Are Buy-In Jurisdictions Tax Havens In Disguise?

ABSTRACT:

No sovereign state can be said to be one without the power to tax which allows for revenue raising power. But does this power extend to regulate tax behavior in other jurisdictions as well? This question has been answered in the context of Tax Havens – in saying that they have a negative impact as they erode the tax base of high tax countries and therefore, the sovereign power to tax of one state is impinging on another states power to do the same.

The tax base being referred to here is generally Corporations, as the impact of low or zero tax regions is a disproportionate division of FDI and corporate activity.

However, this question still persists in the context of citizenship or buy-in residence schemes, which are essentially lucrative offers to high net worth individuals to relocate to their country and avoid high tax payments in their own countries. This paper aims to provide a narrative that both Tax Havens and buy-in residence/citizenship jurisdictions should be treated alike because their intended consequences are the same.

TWO SIDES OF THE SAME COIN:

One similarity between Tax Havens and buy-in residence/citizenship jurisdictions are that both of them succeed in regulating aspects with economic bearing. The purpose that Tax Havens try to achieve with their favourable taxation policies is the influx of Multinational Corporations and foreign investment, as not only do the corporations themselves benefit from setting up in Tax Havens for obvious reasons, operations in Tax Havens are viable administratively as well for investment in high tax jurisdictions.

Similarly, in buy-in residence/citizenship jurisdictions, citizenship and the resultant favourable taxes are for the purpose of commoditising citizenship so that the value of residents and citizenships and their contributions to the economy increase. For example, in Italy, it is extremely convenient for a high net worth individual to pay a flat tax of €100,000 per year on their foreign income and gains as substitute tax and gain permanent residence in Italy.

The intended results of both these activities are enrichment of the government and investment into the state. For a country such as Mauritius and Cayman Islands, there is no scope for an industry other than a tourism industry. However, with the advent of their Tax Haven system they have seen the influx of corporations and financial service industries. Moreover, tax havens such as Luxembourg, Singapore and Ireland have shown an annual per capita growth rate of 5 % whereas the average annual per capita growth rate was 1.4 %. Similarly, small island countries like St. Kitts, which has the oldest citizenship programme of this sort, allows rich individuals to either donate $150,000 to a government growth fund, or invest $400,000 to get a citizenship. Moreover, Vanuatu is an island country that allows rich individuals to become citizens for donations to government growth funds of $150,000. This is a more direct monetary investment as compared to Tax Havens.

These two concepts are also linked, as profit shifting in Tax Havens can now be monitored by government programmes, which has resulted in shifting whole operations along with the immigration of employees. The buy-in residence/citizenship schemes actualise the latter, and facilitate base erosion and profit sharing in the modern world. Therefore, Tax Havens and buy-in residence/citizenship jurisdictions are two sides of the same coin and should not be looked at differently. 

DISPARITIES IN OUTLOOK:

The narrative involving negative impacts of Tax Havens is not as vehement when it comes to buy-in jurisdictions.  For example, OECD had a list of Un-Cooperative Tax Havens(2002) on which countries like Vanuatu and Monaco were present. As shown above, Vanuatu has a clear citizenship by donation system, similarly to get a citizenship in Monaco the investment would have to be at least €500,000 into a deed of property with another  €500,000 deposited into a bank account in Monaco. Both these citizenship schemes are still very much active, but OECD has derecognised them as Un-Cooperative Tax Havens upon undertakings and gave them impunity.

Moreover, Vanuatu ranks at 66 out of 112 in the Financial Secrecy Index 2018 and Monaco ranks 92 out of 112, which is a cause of worry in light of the scope of exploitation their citizenship schemes can bring. St. Lucia is another country with a donate ( $100,000) or invest ($300,000) scheme for citizenship which ranks at an extreme low of 110 out of 112 in the Financial Secrecy Index 2018. 

Therefore, there is a clear disparity between the recognition of buy-in jurisdictions as tax havens, whereas their intended purpose and effect is the same. This results in flourishment of these jurisdictions and impunity from being caught under the radar as tax havens which would bring them disrepute. There is a need for recognising these effects so that the mechanisms to counter base erosion and profit sharing can take into account this narrative as well.    Author: Shreesh Chadha

Also Read: Top 20 Judgements of Year 2020 under the Indirect Tax Laws