Tax haven – The 20-trillion dollar question
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What is the Caribebean famous for?
The Caribbean is not only famous for its beautiful beaches but also has made headlines for years for its tax haven reputation. Recent years, many policy makers have been voicing their concerns about corporation’s tactics to avoid tax by shifting profits overseas. Tax haven is also a major political issue. During his presidential campaign in 2012, Mitt Romney went under fire for his holdings in Cayman Island which, according to the U.S. Department of Treasury’s 2011 estimate, held almost 1.4 trillion dollar of hidden assets for tax evasion purposes.
So what exactly is a tax haven country and why it is such a major concern for policy makers? In order to stimulate their economic activities, tax haven countries offer attractive tax rates to attract investments from foreign investors whose home country’s tax rates are much higher. To avoid paying taxes, corporations open “shell” subsidiaries oversea and shift their profits to such subsidiaries. U.S. law doesn’t require companies to record or pay taxes on profits earned by overseas subsidiaries as long as the money isn’t brought back to the U.S. The money, however, is not trapped oversea either. It is brought back to the U.S. by corporations’ internal short-term loans between subsidiaries.
The jury is still out on whether tax haven countries have hurt the higher tax countries’ economic activities. However, some recent research have pointed out that tax haven status actually boosts investments in those countries with lower tax rates. On the other hand, corporations, without a doubt, are the ones who benefit the most. In 2012, corporations were able to shield more than 40% of annual profits from U.S. tax authorities. An average U.S. corporation pays 12.1% in tax. 25 corporations paid their CEOs more than what they paid the government. Bank of America, in 2012, paid no taxes while stashing $17.2 billion offshore profits in 314 offshore tax havens.
The U.S. and the European Union have worked hard to put more pressure on these tax haven countries to either end their tax haven status or provide more information on corporations who are hiding money from tax authorities. In August 2013, Switzerland, after three years of intense battle with the U.S., signed an agreement to put an end to its status as one of the most popular destinations for American wealthy clients to evade tax. A spokeswoman for the Swiss Bankers Association called the deal “very, very painful for the banks” as Swiss banks would have to disclose detailed information about U.S. accounts. The European Union, in 2013, forced Cyprus to scale back on its tax-shelter activities as part of the 13-billion bailout deal provided for Cyprus by the E.U.
So the 20-trillion-question is how to solve the problem of corporation avoiding paying taxes by stashing profits in tax haven countries. As Switzerland and Cyprus removed themselves from tax haven country list, many other countries are actually eager to join the list. Latvia, Kenya are working to implement new tax laws to attract foreign investors. Putting pressure on tax haven countries, obviously, is not the long-term solutions. Many people are calling to a more controversial solution which is “lowering tax rate”. Though it might sound contradicting at first to tax authorities who are looking into way to collect more taxes, the proposal actually does make sense. The government will be able to collect taxes on the 20 trillion dollars parked in offshore accounts. Corporations will have more incentives to be more transparent on their tax reporting. Many people, however, are opposing this idea, reasoning the corporate tax rate is already low enough. It seems like the debate on tax haven will still be a major headache for while. That is why it is a 20-trillion dollar question.