Tax Havens and Global Capital Allocation PDF

Tax havens and global capital allocation Ali Lazrak Learning Objectives Understand the different type of taxes Realize the incentives of corporation and wealthy individuals to use tax heaven to delay/avoid tax payments Be aware the importance of tax heavens in the...

Tax havens and global capital allocation Ali Lazrak Learning Objectives Understand the different type of taxes Realize the incentives of corporation and wealthy individuals to use tax heaven to delay/avoid tax payments Be aware the importance of tax heavens in the global capital allocation Outline Types of Taxation National Tax Environments Organizational Structures Tax heavens share of global capital allocation All the tables and results on investment positions in tax havens are taken from the website https://www.globalcapitalallocation.com Importance of Tax havens As of December 2017, IMF coordinated investment survey reported $3.9 Trillion investment position in Cayman Island Cayman Island GDP is only $5 Billion Mismatch between the investment flow and the economic activity Types of Taxation Three basic types of taxation that national governments throughout the world use in generating revenue: 1. Income tax. 2. Withholding tax. 3. Value-added tax. Income Tax  Corporate Percentage Income Tax Rates across border Country Headline Corporate income tax (CIT) rate Federal CIT: 15%. Provincial and territorial CITs range from 8% to 16% and are not deductible for Canada federal CIT purposes. United Federal CIT: 21%. State CITs range from 1% to 12% (although some states impose no CIT) and are States deductible expenses for federal CIT purposes. China 25% Hong First HKD 2,000,000 of assessable profits at 8.25%; Kong Remaining assessable profits at 16.5% Netherlan 25% ds Venezuel 34% a Vietnam 20% Cayman NA Island 46% for oil corp.'s; Bahrain 0 for other corp.'s Virgin NA Island  Personal Percentage Income Tax Rates across border Country Personal income tax (PIT) rate (%) Federal top rate: 33%. Canada Provincial/territorial top rates range from 11.5% to 21%. United 37% States China 45% Hong Progressive rates: ranging from 2% to 17%; Kong Standard rate: 15% Netherlan 49.5% ds Venezuel 34% a Resident: Progressive rates up to 35% for employment income; Vietnam Non-resident: A flat tax rate of 20% for employment income; See Vietnam's Individual tax summary for rates for non-employment income. Cayman NA Island Bahrain NA Virgin NA Island Withholding Tax Levied on passive income earned by an individual/corporation of one country within the tax jurisdiction of another country Passive income: dividends, and interest income, and income from royalties, patents, or copyrights Many countries have tax treaties with one another specifying the withholding tax rate applied to various types of passive income. Withholding tax rates imposed through tax treaties are bilateral, or negotiated between two countries.  Withholding tax across border Country Withholding tax (WHT) rate (%) (Dividends/Interest/Royalties) Resident: NA; Canada Non-resident: 25 / 25 / 25, may be reduced by treaty and to 0% for most interest paid to arm's-length non-residents. Resident: NA; United States Non-resident: 30 / 30 / 30 Resident: NA; China Non-resident: 10 / 10 / 10 Resident: 0 / 0 / 0; Hong Kong Non-resident: 0 / 0 / 2.475 to 4.95 Resident: 15 / 0* / 0*; Non-resident: 15 / 0* / 0* Netherlands *As of 1 January 2021, there is a conditional WHT on interest and royalties, please refer to the section on Withholding tax. Resident: 34 / 0 or 5 / 0 - see summary; Venezuela Non-resident: 34 / see summary / see summary WHT applies to certain payments made to foreign organisations and individuals undertaking business or earning income sourced from Vietnam, regardless of the residency status. Vietnam WHT rates are nil for dividends. For interest and royalties, please refer to Vietnam's Corporate tax summary. Cayman Island NA Bahrain NA Virgin Island NA Value-Added Tax 1 National Tax Environments International tax environment confronting a MNC or an international investor is a function of the tax jurisdictions established by the individual countries in which the MNC does business or in which the investor owns financial assets Two fundamental types of tax jurisdiction: 1. Worldwide taxation. 2. Territorial taxation. Unless prevented, double taxation would result if all nations were to follow both methods simultaneously Worldwide and Territorial Taxation Foreign Tax Credits Organizational Structures: Branch and Subsidiary Income Organizational Structures: Tax Havens A tax haven country is one that has a low corporate income tax rate and low withholding tax rates on passive income Examples of tax havens are Bahrain, Bermuda, Cayman Islands, Channel Islands (Guernsey and Jersey), and the Isle of Man. Useful as locations for a MNC to establish a wholly owned “paper” foreign subsidiary, that in turn would own the operating foreign subsidiaries of the MNC Tax havens are used for setting up "paper" subsidiaries to defer taxes on dividends. Petrobras Petrobras Petrobras Petrobras Example: Petrobras Bond (CUSIP 71645WAR2) $2.7 Billion, coupon of 5.375%, 10-year, issued January 2011 Immediate issuer: Petrobras Int. Fin. Co., Cayman Islands Why issue/purchase securities in tax havens? Reduce corporate taxes and withholding taxes Avoid capital controls Avoid regulation Access a different investor base  1. Reduce withholding/corporate taxes Tax inversions: relocate headquarters to a lower tax jurisdiction Medtronic: US firm with 160B market cap relocated to Ireland even if 57% of the sales are in the US Reduce withholding taxes: If a mutual fund buys directly Petrobras’s equity from Brazil, they will have to pay 15% withholding taxes By US tax laws, mutual funds are not eligible for The Treasury International Capital (TIC) reporting system collects tax credit for foreign investments data for the United States on cross-border portfolio investment flows and positions between U.S. residents (including U.S.-based In contract, there is 0 withholding taxes if the branches of firms headquartered in other countries) and foreign Petrobras equity is issued in Cayman Island residents (including offshore branches of U.S. firms). 2. Tax Havens to Avoid Capital Controls Foreign ownership of strategic industries (IT and Telecommunication) is forbidden in China Get around this using Variable Interest Entity (VIE) structure: Alibaba, Baidu, JD.com,Tencent Evergrande also Issued Bonds in Cayman Island  3. Avoid Regulation European Firms Use Tax Havens to Avoid Regulation EU introduced “Market Abuse Regulation” (MAR) in July 2016 Extended strict disclosure requirements to issues in most of EU, but not Guernsey and Jersey 4. Access a different investor base How Big A Deal? Tax Haven Share of Total Financing How Big A Deal? Tax Haven Share Cross-Border Financing Restating the portfolio position for the US investors for bonds Who Issues Equity in Tax Havens? Who Issues Bonds in Tax Havens?  Conclusion Big disparity in corporate taxes across jurisdictions Regulations and Tax represent a first order force in cross border security issuances and investment Tax Havens are economically important Political response?