounts and improved tax compliance.

Britain, too, has recently taken some small steps to boost tax collection, requiring targets to reveal the source of unexplained wealth. But the U.K. is at the center of the largest global tax haven system. It is one of the greatest enablers of tax avoidance. It has tolerated tax havens such as Guernsey, Jersey, the Isle of Man, and the Cayman Islands for a long-long time.

Maybe we could all learn a little from the following example: in the 1960s, the French President Charles de Gaulle had taken an important step to stop French citizens from hiding their income and wealth in Monaco. At the time, France had a tax rate of over 50 percent, whereas Monaco didn’t tax the income of French nationals. De Gaulle stopped the practice by shutting down the one road to Monaco until the principality disclosed the names of French citizens using its banks.

We need to be prepared. We need to make sure that the impact of any global crises on finance and health is lessened in the future. The pandemic has made the facts very clear. It has changed the equations by which we have been living.

The tax havens are wrecking too many countries where multinationals make their money. And it will be really difficult for a single country to stop this. Companies might simply end up relocating. This would result in the loss of jobs and taxes for that country. But we still have an option…

What if the countries act ‘together’? Would they be able to stop or limit the practice of multinationals and individuals using taxpayer money?

Till next time…

Sources: /

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  1. Reduced rent, no cab fares and yes to savings

  2. Hi @senthil_v

    It can be treated as gift income received from your brother. Gift received from a relative is exempt from Income Tax, however should be reported under exempt income when filing your ITR.

    You can report it under the head Income from Other Sources and file ITR 1.

    As per the Income Tax Act, relative includes:

    • Spouse
    • Parents & Parents of your spouse
    • Siblings & Siblings of your spouse
    • Lineal ascendent or descendent or your spouse

    You can use the Know your ITR tool to determine which ITR form you need to file

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