Prime Minister Imran Khan has rightly observed that issues relating to offshore tax havens must be seen in the broader perspective of outflows from poor countries to rich countries. It is very unfortunate that the so-called financial wizards and economists who are ardent supporters of the capitalist economy hesitate to denounce the double standards employed by developed economies to establish, protect and profit from these offshore tax havens. Most media commentators are not fully aware of the underlying factors that feed this culture and choose to ignore the double standards of developed countries while dealing with tainted money. The following paragraphs of this article will attempt to explain the double standards adopted by capitalist societies to promote and nurture these tax-exempt jurisdictions and some recent setbacks in this regard. September 11 changed many things, including the future of these jurisdictions. In addition, I am also convinced that there is no leakage as claimed by the ICIJ. In my opinion, this is a long term strategy to discourage such jurisdictions for the 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 the regulation of business and foreign exchange. In other words, these jurisdictions allow a corporate and foreign exchange shield that is acceptable to the international trade and financial system. A corporation or trust established in an offshore tax haven jurisdiction may be considered a corporation for all intents and purposes around the world despite the fact that the corporation and foreign exchange laws of that jurisdiction do not meet generally acceptable standards. . Additionally, these jurisdictions allow citizens of other countries to establish companies and trusts in those jurisdictions without complying with regulations. Contrary to popular belief, business and currency protection is the main advantage of an offshore jurisdiction.
In addition to corporate and foreign exchange regulations, not all of these jurisdictions tax income from such trusts and corporations in their jurisdictions or overseas.
Liberal corporate, foreign exchange and tax regulations can be put in place in these jurisdictions, as in almost all cases the population of each state / tax haven is very small and the sole objective of maintaining a independent status is to promote the activities described in this article for the benefit of developed economies. In very simple terms, these are places where wealth can be legally invested without any further corporate, foreign exchange and tax obligations. Now, some of these jurisdictions also provide valid passports for international travel.
Where are the main offshore tax havens located?
There are many offshore tax haven jurisdictions; however, the Cayman Islands, British Virgin Islands, Seychelles, Bahamas, Isle of Man and others which are under the control of the Commonwealth of England are commonly known in Pakistan. Then there are places dominated by the United States like Panama. The Jebel Ali Free Zone and the DIFC in the United Arab Emirates have only recently entered the imagination of Pakistanis. An almost identical situation exists for Mauritius with regard to investments made in India.
Who is the protectorate of these offshore havens?
All offshore tax havens are political entities in their own sense; however, for all intents and purposes, these jurisdictions are protectorates of the United Kingdom, the United States, the Netherlands, France and others. It can be safely deduced that almost all of these jurisdictions are part of the dynamic legacy of colonialism. In addition, developed economies protect these jurisdictions for their own benefit.
How do developed economies benefit from offshore tax havens?
Developed economies are doubly advantaged by the existence of these offshore tax havens. First, whatever is implicitly invested in these jurisdictions is actually invested in these economies. The reference to the offshore jurisdiction is only an accounting entry. For clarity, this is explained as below:
Illustration A: Mr. A owns US dollars outside of Pakistan (acquired by legal or illegal means) which he intends to use to acquire a mansion in the UK. The procedure will oblige Mr. A to incorporate an entity in the BVI which is 100% owned by him. The money is sent to a bank account at BVI as Mr. A’s share capital 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 to acquire a mansion in the UK. BVI company purchases with funds received from Pakistan a mansion in UK for which US dollars received from Pakistan are used. This mansion is reflected as an asset in the books of the BVI entity. The net effect of transactions is:
The funds are transferred from Pakistan to the UK while the BVI is basically just a conduit;
The UK has control of the property as the BVI entity is effectively under the control of the UK legal system;
UK is not exposed to the illegality of Mr A’s source, if any, as Mr A does not own any UK assets. In this way, the UK economy effectively stays clean while their “proxy” (offshore tax haven jurisdiction) provides protection to their system. This means that most of the politically exposed corrupt people in poor countries own assets and properties in London, New York, Paris and other cities of the developed world without compromising its image as a civilized world, as all of these goods and assets belong to anonymous companies. entities located in offshore jurisdictions which are diligently protected and guaranteed by competent lawyers, financial advisers and notaries.
As noted, Pakistanis are the fifth largest investors in UK real estate. I am sure that around 80 to 90 percent of these properties are owned by companies based in offshore tax havens. It’s a win-win for the UK in every sense of the word. When this issue is looked at in this way, developed companies have no moral basis to facilitate the transfer and accumulation of these illegal funds to their countries using these offshore tax haven jurisdictions.
(to be continued tomorrow)
Copyright Business Recorder, 2021