“Tax Havens are states, territories or countries where there are nil or very low taxes”
This can either be due to certain tax laws, good governance or a clear sign of less corruption.’ Okay, now let’s put aside the textbook definition and find out what a Tax Haven is, in the real world.
What is a Tax Haven?
As suggested by many economists, a Tax Haven is an area where the taxation structure has loop holes which allows individuals and companies to take advantage of significantly lower taxes while engaging in domestic or international trade. A typical haven for certain institutional investors in India is Mauritius, which will we talk about later.
Why should there be a Tax Haven in the first place?
It is hard to pin point guidelines which promote the existence of Tax Havens but on a general basis, a Tax Haven can arise due to the following.
- Lack of transparency in a country’s taxation laws
- Lack of exchange of information between two countries
- Deliberate attempt by countries to formulate tax laws which act as ‘tax-shelters’ for non-residents engaging in foreign financial transactions.
- Specific laws/rules of a country which give undue protection to the financial information of the tax payers.
Why do Tax Havens attract investors?
Do we really need to spell this out for you? Wouldn’t you love the idea of paying ‘nil tax’? The tax burden seems to overweigh the worries and balance sheets of many individuals and corporates. To minimise the financial impact of tax levy, many individuals and businesses search for countries where tax laws work in their favour. A prime example of such a situation is the use of Mauritius as a Tax Haven by foreign investors who wish to invest in India.
The Double Taxation Avoidance Agreement (DTAA) between India and Mauritius has a loop hole regarding capital gains tax which investors like to exploit. Mauritius also has certain laws which protect the financial information of individuals and companies which work in the tax payer’s favour. However if you are thinking of jumping on this bandwagon, be warned because recent news suggest that the Indian government is taking active steps toward curbing such activities and minimise tax evasion. In a first, Mauritius also provided banking details of a person to India who was being investigated for money laundering and tax evasion.
Popular Tax Havens
Many Tax Havens have existed around the world. But were you aware of a few hot spots? Dubai, Hong Kong, Switzerland, Barbados, Cyprus, Liechtenstein and Republic of Panama are some of the well known Tax Havens.
What does this mean for you?
If you or your business are actively involved in overseas financial transactions, you may want to yield the benefit of a situation of lower taxes from such tax structures.
The best way to find out more is to refer to the Double Taxation Avoidance Agreement between India and the country with which the agreement exists. However in these modern times, the Indian government is going full steam to curb these loopholes, especially as these tax havens are heavily used to stash in Black Money.
Recently, the government of India identified 9 Tax Havens and will now be officially be able to exchange information and engage in agreements.