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The Who's, The What's And The Why's of Tax Havens
By Shailendra Kumar, Founder Editor (Dated: Feb 16, 2012)
Mar 23, 2020

TAX Havens are once again back in the news, with a bang! First, the local news! Even as India's three leading research institutes are in knots to arrive at some realistic figures of black money generation in the economy and the quantum thereof, the CBI Director sprang a surprise by disclosing a concrete figure of USD 500 bn Indian funds parked in tax havens! Speaking at the first 'Interpol Global Programme on Anti-Corruption & Asset Recovery', Mr A P Singh said that Indians are apparently the largest depositors in Swiss Banks. How realistic is this figure is not known. How did the CBI Director arrive at this quantum, and what were the methodologies applied to work it out are not known. But if there is some science behind his computation, it would indeed help the Finance Minister's team working on the much-talked about 'White Paper' on Black Money and the Indian wealth parked in tax havens.

Meanwhile, to answer the billion-dollar question of how to bring the trillion or billions of dollars owned by Indians back home from tax havens, the outgoing CBDT Chairman, Mr Mukesh Joshi, who was heading the Black Money Committee, has apparently recommended that the Finance Minister may explore the possibility of an Amnesty Scheme. Will FM pay studied attention to it or not would be known on March 16 when he is scheduled to roll out various possible measures to tap the lost wealth of the country.

Let's now pan our eyeballs to the global landscape for tax havens related news. A laborious study done by the UK-based NGO ActionAid has been hogging headlines and its content creating ripples across the Euro Zone. As per this Study, out of 100 large corporate groups listed on London Stock Exchange, 98 sumptuously use tax havens. And the biggest users are the banking, oil & mining and advertising companies. Netizens may recall that the financial whirlwind in which the entire global economy is caught today, originated from none but the banking and financial sector, thanks to their toxic mix of financial products. Before we focus a little more on the key bankers and 'look through' their modus operandi, let's first take a 'look at' some of the highlights of this Study:

++ the UK's 100 largest groups listed on LSE have 34216 subsidiaries, JVs and AEs. About 38% (8492) of their foreign companies are addressed in tax havens;

++ bankers are the heaviest users of tax havens with a total of 1649 tax haven companies between the UK's big four banks. In Cayman Islands, Barclays alone has 174 companies;

++ the undisputed biggest tax haven user is the advertising company WPP, which has 611 tax haven companies;

++ the cream 100 companies of the UK have 600 subsidiaries in Jersey; 400 in the Cayman Islands and 300 in Luxembourg; and only about 400 in whole of China.

Let's go back to 2009 when the G20 launched its first salvo against tax havens. Since then, hundreds of Tax Information Exchange Agreements (TIEAs) have been signed under the tutelage of OECD, and many economies claiming partial success in cleaning up their banking sectors, but this Study shows that the global bankers have still been doing a brisk business via tax havens. HSBC is the biggest user of tax havens with a total of 556 subsidiaries ; Lloyds Group has 97 companies in the Channel Islands; and HSBC has 156 companies in the American State of Delaware, compared to 97 in the rest of the USA. Worldwide, banks have also been getting a good deal on their tax liabilities - partly through tax avoidance and partly by setting off their losses accumulated during the financial crisis.

The Study further states that oil and mining companies have also been making a good use of tax havens. Shell and British Petroleum have about 1000 tax haven subsidiaries between them, including 100 in the Carribean with no oil reserve at all. British American Tobacco, which largely operates in developing countries, has 200 tax haven companies.

All these facts culled out by the ActionAid pose a serious question - What message does it have for a transitional economy like India? Governments in most developing countries are starved of resources. The MNCs operating in the developing world lead to huge revenue losses that no government can afford. How do they do it? Transfer Pricing is the answer to this question. The MNCs pumping FDI into developing economies generate huge profits and shift them to tax havens - no tax or low tax jurisdictions. This explains the reason why so many top UK companies feel compelled to locate their subsidiaries in tax havens. In other words, the message for the countries like India is that it needs to hugely strengthen its transfer pricing and international taxation regime.

Early this week, while addressing the Central Direct Taxes Advisory Committee, the Union Finance Minister, Mr Pranab Mukherjee, said that the Directorate of Transfer Pricing has helped in saving Rs. 66,085 Crores during the last year by timely stopping the illegal transfer of money through transfer pricing. He further added that 25 tax treaties have been already concluded for improved exchange of Information. He said that India has also signed Multilateral Convention on Mutual Administrative Assistance in tax matters for automatic exchange of information, exchange of past information and assistance in collection of tax claims among others.

Although the UPA Govt has been trying hard to launch multi-pronged attack on black money generation and transfer of profits outside India by MNCs, but it is clear that all these measures are not adequate to plug the loopholes. A lot many measures like APA, CFC rules and thin capitalisation provisions are immediately required in addition to GAAR, and the Exchequer cannot wait for the DTC Bill to be vetted over a period of two years. Why?

Let's go back to the ActionAid Study. India and the UK have very good bilateral trade worth 13 bn pounds. But the UK's 100 top companies have fewer subsidiaries in India (334), than in Luxembourg (336). The Study underlines that SABMiller uses tax havens to siphon profits out of developing countries across Africa and India. It estimates that the tax it avoids in Africa is enough to educate an additional 250,000 children there.

Let's recall the OECD's study in this context, which underlined that the developing countries lose almost three times more to tax havens than all the aid they receive per annum. Thus, the message for the Indian Finance Minister is not to dissipate his energy in convincing the UK Govt not to cut their aid to India in the wake of the defence aircraft deal going the French way, and focus more on safeguarding his legitimate revenue by making time-tested legal provisions and strengthening the Directorate of Transfer Pricing. The tall figures being quoted by the FM at every meeting about saving of Rs 66000 Crore through TP may look tiny if the exact quantum of revenue leakage is estimated. The message is loud and clear - it is not prudent to put all our eggs in the FDI basket, and look for resources for our infrastructure and anti-poverty schemes. Instead, India needs to focus on preventing the flight of legitimate tax revenue out of India through the AE-route of the MNCs, in addition to Indian tax dodgers parking their tax evaded wealth in tax havens.