Impact of Tax Haven on Businesses: advantages and disadvantages of tax havens
Impact of Tax Haven on Businesses It is quite interesting to note how the development of tax havens has changed the dynamics of conducting business in recent times. Every new development has its pros and cons, which generates new ideas for economic growth. The majority of businesses wanting to grow their business is deterred by the high rate of taxes levied on their profits. It leaves no or little margin for them. Therefore, tax havens are quite lucrative with respect to the opportunities they offer particularly in terms of saving on a lot of money that would otherwise be lost as taxes. In this context, the following quotation is so appropriate.
“The proprietor of stock is properly a citizen of the planet and is not necessarily attached to any particular country. He would be apt to abandon the country in which he was exposed to a vexatious inquisition, in order to be assessed to a burdensome tax. . . . A tax which tended to drive away stock from any particular country would so far tend to dry up every source of revenue both to the sovereign and to the society.”
—Adam Smith, The Wealth Of Nations, 1776
In the general context of globalization of the economy, a significant obstacle to
governments concerned with the increase in tax revenues is the tendency of the businesses to make use of the transferability of the results arising from the productive activity in areas with low taxation, known as tax havens, the phrase that tends to be replaced by the name of international financial centre or a financial haven.
However, with law enforcement still implemented nationally, the freedom gained is being abused through globalization of such acts. This Tax evasion undermines a government’s ability to raise revenue whereby tax abusers shift financing burdens onto others. This forces governments to cut back on social and infrastructure projects. If somebody’s businesses are actively involved in overseas financial transactions, they may want to yield the benefit of a situation of lower taxes from such tax structures. However, in these modern times, the government is going full steam to curb these loopholes, especially where these tax havens are used frequently to stash in Black Money. For some people, tax havens help keep tax rates down and, therefore, are legitimate tax competitors. They are seen as legal offshore instruments to provide protection of assets from government abuses or the confiscation of the assets.
Although tax evasion drains a substantial amount of revenue from the economy and spreads across the entire population, still the direct effect on any individual citizen is minimal. This, however, should not undercut the subtle injustices suffered by citizens. These conditions led the Organization for Economic Co-operation and Development (OECD)to address the global issue of harmful tax practices. It adversely affects the budgetary revenue of countries with higher taxation and thereby leads to growth, tax avoidance, particularly that of legal, lawful and unlawful migration to the capital, causing financial instability, and by circumvention of financial control, financial crises.
Therefore, we can conclude that from an economic perspective, these lower tax rates are critical because they reduce the tax bias against saving and investment. This encourages people to set aside more of today’s income to finance tomorrow’s growth. Even socialists agree that capital formation is the key to long-run prosperity and better living standards.