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) underBEPS: 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.