Globalization, liberalization, and privatization were all prominent in the second half of the twentieth century. Under the auspices of International Economic and Trade Institutions such as the World Trade Organization (WTO) and the International Monetary Fund (IMF), as well as technological development, trade relations between nations expanded beyond municipal boundaries, and formerly local trade corporations transformed into Multinational Corporations (MNCs) of the modern world. With their vast resources, these MNCs increasingly play a crucial role in commerce, business, products and services, and employment. Because these MNCs can influence government policy at all levels, they are frequently caught flouting financial restrictions, particularly tax legislation. Tax Havens, as key players in the global financial landscape, have become an attractive avenue for MNCs to optimize their tax strategies. This study delves into the realm of Tax Haven Regulation, shedding light on the legal obligations and implications of these offshore jurisdictions.
According to numerous resources, the inherent ambiguities in tax legislation at the national and regional levels sometimes entice major MNCs to exploit the rules, resulting in massive revenue losses for governments.4 Because the availability of tax money is a prerequisite for nations to engage in developmental activities such as trade, commerce, employment, and other welfare programs, a decrease in tax collection has a direct impact on them. Thus, a drop in tax collection is more than just a loss of income; it is a direct hit to development and welfare.
The nations are now united together as a result of globalization. However, the simultaneous globalization of national economies has allowed for unfavorable tax competition across countries. With the global economy becoming more interconnected, a nation’s tax policies have a larger chance of having an impact on other nations. While the benefits of tax competition are numerous, the municipal tax policies of one nation can be detrimental to those of other nations, particularly when that nation lowers taxes to lure multinational corporations to locate their corporate headquarters there without making any significant changes to its own tax structure.
As a result, these tax havens draw MNCs to relocate there in order to maximize profits by avoiding taxes. The tax competition pattern casts questions on the core goals of globalization. The continued existence of tax havens throughout the globe is a sign of a highly skewed international order in which fairness in commerce and business is the first thing to go, creating extreme inequality. Research data gathered by organizations like Oxfam and others demonstrate the reality of rising inequality. According to Oxfam research, there are more billionaires every year, yet they continue to avoid paying their fair share of taxes by moving to tax havens together with multinational firms.
Individual taxpayers siphoned out $ 7.6 trillion to offshore regions, according to an Oxfam investigation. In reality, tax evasion by affluent individuals is one of the primary causes of the developing world’s financial crisis. Much-needed tax resources are being diverted from poor nations to tax havens, resulting in not only a massive loss of money but also a skewed global economy. According to one study, around 40% of worldwide FDI is fake, consisting of financial investments channeled through business shells in tax havens. These investments are unrelated to any genuine or substantial economic activity occurring in any place in the world.
Tax Havens – Home of Tax Avoidance
Globalization and increased capital mobility have increased the importance of tax havens. Multinational Corporations typically move earnings to low-tax jurisdictions or ‘tax havens’ in order to decrease their tax liability. MNCs utilize a range of approaches for this aim, ranging from transfer pricing to transferring royalty-generating patents, among others. Studies on tax avoidance and tax havens give numerous instances of the strategies and mechanisms through which organizations, firms, and individuals continue to siphon their money. One such research describes the pattern of tax evasion using the example of an MNC operating in Zambia that sells copper from the home nation to its subsidiary in Mauritius for €2,000 per tonne. The same was resold at €6,000 per tonne by the subsidiary business in Mauritius. The home nation, Zambia, is deprived of the ability to tax the margin of €4,000 per tonne as a result of this process.
These corporations evade taxes to the tune of $500 billion yearly, according to an investigation released by the United Nations University World Institute for Development Economics Research (UNU-WIDER). The collection of taxes from such shifting income can boost global government revenue totals by around 4.5 percentage points. The Organisation for Economic Co-operation and Development (OECD) believes that tax evasion methods result in a loss of tax income of up to $240 billion every year, according to a story that appeared in the Guardian news daily.
Another analysis contends that Cyprus, Mauritius, Singapore, the Netherlands, and other tax havens make up a sizable portion of total FDI equity inflows. With $39 billion, or over half of all investment flows, Mauritius is already the largest single source of foreign investment in India. Singapore comes in second with 9 percentage points, followed by the lovely tourist island of Mauritius, which contributes 44 percentage points of capital “invested” in India. This frequently happens through “round-tripping,” in which eager Indians who want to cheat and avoid taxes deposit their money in Mauritius before “re-investing” it in India at a lower tax rate.
