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Dr. R. Vaidyanathan Professor of finance Indian Institute of Management -Bangalore India 560076 Ph: 918026993086[W] 919742221357[M] E-mail vaidya@iimb.ernet.in
Prof.R.Vaidyanathan,iimb,2013
Introduction
In the last decade there have been three major trends in the global financial markets which are of utmost importance to the emerging countries. One is the convergence of different financial services wherein the banking sector, securities industry and insurance business are being conducted by the same institution. The second is the significant increase of the role of information technology particularly Internet in these activities, which provide clues to the extinction of traditional intermediation. The third is the global reach of the off shore centers or Tax havens with their instruments and institutions which brings to focus the inadequacies of the existing premises and policies of the national regulatory authorities. This issue of tax Havens have occupied the Centre stage in the discussions on Global financial architecture particularly in the context of the Global meltdown in Financial markets and 9/11 terror attacks. There exist more than seventy tax havens or secretive tax jurisdictions and all of them are facing pressures from G-20 and OECD type organizations to become transparent and cooperative in finding tax evaders.
Prof.R.Vaidyanathan,iimb,2013
[Quote]
These are foreign jurisdictions that offer financial secrecy laws in an effort to attract investment from outside their borders. These jurisdictions are commonly referred to as tax havens, because in addition to the financial secrecy they provide, they impose little or no tax on income from sources outside these jurisdictions. It is difficult to quantify the amount of assets being held offshore or the rate at which the industry is growing. But it is estimated that some USD 5 trillion in assets is held offshore in tax havens. One authority estimate that the annual revenue loss to the USA at a minimum of USD 70 billion. Tax haven service providers and their clients know their actions are veiled from tax authorities by banking and commercial secrecy laws and by lack of tax treaties or tax information exchange agreements. They create paper entities to disguise the real parties to the transactions, and many are willing to create false documents to disguise the real nature of transactions. At least forty countries aggressively market themselves as tax havens. Some have gone so far as to offer asylum or immunity to criminals who invest sufficient funds. They permit the formation of companies without any proof of identity perhaps even by remote computer connections. Generally though such extremes are found in emerging nations where the stability and security of the financial, legal, political systems is questionable The largest concentrations of assets are attracted to the stable secure environments of the established tax havens those that have existed a number of years and enjoy the diplomatic protection of former colonial powers.
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It is similar to the definition offered by Richard Murphy of Tax Justice Network. Shaxson also suggests that More than half of world trade passes, at least on paper, through tax havens. Over half of all banking assets and a third of foreign direct investment by multinationals corporations are routed off shore.
The US Government accountability office reported in 2008 that 83 of the USAs biggest 100 corporations had subsidiaries in tax havens. Tax justice Network discovered that ninety nine of Europes hundred largest companies used off shore subsidiaries. In each country the largest user by far was a bank. IMF estimated in 2010 that the balance sheets of small island financial centers alone added up to $18 trillion a sum equivalent to about a third of the world GDP.
These tax havens are estimated to number more than 70 but as the IRS [USA] discussion reveals that around forty of them aggressively market themselves as tax havens. The popular one is Switzerland, besides Luxemburg, Lichtenstein, Channel Islands, and Bahamas etc.
Prof.R.Vaidyanathan,iimb,2013
IMF estimates global black money excluding Switzerland, China, Taiwan and Oil exporting economies -- at $18 trillion; that still an underestimate, says IMF.
The latest available IMF figures show portfolio assets held by foreigners in Luxembourg to be worth $1.5 trillion at the end of 2008. But looking at statistics provided by the Luxembourg Government on portfolio investment liabilities for the country the mirror image of the asset information held by the IMF there is a big discrepancy. The investment liabilities in Luxembourg were $2.5 trillion $1 trillion (726bn) more than the assets reported. Milesi-Ferretti said: This is a huge difference, almost 40%, and is unlikely to be entirely accounted for by the fact that some countries do not report their portfolio investments or their destination to the fund.
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Recent Examples Tunisia- Zine El Abidine Ben ali Egypt- Hosni Mubarak Pakistan- Benezir Bhutto/ Haiti-Baby Doc Duvalier Freezing of Assets of -- Politically Exposed Persons
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Indian Scene-1
The Global financial Integrity a Non-profit research organization working in the area of Tax Havens has estimated for India that the present value of illegal financial flows held abroad is nearly $500 Billions [12] Our GDP or national income at that time was nearly USD 1200 billons. And so nearly 40 % is outside as illegal wealth. At say 50 rupees to a USD it comes to INR 25000 Billions. So now there can be no dispute about the amount of Indian wealth stashed away abroad. GFI says that more than two-thirds of this amount has been stashed away after the liberalization of the Indian economy in 1990s. It means that those aspects of the liberalization policies, which must have facilitated this process, must be scrutinized as part of the preventive efforts needed to tackle the accumulation of Indian black wealth abroad on an ongoing basis.
