That India’s supreme market regulator, Securities and Exchange Board of India (Sebi), should throw up its hands in its quest to find the beneficial owners of some offshore entities, is one of the oddities of international finance. After all, a year ago, Western nations under the NATO umbrella, got together to freeze Russia’s financial assets following its invasion of Ukraine. So how is it possible that tiny nations like Bermuda or Cayman Islands can defy global norms to become havens for tax avoidance as well as opaque shell entities that are impenetrable for powerful regulatory agencies?
These offshore financial centres have become a vital part of the corporate jigsaw. With companies setting up extremely complex structures of parents and subsidiaries for their ownership as well as their operations, these destinations come in very handy. Regulation in such places is loose and taxation heavily loaded in favour of multinationals.
The history of such havens dates back to the late 19th century but they were given their current form and structure only around the time of the First World War, when some countries started putting in place systems and policies to nurture them. Their subsequent growth is also a consequence of the increasing freedom for sovereign states to write their own laws.
Significantly, many of the best-known tax havens today, including the Channel Islands, Jersey, Guernsey, the Cayman Islands, Bermuda, British Virgin Islands, and Gibraltar, emerged from close links to the City of London, once the financial epicenter of the world. But perish the thought that it is only inaccessible islands that provide companies and wealthy individuals with sanctuaries. Switzerland’s well-known banking system or Luxembourg’s wealth management industry are equally complicit in what has been described as the most legal loot of global wealth. That’s because a country and its government have to enact specific laws and regulations to become viable tax shelters.
The Corporate Tax Haven Index is a ranking of jurisdictions most complicit in helping multinational corporations underpay corporate income tax. The index is based on an evaluation of each jurisdiction's tax and financial systems to arrive at a ranking of what it calls “the world’s greatest enablers of global corporate tax abuse”. A jurisdiction’s Haven Score is a measure of how much scope for corporate tax abuse the jurisdiction’s tax and financial systems allow.
A look at its last such ranking, in 2021, throws up some unexpected names. The top 10 jurisdictions according to the report are British Virgin Islands, Cayman Islands, Bermuda, Netherlands, Switzerland, Luxembourg, Hong Kong, Jersey, Singapore and the United Arab Emirates. Noticeably, India isn’t one of the countries in the list which is probably what forces so many Indian companies to make a beeline for these overseas havens.
The impact that these havens have on developing nations like India is actually more onerous than on developed nations. According to the report, “Governments around the world lose over $427 billion in tax every year to global tax abuse. These tax losses are particularly damaging to lower income countries, which lose the equivalent of half of their combined public health budgets every year to global tax abuse.”
Just how powerful these tax havens have become can be judged by the abject failure of various efforts to reign in their powers. Thus, the Organisation for Economic Co-operation and Development (OECD) launched the Common Reporting Standard (CRS), whereby financial information could be automatically exchanged across borders allowing tax authorities in various countries to track the offshore holdings of their taxpayers. However, several loopholes related to residence status for some people as well as the refusal of some powerful countries to share information with smaller and less developed countries, meant that the initiative had little impact.
After repeated failures, the OECD has now come up with a proposal for a global corporate minimum tax rate of 15 percent on a corporation’s “book” profits in participating countries, currently numbering 137. The implementation, expected by next year, could pose challenges but the objective makes it worth trying out. The plan is meant to counter efforts by low-tax countries to attract investment away from higher-tax jurisdictions.
So far, offshore tax havens have resisted efforts to breach the secrecy they provide those who seek their shelter. But their increasing level of misuse is forcing regulators across the world to seek laws that force them to open up.
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