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Definition: Tax Haven
Tax havens is a country or a jurisdiction which offers no or low tax liability to businesses and individuals and has high levels of secrecy, few regulations and political stability. The 3 factors considered by Organisation of Economic Cooperation and development (OECD) to determine whether a jurisdiction is a tax haven or not are
• Low or no taxes: Tax havens have almost nil or very low taxes. Non-residents can take advantage of this by escaping their own country’s high taxes and paying very low taxes in the tax haven.
• Secrecy: Tax havens have strict laws and administrative practices which prevents them from disclosing information about tax payers who are benefitting from the lower tax jurisdiction
• Lack of transparency: Lack of transparency in legal and administrative practices which would make it difficult for the tax authorities of other countries to apply their laws in the tax haven. Secret rulings and negotiated tax rates which are not disclosed are examples of lack of transparency
Some of the strategies adopted by companies in order to gain tax and financing benefits are
• Transfer Pricing- companies have the ability to determine the jurisdiction in which profits are realized
• Patent and Intellectual property licensing in a tax haven
• Asset revaluation and leasing- a single asset is depreciated twice, first in the home country and then in a tax haven
Tax havens have become a popular destination for MNCs, big banks and HNIs. Around $21 to $32 trillion are invested in tax havens. Some of the major tax havens are Hong Kong, Ireland, Lebanon, Liberia, Panama, Singapore, Switzerland, Cayman Islands, Barbados, Isle of Man, Mauritius etc.