Tax havens: conduits for corporate tax malfeasance
| DOI | https://doi.org/10.1108/JFRC-04-2016-0039 |
| Date | 13 February 2017 |
| Published date | 13 February 2017 |
| Pages | 86-104 |
| Author | Akanksha Jalan,R. Vaidyanathan |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation |
Tax havens: conduits for
corporate tax malfeasance
Akanksha Jalan
Center for Capital Markets, Indian Institute of Management Bangalore,
Bangalore, India, and
R. Vaidyanathan
Indian Institute of Management Bangalore, Bangalore, India
Abstract
Purpose –This paper is an effort to demystify tax havens – what they mean, what they offer and why they
are harmful. It offers a detailed analysis of abusive tax planning by multinational corporations, involving the
use of tax havens, shedding light on how corporations use “egregious” tax-sheltering techniques right from
their incorporation to avoid payment of income taxes. The paper also discusses global efforts against the
phenomenon and policy recommendations.
Design/methodology/approach –The paper brings together denitions from various sources to
accurately dene and identify tax haven economies. The key contribution of the paper is to diagrammatically
explain the use of tax havens by MNCs right from the time they are incorporated. It explains how every big and
small corporate decision is motivated by the desire to save taxes and how tax havens come in handy for such
corporations.
Findings –This paper nds that base erosion and prot shifting (BEPS) is a pervasive phenomenon, largely
due to the suppliers of tax haven operations. Here, corporate decisions are divided into strategic and
operational and further subdivided into investing, operating and nancing activities, and provide real-life
corporate examples of how tax havens t into almost every corporate decision. This is the key contribution of
the paper.
Research limitations/implications –This is a review paper that sums up knowledge about tax havens
and their use by MNCs. It does not, however, use empirical data to corroborate its ndings. It would be
interesting to see empirically whether MNCs with greater tax haven operations actually have lower effective
tax rates.
Practical implications –The paper can provide a framework for designing tax policies in a manner that
geographical arbitrage can be minimized. It can enable formulation of the necessary incentive structures in the
form of penalties, rewards and the like for both the users and providers of tax haven services to curb massive
base and prot shifting out of high-tax countries.
Social implications –The paper is one small step in the direction of bringing about equality in tax payments,
i.e. to align real tax systems with the canon of equality that Adam Smith once dreamt of. Taxes should be
progressive in nature, implying that the amount of taxes paid should increase with one’s income. However, with the
advent of offshore nancial centres and egregious tax planning techniques, only the smaller corporations and
middle-class individuals end up paying taxes, while the rich and bigger corporations get away easily.
This paper is an effort to demystify tax havens – what they mean, what they offer and why they are
harmful. Tax havens are secrecy jurisdictions that enable wilful tax planning by multinational
corporations worldwide. In the light of the global corporate tax misbehaviour, these have come under
policy glare. Starting with explaining the meaning and relevance of taxes in general, the paper offers a
detailed analysis of aggressive tax planning by MNCs, involving the use of tax havens. By highlighting
the various mechanisms through which corporations push the envelope of the tax laws, the paper goes
on to show how such mechanisms obey the word but defeat the spirit of tax laws. In fact, careful tax
planning starts much before a corporation is even born. This issue is important because not only does
it shift the tax burden to the ordinary citizens of a country, but also breeds disrespect for tax laws across
the globe. Finally, the paper talks about policy issues and global effort in curbing tax misdemeanour.
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1358-1988.htm
JFRC
25,1
86
Journalof Financial Regulation
andCompliance
Vol.25 No. 1, 2017
pp.86-104
©Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-04-2016-0039
Originality/value –The paper explores in detail the manner in which MNCs use, rather exploit, regulatory
loopholes in tax systems of different countries to save on tax payments. By shifting their tax base from one
country to another, MNCs not only hamper Treasury collections but also breed disrespect for the global tax
system. The paper can help in designing tax laws in tune with such corporate motives.
Keywords Corruption, Tax evasion, Anti-money laundering, Financial regulation,
Compliance and regulation, Corporate compliance
Paper type Research paper
1. Understanding Taxes
1.1 Denition
Simply dened, taxes are any compulsory contribution that the State (i.e. governments)
imposes upon their citizens without any promise for a proportional return (no quid pro quo).
The rationale behind taxes is to equip the State with enough funds that enable it to undertake
developmental activities such as providing basic health-care facilities, infrastructure,
defence expenditure, etc.
The 4 key functions of taxes are the following (referred to as the 4Rs) (Cobham, 2005):
(1) Revenue generation: They serve as the most convenient and risk-free source of
revenue to the Government.
(2) Redistribution: Direct taxes being progressive in nature, help in achieving the goals of
equitability in income and wealth. Because the rich pay higher taxes, they bridge the
gap between the rich and the poor.
(3) Re-pricing: They enable the State to inuence the behaviour of its individual and
corporate citizens. For instance, increasing the penalties on environmental pollution
or offering tax incentives to save can yield signicant benets.
(4) Representation: They also strengthen political representation by inducing civic
consciousness among the residents of the country about the manner and use of public funds.
1.2 Tax competition: the true culprit
In its report titled “The OECD (1998) Report on Harmful Tax Competition”, the Organization for
Economic Cooperation and Development (the OECD) has attracted attention towards harmful tax
practices by certain jurisdictions that are attempting to derail the tax policies of other countries
across the world. While globalization is reducing trade barriers and opening up new avenues for
capital ows and development, attempts to attract foreign funds among countries is also on the
rise. The OECD does not interfere as long as the intention of doing so is legitimate and does not
involve the use of “aggressive tax practices” that disrupt the tax systems of other countries.
The report describes the situation as follows:
[…] globalization has, however, also had the negative effects of opening up new ways by which
companies and individuals can minimize and avoid taxes and in which countries can exploit these
new opportunities by developing tax policies aimed primarily at diverting nancial and other
geographically mobile capital. (OECD, 1998)
1.3 Why can tax competition prove disruptive?
The OECD (1998) report puts forward the following reasons:
•Erosion of national tax-base of non-haven countries: When income earned in a country
is shifted to a low- or no-tax country, the tax base in the former shrinks signicantly.
Government collections suffer.
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Tax havens
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