Tax Havens and the Alternatives: Lower Personal and Corporate Tax Rates in Australia Would Be a Far More Effective Way of Countering the Revenue Impact of Tax Havens. (Tax Avoidance)
Trayling, Mark, Journal of Banking and Financial Services
The use of tax havens has increased enormously in recent years. According to Organisation for Economic Development and Cooperation estimates, foreign direct investment by G7 countries into low-tax jurisdictions increased five-fold between 1985-1994.
Furthermore, US academics Hines & Rice estimate tax havens share 3 per cent of the world's GDP, while the aid agency Oxfam claims it could be costing developing countries up to $US50 billion a year.
This is not hard to imagine, considering The Cayman Islands is currently the world's fifth biggest financial centre and Bermuda (with a population of just 62,000) is the world's second biggest insurance centre.
Given the ability of tax havens to distort financial and investment flows and to undermine the integrity of tax structures, it is not surprising the OECD more recently has been cracking down on tax haven activity.
Over taxed and overly complex
What are the incentives for Australians to use tax havens? The obvious answer is that Australia has one of the highest tax rates in the world. But complexity is also an issue, given the size of the Income Tax Assessment Act 1936 alone equals four phone books!
Therefore, to avoid complicated rules and related taxes, some people have decided to resort to hiding behind banking secrecy rules and lower tax requirements elsewhere. After all, the argument goes, if a company cannot hope to get adequate returns on an Australian investment because of prohibitive taxes, what is wrong with using a foreign tax haven with low or no taxes?
It is also fairly easy to set up a company in a tax haven as well. Under Bahamas law, for instance, there are no corporate accounting or auditing requirements and not even the need to hold an annual shareholders' meeting.
Thomas Azzara, the author of Tax Havens of the World, advertises he is willing to incorporate a company within four days, charging a mere $US2100. As we can see from this, the costs are not prohibitive, and even more attractive when considering how much tax one could save. In fact it is a very realistic option for even small business owners.
The usual characteristics of tax havens are low corporate and personal taxes (e.g. no direct taxes), legislation the supports banking and business secrecy (e.g. no requirements to audit) advanced communication facilities and self-promotion as an offshore financial centre.
The Economist in January 2000 reported that Rupert Murdoch's News Corporation had earned profits of 1.4 billion [pounds sterling] in Britain since 1987, but had paid no corporate tax.
But while governments are clearly very concerned about tax evasion and tax avoidance, it is impossible to ascertain just how much of the tax havens' revenue consists of ill gotten gains.
Current Australian measures
Has Australia got the right legislation to deal with the issue and are tax havens really the menace they are perceived to be?
Australia has a number of measures in place already to discourage the use of tax havens, but it is questionable whether the measures cover all of those suggested in the OECD's Towards Global Tax Cooperation report.
The recommended OECD measures, in short, cover tax havens opening up, disincentives for their use and political pressure to bring about change.
In terms of choosing which countries to pressure, the OECD keeps a list of uncooperative tax havens that Australia could use. One of the first measures suggested by the OECD is to `require comprehensive information reporting rules for transactions involving uncooperative tax havens', with penalties for inaccurate reporting.
This would involve Australia forming bilateral agreements with tax haven countries to release company accounting information so as to ascertain whether the relevant company accounts have been properly audited/reported.
On its own, this recommendation is impractical. …