Tax Haven - Anti-avoidance

Anti-avoidance

To avoid tax competition, many high tax jurisdictions have enacted legislation to counter the tax sheltering potential of tax havens. Generally, such legislation tends to operate in one of five ways:

1. attributing the income and gains of the company or trust in the tax haven to a taxpayer in the high-tax jurisdiction on an arising basis. Controlled Foreign Corporation legislation is an example of this.
2. transfer pricing rules, standardization of which has been greatly helped by the promulgation of OECD guidelines.
3. restrictions on deductibility, or imposition of a withholding tax when payments are made to offshore recipients.
4. taxation of receipts from the entity in the tax haven, sometimes enhanced by notional interest to reflect the element of deferred payment. The EU withholding tax is probably the best example of this.
5. exit charges, or taxing of unrealized capital gains when an individual, trust or company emigrates.

However, many jurisdictions employ blunter rules. For example, in France securities regulations are such that it is not possible to have a public bond issue through a company incorporated in a tax haven.

Also becoming increasingly popular is "forced disclosure" of tax mitigation schemes. Broadly, these involve the revenue authorities compelling tax advisors to reveal details of the scheme, so that the loopholes can be closed during the following tax year, usually by one of the five methods indicated above. Although not specifically aimed at tax havens, given that so many tax mitigation schemes involve the use of offshore structures, the effect is much the same.

Anti-avoidance came to prominence in 2010/2011 as NGOs and politicians in the leading economies looked for ways of reducing tax avoidance, which plays a role in forcing unpopular cuts to social and military programs. The International Financial Centres Forum (IFC Forum) has asked for a balanced debate on the issue of tax avoidance and an understanding of the role that the tax neutrality of small international financial centres plays in the global economy.