Anti-Tax Avoidance Policy through Tax Havens
Tax havens may seem like a good idea from a commercial standpoint, but they are seriously harming the chances of socioeconomic progress. By creating a spillover effect, tax havens not only violate the economic interests of neighboring nations but also engage in criminal activity. The United Nations produced “Guiding Principles on Business and Human Rights: Implementing the United Nations ‘Protect, Respect and Remedy’ Framework” to address the issue of human rights and multinational firms.
This document lays out specific rules for how businesses should behave. These guiding principles are founded on the recognition of (a) the responsibility of the government to honor, safeguard, and uphold human rights and fundamental freedoms; (b) the role of business enterprises as specialized social organs carrying out specialized functions, which must be abide by all applicable laws and respect human rights; and (c) the necessity of matching rights and obligations with appropriate and effective remedies when violated. Regardless of their size, sector, location, ownership, or structure, all nations, and all commercial enterprises both transnational and domestic must abide by these basic principles.
The concept of progressive taxation has given the tax system fresh life. The progressive tax system requires the state to design its tax system in such a way that it may be utilized to bridge disparities of wealth and income. A progressive tax is one that levies a lower tax rate on people with lower incomes than on those with higher incomes. It appears to be a system based mostly on reverse discrimination; in that it cuts tax burdens on those who can least afford to pay them while charging higher rates to those in higher tax brackets. Because of this, progressive taxation essentially becomes a weapon for income redistribution.
A progressive tax is an approach to taxation in which the average rate of taxation or the overall amount of tax paid, as a percentage of income, rises as the taxpayer’s income rises. Progressive taxation is diametrically opposed to the concept of tax havens. It is considered that corporations or firms that utilize a specific country’s natural and other resources and make great profits are expected to assist the state by paying higher taxes. This is achievable if these enterprises or companies reveal their genuine income. These corporations, however, falsify their genuine profits and thereby evade taxes by establishing subsidiaries in tax havens.
Due to the strict confidentiality laws of tax havens, the local legal system, where these corporations predominantly operate, faces a tremendous burden of obtaining financial information regarding tax evasion. Mining agreements involving two Financial Time Stock Exchange (FTSE100) businesses, conducted out through entities in the British Virgin Islands, Panama, and Gibraltar, were highlighted by Kofi Annan’s Africa Progress Panel, which claimed had cost the Democratic Republic of the Congo an estimated $1.36 billion – nearly double the country’s education and health budgets combined.
The concept of progressive taxation is further weakened by the small number of taxpayers. For example, despite the fact that direct taxes account for 54.78 percent of overall tax income in India, only 8,45,21,487 people paid taxes in the fiscal year 2018-19. According to a study published in the Economic Times, 93.2 percent of Indians do not fall into the tax category since they report income between 0-2.5 lakhs per year and are thus tax-free. Only 6.2 percent disclose income between 2.5 and 5 lakhs, leaving only 0.35 percent in the higher tax bracket.
The government of India formed a committee in 2016 to evaluate the Fiscal Responsibility and Budget Management Act, of 2003. The Committee suggested that the government target a budget deficit of 3% of GDP by 2020, then reduce it to 2.8% in 2021 and 2.5% in 2023. In terms of taxes, while the absolute amount of Central tax collection grew by 3% over the previous decade, the percentage of direct collection of taxes decreased by 3%, which was offset by an increase in indirect taxes. The story of corporation tax collection is similar. Its direct tax share declined from 63 percent in Fiscal Year 2009, down to 56 percent in Fiscal Year 2018.
However, the tax on personal income, which is regarded as a safe source, has climbed from 35 percentage points to 41 percentage points during the previous ten years, as the number of taxpayers in the direct tax net has expanded. The Kelkar Committee report notes the ‘missing middle,’ which includes professionals (such as accountants, attorneys, and physicians) who have the ability to record true income. Furthermore, agricultural income tax breaks must be strategically plugged in. It goes without saying that comprehending the significance of taxes in economic growth requires looking beyond tax enforcement and compliance.
