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27 International tax avoidance or evasion is resorted
to by investment in or through tax havens. Diversion or shifting of profits to a country
which imposes little or no tax on income generated in its territory. Tax haven is country
actively making itself available for avoidance of tax which would otherwise be paid in
relatively high tax countries. This is because that country has no taxes, or with taxes
but at relatively low rates are imposed only on local income and not on foreign income.
This includes 'normal rate' countries which become unexpected tax havens, because they
serve as tax shelters in some respect due to the special tax concessions they offer to
certain types of income or class of taxpayers, as Pakistan's tax holiday for export.
Though it goes without saying that investment in tax havens is tax motivated, there are
other considerations too. Absence of exchange controls on foreign deposits, tax agreements
providing for exchange of information or provision of high level banking and commercial
secrecy, are some of the few factors which influence foreign investment mainly of
criminally obtained funds.
Syphoning of profits to tax haven countries by shifting of fiscal residence, setting up
base economic activities be it a holding or subsidiary company, using conduit companies in
other countries to disguise income flows; using of the technique of treaty shopping, are
some of the means of making investments in or through tax haven countries.
