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The Effects Of Tax Havens Can Have On A State

3386 words - 14 pages

The phrase “tax haven” usually is associated with the islands of the Caribbean, the Alps of Switzerland, or a developing nation looking to improve its economy by encouraging businesses to come there, a place where the wealthy and multi-national enterprises can hide away their wealth from home states. They are seen as corrupt states, willing to help the already corrupted, but is the full truth? Could it be that tax havens play a key part in the development of not only a state, but the furthering of the international economy as well? The answer, while a complicated one, can be found. Through understanding key definitions and examining the effects that a tax haven can have on a state in which ...view middle of the document...

The first of these is known as primary tax havens. It is at these locations where the financial capital of a corporation ends up. To accomplish this subsidiary shell companies are established and have the rights to the intellectual property of the company and collect the profits on it. Second, semi-tax havens. These locations are used primarily for the production of goods for sale. It is located outside of the parent country in a host country that has set up flexible regulations as it is seeking to encourage growth. Examples of these can be found in tax free zones or developing nations seeking to improve employment and business within their boundaries. Lastly, conduit tax havens. In these locations income made from selling goods outside of their boundaries is collected and then distributed within the company (Dharmapala & Hines, 2009).
This is not a perfect definition and it is one that is in continuous flux as the OECD has found that some of its own members meet one or more of the criteria to be considered a tax haven. Such as Switzerland. A member whose tax laws are minimal compared to other nations, causing it to be a haven for those looking to place their money. To combat this problem the OECD has made the inability to collect data on individuals or foreign business as its top criteria when classifying a state as a tax haven or not.
Second, non-tax havens. Non-tax havens, for the purpose of this paper, may appear to be easily defined. However, it is in the benefit of any state to enact polices that would be beneficial to businesses and attract any type of investment. Thus, for the purpose of this paper, non-tax havens will be defined as those states that follow the OECD regulations when it comes to transparency and a lack of stringent polies/regulations for business. .
The purpose of using this definition, rather than focusing solely on tax rates, is that it has been noted in the definition of a tax haven that these are easily identifiable and there is little debate on whether these practices constitute a state as a tax haven. With the idea of nominal taxes, however, there still exist debate on whether such can be used as a state’s rate may change depending on the market or for other sound reasons.
Third, foreign direct investment (fdi), is direct investment made by a business into a company or state from a business that is located in another state. This type of investment may come in various forms. The first of these forms could be accomplished by a firm duplicating a business it has in its state of origin into another state, also known as horizontal fdi. In addition, another type may be in the form of investing from one state to another state for the purpose of exporting to a third state, also known as platform fdi. Lastly, a firm may move capital or investment through its various subsidiaries located in or outside the home country depending upon where it may be able to obtain the highest return on investment, this is known as...

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