Why in the news?

  • An analysis of an RBI data showed that almost 56% of India’s outward FDI investments are going to Tax havens due to the strategic advantage of such countries.

Tax Havens

  • What is it?
    • Tax havens are jurisdictions or countries that offer low or zero tax rates on certain categories of income, along with financial secrecy and minimal regulatory oversight, attracting individuals and corporations seeking to reduce tax liabilities.
    • They are often small economies but play an outsized role in global finance.
  • Examples of Tax Havens: Cayman Islands, British Virgin Islands, Luxembourg, Switzerland, Singapore, Hong Kong, Mauritius and Cyprus.
  • Features of Tax Havens:
    • Low or Zero Taxation: Corporate profits, personal income, capital gains often exempt or lightly taxed.
    • Financial Secrecy: Laws protect confidentiality of investors and companies.
    • Ease of Incorporation: Quick company registration with minimal disclosure requirements.
    • Liberal Regulations: Looser rules for banking, investment, and accounting.
    • Political & Economic Stability: Attracts foreign wealth.
  • Why they are preferred:
    • Tax Avoidance: Legally shifting profits to low-tax jurisdictions.
    • Tax Evasion: Illegally hiding income/assets to escape taxation.
    • Round-Tripping: Domestic money routed abroad and reinvested as FDI to gain tax benefits.
    • Shell Companies: Entities without real business operations, used for profit shifting.
  • Concerns regarding Tax Havens:
    • Revenue Loss to economies: Developing countries lose billions in tax revenues.
    • Inequality: Benefits large corporations and ultra-rich individuals, widening wealth gap.
    • Black Money & Money Laundering: Havens often linked to illicit financial flows.
    • Base Erosion & Profit Shifting (BEPS): Companies artificially shift profits to reduce tax burden.
    • Erosion of Sovereignty: Undermines domestic tax laws.
  • Efforts to Curb Abuse:
    • OECD’s BEPS Framework: Combat tax avoidance by multinational corporations.
    • Global Minimum Tax (2021 G7 & OECD agreement: 15% minimum corporate tax globally.
    • India’s Measures:
      • GAAR (General Anti-Avoidance Rules, 2017).
      • Renegotiation of DTAA with Mauritius, Cyprus, Singapore.
      • Participation in OECD/G20 BEPS initiatives.