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Indian Scene-2
Now let us look at what kind of black money from elsewhere is lodged in secret Swiss bank accounts. We saw that nearly one trillion out of 2.8 trillion of Swiss money CHRis black money says Konrad Hummler The Chairman of the Swiss private Bankers Association. Julian Assange of Wiki leaks fame has told an Indian TV channel that Indians are largest investors in Swiss Banks. That means out of 1 trillion USD [the Swiss Currency is nearly same as US Dollar] more than 50 % is owned by Indians. This alone comes to USD 500 billion. This is only Bank deposits. Then there are other exotic financial products offered by Swiss Banks offshore also-where Indians are invested. Plus there are funds accumulated directly abroad through commissions in defense contracts [remember Bofors!] which is not going out of the country due to trade mis-pricing. The International Narcotics Control Strategy Report Money Laundering and Financial Crimes March 2009by US department of state suggests that 30-40 percent of the inflows may be by Hawala market not accounted. During 2007-2008 according that report formal inflows were USD 42.6 billion and so 40 percent of this namely USD 18 Billion could be reflected as illegal flows not captured by the law. This sum could be paid for in rupees here but stored in tax havens abroad. This Hawala deals are for only one year. Hence one can conclude that GFI estimate of USD 500 billion is a lower band and 1.5 trillion USD can be an upper band. That means it is between Rs.25 000 Bn and 75 000Bn [at 50 Rs per USD].
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Indian scene-3
Not just tax evasion, but theft and plunder says the Indian Supreme Court But on the 19th of January-2011 [Wednesday] the Supreme Court of India made an historic observation about this shameful phenomenon of Indian funds kept illegally abroad and the obstructionist attitude of the Central Government in unraveling the truth. The Bench was observing on the Petition filed by Ram Jethmalani and others with reference to the illegal money kept by Indians in the Lichtenstein bank Quote
Describing black money stashed away abroad by Indians as pure and simple theft of national money, the Supreme Court on Wednesday questioned the Centre's approach to tackling this menace and retrieving the huge amount kept in foreign banks. When Solicitor-General Gopal Subramaniam furnished in a sealed cover a list of 26 names who had accounts with Liechtenstein Bank, a Bench of Justices B. Sudershan Reddy and S.S. Nijjar was not convinced of the steps taken by the government for getting back black money. Justice Reddy, after perusing the list, told the SG: This is all the information you have or you have something more! We are talking about the huge money. It is a plunder of the nation. It is a pure and simple theft of the national money. We are talking about mind-boggling crime. We are not on niceties of various treaties. The Bench was hearing a petition filed by the former Union Law Minister, Ram Jethmalani, and others. Appearing for them, senior counsel Anil Divan earlier alleged inaction on the part of the Centre in bringing back black money parked in foreign banks. Unquote
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Indian Scene-4
It is important to recall that our Honorable President in her address to joint session of Parliament on 4th June 2009, after the UPA II government took over immediately after the Lok Sabha elections 2009 when the illegal Indian monies abroad had become an election issue and the Congress Party after denying its existence had to promise to bring back illegal Indian monies abroad, states as under: [36]. My Government has been able to significantly increase realization of direct taxes as a result of improved and simplified tax administration and this process will continue. The roadmap for moving towards a Goods and Services Tax will be vigorously pursued. My Government is fully seized of the issue of illegal money of Indian citizens outside the country in secret bank accounts. It will vigorously pursue all necessary steps in coordination with the countries concerned. [http://presidentofindia.nic.in/sp040609.html] But the actions of this Government, detailed hereunder, do not match the vigorous steps promised by the honorable President.
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Corporate use of Tax Havens Multinational Enterprises (MNEs) have spread their roots across the globe Complex and obscure ownership structures Tangle of hundreds of affiliates and subsidiaries Opportunities to avoid taxes since their very inception! Inter-group transactions used to shift taxable income from high-tax to low-tax jurisdictions It is likely that less than 10% of the worlds corporations are part of multinational groups but it is estimated that about 60% of world trade in is in the nature of intra-group sales (sales between members of a common MNE group)! (TJN 2008)
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Conclusions
Tax Havens or Secretive jurisdictions are passe USA/ Germany/France/UK are all for regulating/restricting Tax Havens Global recession and anger on the illegal money Terrorism related issues is also of concern Emerging Markets are severely affected since for every 1 Dollar Aid 10 Dollars is sent as illicit money. Emerging Markets need to have coordinated efforts It is not just Tax evasion it is illicit wealth and it should be returned to the rightful ownersordinary citizens of emerging markets.
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