Prime Minister Imran Khan has rightly observed that the matters relating to offshore tax havens are to be seen in the wider perspective of outflow of funds from the poor to the rich countries. It is very unfortunate that the so-called financial wizards and economists that are ardent proponents of capitalist economy are hesitant to call out the double standards employed by the developed economies in establishing, protecting and benefitting from these offshore tax havens. Most of the commentators in the media are not fully conversant with underlying factors that nourish this culture and choose to ignore the double standards of the developed countries whilst dealing with tainted money. The following paragraphs of this article will attempt to explain the double standards adopted by the capitalist societies in promoting and nourishing these tax-free jurisdictions and some recent reversals in this respect. 9/11 changed many things, including the future of these jurisdictions. Furthermore, I am also convinced that there is no leak as has been claimed by ICIJ. In my view it is a long-term strategy to discourage such jurisdictions for reasons explained in this article.
What does an offshore tax haven jurisdiction mean?
An offshore tax haven jurisdiction is a state or political entity that provides a liberal regime for corporate and foreign exchange regulations. In other words, these jurisdictions allow a corporate and foreign exchange shield which is acceptable to the international commercial and financial system. A company or a trust established in an offshore tax haven jurisdiction qualifies to be a company for all purposes throughout the world despite the fact that corporate and foreign exchange laws of that jurisdiction do not comply with generally acceptable standards. Furthermore, such jurisdictions allow persons being citizens of other countries to establish companies and trusts in these jurisdictions without meeting any regulatory compliance. Unlike the common perception, corporate and foreign exchange protection is the main benefit of an offshore jurisdiction.
In addition to corporate and foreign exchange regulations all these jurisdictions do not tax income arising out of these trusts and companies in their jurisdictions or abroad.
Liberal corporate, foreign exchange and tax regulations are possible to be provided in these jurisdictions for the reason that in almost all the cases the population within each state/tax haven is very small and the only objective of maintaining independent status is to promote activities described in this article for the benefit of developed economies. In very simple terms, these are places where wealth can be legally placed without any further corporate, foreign exchange and tax obligation. Now some of these jurisdictions also provide passports valid for international travel.
Where are major offshore tax havens located?
There are numerous offshore tax haven jurisdictions; however, commonly known in Pakistan are the Cayman Islands, the British Virgin Islands, Seychelles, Bahamas, the Isle of Man and others which are under control of the Commonwealth of England. Then there are US-dominated places like Panama. Jebel Ali Free Zone and DIFC in the UAE have found entry into Pakistanis' imagination only recently. A nearly identical situation exists for Mauritius with regard to investments made in India.
Who is the protectorate of these offshore havens?
All the offshore tax havens are political entities in their own sense; however, for all purposes these jurisdictions are protectorates of the UK, the USA, the Netherlands, France and others. It can be safely deduced that almost all of these jurisdictions are part of vibrant legacies of colonialism. Moreover, developed economies protect these jurisdictions for their own benefit.
How do developed economies benefit from offshore tax havens?
Developed economies are doubly benefitted on account of existence of these offshore tax havens. Firstly, whatever is impliedly invested in these jurisdictions is actually invested in these economies. The reference to the offshore jurisdiction is only a book entry. For the sake of clarity this is explained as under:
Illustration A: Mr A has US dollars outside Pakistan (acquired through legal or illegal means) which he intends to use for acquiring a mansion in the UK. The procedure will require Mr A to incorporate an entity in BVI that is 100% owned by him. The money is sent to a bank account in BVI as share capital of Mr A in a BVI company. This is reflected as share capital in the books of this BVI company. The funds received by the BVI company are used for acquiring a mansion in the UK. The BVI company buys from the funds received from Pakistan a mansion in the UK for which the US Dollars received from Pakistan are used. That mansion is reflected as an asset in the books of the BVI entity. The net effect of transactions is:
Funds move from Pakistan to the UK while BVI is essentially a conduit only ;
The UK has control on the property as BVI entity is effectively under the control of British legal system;
The UK is not exposed to illegality of the source of Mr A, if any, as Mr A does not own any assets in the UK. In this manner the UK economy effectively remains clean whereas their 'proxy' (offshore tax haven jurisdiction) provides a protection to their system. This resultantly means that most of the corrupt politically exposed persons of poor countries own assets and properties in London, New York, Paris and other cities of developed world without jeopardizing its image of civilized world because all such properties and assets are owned by some anonymous corporate entities in offshore jurisdictions which are diligently protected and guaranteed by able lawyers, financial advisers and solicitors.
As reported, Pakistanis are fifth largest investors in the UK's real estate. I am sure that almost 80 to 90 percent of such properties are held through companies based in offshore tax havens. It is a win-win for the UK in every sense of the word. When this matter is examined in this manner then the developed societies have no moral ground in facilitating transfer and accumulation of such illegal funds to their countries using these offshore tax haven jurisdictions.
(To be continued tomorrow)
Copyright Business Recorder, 2021