Tax Havens – International Legal Obligation
The presence and maintenance of a competitive tax regime have a negative influence on the globalized world economy. The developing world bears the brunt of the consequences of this system. Tax havens commit tax evasion by luring businesses and firms to their jurisdiction, inflicting a significant dent in restricted income and, as a result, diminishing economic growth and development. As a result, the question of the legality and legitimacy of these tax havens under the current international legal environment emerges. The issue of state responsibility necessitates the fulfillment of two elements: first, a theoretical foundation upon which international norms may be constructed without infringing on age-old state sovereignty, and second, a normative duty under International Law.
Two requirements must be satisfied in order to resolve the issue of establishing state responsibility: first, a theoretical foundation that would allow for the development of international norms without violating long-standing state sovereignty; and second, a normative requirement under international law.
State Sovereignty
According to accepted international law, sovereignty is a social phenomenon that is closely related to the state and its function in international relations. In actuality, under International Law, the idea of sovereignty evolved alongside the formation of the modern state. This is the reason why state independence in governing local issues, particularly budgetary ones, is sometimes associated with sovereignty. It should be highlighted that notions of sovereignty are largely derived from the dominant political culture and are most often associated with the ultimate, effective political authority of the state.
According to the Treaty of Westphalia, the idea of sovereignty originated in European countries, where these governments evolved it in accordance with their political cultures. Interesting new developments in political culture and sovereignty are increasingly apparent throughout Asia and Africa.
One may interpret the first phrase of the United Nations Charter as the first overt indication of the conventional concept of sovereignty’s declining importance. The phrase “We the Peoples of the United Nations determined…” in the opening line is an important one because it combines the words “peoples” and “nations” with the verb “determined,” which makes it obvious that it is the people of the United Nations who are framing and expressing the desire for this.
The people of the globe are the ultimate source of international power, one could theoretically contend with this situation. Article 2(7), when read in conjunction with the other sections of Article 2 of the United Nations Charter, hints at the potential limitations of conventional sovereignty. Though Article 2(7) precludes the UN from intervening “in matters essentially within the territory of any state,” all governments are subject to a good faith responsibility to honor the Charter ideals and are obligated to handle disputes peacefully. complete interpretation of the UN Charter’s different clauses would imply that the Charter symbolizes a continual constitutional process of dispute and cooperation. This approach has influenced subsequent developments in international law.
The development of a robust legal framework to address the worldwide humanitarian crises, environmental challenges, trade, and intellectual property protection, and the current push toward nuclear weapons44 all indicate that global order has never been regarded in a doctrinal sense. It is dynamic enough to deal with topics that influence people’s lives. As a result, it is clear that the concept of sovereignty never served as an impediment to the development of a new international legal framework for dealing with the system. Based on this conceptual foundation, it is claimed below that tax havens, which are causing significant human rights violations, cannot be protected in the form of sovereignty.
Normative Obligation
The OECD Committee on Fiscal Affairs questioned the legitimacy of tax havens, stating that “countries should remain free from developing their own tax systems for so long as they comply with internationally recognized norms in doing so.” The study alludes to the existence of “internationally accepted standards” that governments are obligated to follow. The OECD’s strategy of “terminating double taxation conventions with uncooperative tax havens” and “initiatives deployed in working together with non-member nations, such as the advance commitment letter, agreements, etc.” is a categorical indication towards some international norms, even if they are still in their infancy, which each country is expected to observe.
Conclusion
Tax laws are no longer viewed as primarily domestic in origin, and states no longer have entire control over tax policy rules. With the increase in internationally linked business and commerce, taxes must be balanced in accordance with international norms. When financial policies, particularly tax policies, have a negative impact on a state’s financial well-being, it is critical to develop alternative tax jurisprudence. It is important to emphasize that any failure to prepare and implement a suitable tax policy will certainly result in income loss, and as a result, human rights will be the first victim.
In emerging nations, rising inequality and poverty can only be addressed by adopting a strong tax policy and enforcing it strictly. States must develop new tools and procedures to ensure that firms, businesses, and the super-rich, who often aim to minimize tax duties through complex processes, do not escape the tax net. Tax havens and transfer pricing manipulation are global issues that demand global solutions. States will lack the financial means to sustain their welfare programs and hence preserve the human rights of disadvantaged sections of their society unless they band together and adopt aggressive measures against tax evasion. It is also advised that agreements to avoid double taxation (DTAA) would have minimal impact because they are only applicable between two nations, and it is highly dubious that tax haven systems will implement them in their true spirit.