Tax haven hydra

PUBLICATIONS / Newsletters / 2012 / Newsletter September & October
Tax haven hydra
Virtually every high-tax nation has one or several symbiotic tax havens that reduce damage of excessive taxation. The US uses the Bahamas and Bermuda, the UK has Ireland, Channel Islands and the isle of Mann, Russians depend on Cyprus and India uses mainly Mauritius. For thirty years the African island nation has had a very attractive tax treaty based on cultural and religious ties with India. Mauritius, with a population of 1.3m, accounted for 42 per cent of India’s foreign direct investment from 2000 to 2011, worth US$55bn according to Delhi’s ministry of commerce.
But when India’s supreme court ruled in favour of Vodafone back in January, authorities have proven to be sore-losers trashing about wildly and blindly one dubious legislative proposal after another. Some of the more wacky ideas included amending tax-laws retrospectively and creating overly vague General Anti-Avoidance Rules (GAAR).
Legislators have dropped the more radical proposals since, but the overall purpose remains clear: any transaction lacking substance risks being scrutinized. An arrangement would be an “impermissible avoidance arrangement” if its main purpose is to obtain a tax benefit and it also has one of the following characteristics:
  •     It creates rights and obligations, which are not normally created between parties dealing at arm’s length
  •     It results in misuse or abuse of the provisions of the tax law
  •     It lacks commercial substance
  •     It is carried out by means or in a manner which is normally not employed for an authentic (bona fide) purpose
India is reviewing its double taxation agreement with Mauritius aiming to root out tax avoidance, notably by “round-tripping” Indian companies that allegedly use Mauritius to reinvest covertly at home.  And perhaps they will succeed in bringing down one tax haven by shooting themselves in the leg. But alternatives such as the UAE and Cyprus would quickly take over. Companies that invest in India must deal with increased tax-planning hurdles but with enough substance they can still benefit from low tax jurisdictions.
The Freemont Group can review the tax-implications of your investment in liaison with Indian tax lawyers and propose and execute the most fiscal friendly approach. Please contact our Dubai office to learn more.

Panama changes world shipping
Ports are expanding worldwide in anticipation of the Panama Canal’s new locks, expected to open in 2014. Presently, ships and ports sizes are limited to the maximum dimensions that the Panama Canal allows. So called Panamax vessels can have a maximum length of only 294 meters, making larger post-panamax vessels less economic to run on shipping routes between  the  Atlantic and the Pacific. The new locks allow for much larger ships of over 400 meters, which increases the capacity of a typical container ship from 5000 to 13000 units. This has prompted the ports of Miami, New York, Baltimore and many others to increase depth and port facilities.
But those are only immediate effects. Panamax ships have a relatively small beam in comparison to their length and therefore run less efficient than what is hydro-dynamically possible. Shipbuilders around the world are well aware of these new possibilities of the canal’s expansion.
Trade routes could drastically change when post-panamax vessels can traverse the pacific from East-Asia, pass the canal, dock in the US east coast and continue to Europe and vice versa. Bulk carriers from North and South America  no longer have to circumnavigate the stormy Drake passage to ship goods to Asia at more competitive rates, though draft will still limit the largest bulk carriers. US agriculture will benefit greatly from better access to the lucrative Chinese market, whereas domestic rail freighters will suffer from increased shipping competition.
With so much focus on Panama, multinational businesses are establishing themselves in Panama in large numbers. Procter & Gamble, Dell and Caterpillar Mexico’s Cemex have already set-up regional headquarters in Panama City. According to a survey by Manpower, Panama leads the America’s with a 26% job creation rate. There are severe shortages in skilled personnel attracting many foreign workers.
Tourism increased 5% annually over the past 5 years. For a long time, Costa Rica has been the main tourist destination in Central America, but with similar nature and more competitive rates, Panama is catching up.
But one of the greatest effects of Panama’s popularity is bank capitalization. While financial institutions in Europe and the US struggle to even maintain a reserve ratio of 1% (meaning for every 100 euro or dollar in deposits the bank has one dollar or euro in cash) banks in Panama average 62.3%. The number has only been increasing since the start of the debt crisis, when it stood at 56%. Holding (part of) your assets in a jurisdiction that even manages to perform during the most adverse conditions is a great insurance against bank failure or government intervention and we gladly assist prospective Panama bank account holders.

The Euro endgame has begun
Failure of the Euro is no longer a question of ‘if’ but ‘when’. The new ECB president Mario Draghi seems determent in continuing the self destructing policies in pursuit of their European dream. are all other major players of European aristocracy (Barosso, Merkel, Schultz, Hollande, Van Rompuy etc)
An important decision by Germany’s constitutional court might have placed some restrictions on the European Stability Fund, but that will not derail the overall effort. For the first time chairman Barosso of the unelected European Commission stated their goal: a European Federation led by an unelected elite of politicians.
Nothing can stop the European elite, no debt too high for a bailout and no protest to great to suppress. Greece will receive another bailout tranche in spite of not meeting the requirements, for otherwise the Euro could fail. The ECB is determined to buy-up debt from Spain and other member-states.
Eurocrats are going to see it all through, which will inevitably result in high inflation or even hyper-inflation. There is no future for the Euro zone, but fortunately not all EU member choose the same path.
Bulgaria announced that it will no longer adopt the Euro. The rejection of Bulgaria to adopt the euro currency coincided with similar actions by other emergent eastern European economies, notably Lithuania, Poland and Croatia.
Sweden is another notable exception. Known for its socialist politics, Sweden’s alliance of moderate parties has been reducing the size of government and government debt in recent years. Overall taxation was reduced from 48.3% of GDP in 2006 to 44.4% in 2011, well below EU average. For 2013, the government plans to cut the corporate tax rate from 26.3% currently to 22%. This is quite an achievement considering most EU countries cannot cut a penny from their budgets and increase tax rates.
Unlike other EU members, when the Swedes voted against adopting the Euro in 2006, the government actually honoured the referendum and no attempts were made to join the Euro through the back door.
When inflation starts taking a real toll on economic life in the Eurozone, countries such as Sweden, Poland, Switzerland, Bulgaria etc. will offer an escape hatch for entrepreneurs.

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