Havens on their way to Have-Nots

Context: The UAE’s recent moves under Base Erosion and Profit Shifting (BEPS) should act as a catalyst for Zero Tax Havens countries to follow similar guidelines.

Issues with Tax Havens:

• Provision of Zero Tax: Tax havens offer low or zero tax rates, as well as adept secrecy laws designed to appeal to foreign investors.
• Provide an escape route from financial regulations, disclosures, criminal liability and provide an easy route for money laundering.
• This unfairly erodes the tax base of other countries since companies shift their address to such countries which are tax havens.
• For, E.g. Many Indian businesses hired letterbox companies, warehouses in the UAE, showing them as a ‘trading hub’ and shifted profits generated in other jurisdictions to the UAE.
• Encourage Monopolies: The economic system tilts the playing field against SMEs, boosting monopolisation since users of tax havens are usually large financial institutes and MNCs. 

Steps were taken to counter Tax Havens:

• The Organisation for Economic Cooperation and Development (OECD) under BEPS: discourages its member countries and certain tax havens from pursuing policies that unfairly erode the tax base of other countries.
•  It particularly disapproves preferential tax regimes like low or no tax for foreign investors, and lack of transparency.
• Double tax Avoidance: Many tax havens like Mauritius, Singapore, and the United Arab Emirates (UAE) signed agreements to avoid double non-taxation.
• Increased Regulatory Checks: 
• Countries such as UAE are ensuring that companies incorporated in the country (zero corporate tax jurisdiction) are not shell and post-box companies.
• For, E.g. The UAE under its Economic Substance Return(ESR) have made certain guidelines like holding of board meeting and necessity of a quorum of Directors physically present in the UAE.

Way Ahead: 

• Catalysing Change: Steps taken by UAE will inspire other jurisdictions which are still in the EU blacklist: American Samoa, the Cayman Islands, Fiji, Guam, Oman, Palau, Panama, Samoa, Seychelles, Trinidad and Tobago, the US Virgin Islands and Vanuatu.
• Test For Economic Activities: Key tests for economic substance are real activity, real presence and real management.