The dilemma that is tax haven

Mon, 8 Apr Pre-Open

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The International Consortium of Investigative Journalists (ICIJ) - a group of global investigative journalists who have been researching this story - reportedly has details and data which is nearly 160 times the size of the US State Departments' documents leaked by Wikileaks in 2010. This is believed to be the biggest amount of information on the offshore system ever obtained by any media organization. It is believed that 612 Indians have such offshore accounts. And this news has made headlines across. These are just a few people amongst the 120,000 account holders of individuals and entities from across 170 countries. In fact, a handful of names of the Indians have been disclosed in the first wave of information release. Given the size of the data, the ICIJ is reportedly planning to release data in a phased manner. Nevertheless, whose names and what information gets divulged in the coming future will be highly awaited.

But lets go back to basics.

What is tax? A compulsory contribution to the government. What is a haven? It is defined as a place of safety or refuge. Putting the two together, we get 'tax haven', a place of safety from compulsory contribution to the government. Or as considered in layman's words, it is a place where the rich stash away their wealth to avoid paying taxes. That is what is the most general belief.

'Tax haven' as explained on Investopedia is - 'A country that offers foreign individuals and businesses little or no tax liability in a politically and economically stable environment. Tax havens also provide little or no financial information to foreign tax authorities. Individuals and businesses that do not reside a tax haven can take advantage of these countries' tax regimes to avoid paying taxes in their home countries. Tax havens do not require that an individual reside in or a business operate out of that country in order to benefit from its tax policies.'

Given the basic structure of such a place, an individual with substantial amount of wealth would essentially be unwise if he does not take advantage of such a situation. Or for that manner, companies would try to use the loopholes to avoid tax if it is possible. Therefore, while on one hand there are rules and regulations that legitimize tax avoidance, on the other there is an outcry over general avoidance of taxes.

Thus, if the procedure is legal, there would definitely be people making use of it. Then there is the issue of complexity and unfairness. While we do nothing to solve the issue of double taxation, we squirm if the same firms resort to double tax avoidance. While the decision of the current Finance Minister to defer the General Anti Avoidance Rules (GAAR) is one thing, it is a topic for another day.

The discussions on tax havens and black money have been going on for a while and a possible solution to put an end to corruption and tax avoidance would be to have uniform tax rates globally. But what are chances of that happening?