By Poovarni Rajagopal

With the dramatic leak of what has become known as the Panama Papers, the topic of tax havens seems to be dominating conversations everywhere. But what are tax havens, and is it illegal to take refuge in them?

Tax havens are defined by three characteristics. These countries offer very low or no tax liability to corporations and individuals seeking to set up business in a fairly stable environment. They have financial secrecy laws in place. They are reluctant to share information with other governments when the need arises.

Large corporations and well heeled individuals use tax havens with the help of tax consultants and legal advisers to avoid paying high income taxes. The use of experts is essential to these groups of people to ensure that all relevant laws and requirements are met. This is what international tax planning is all about. It is deemed a necessary evil for large corporations to maintain their profitability and ensure high returns to shareholders.

In the last ten years or so, tax authorities around the globe have been scrutinizing the tax havens, including our own Labuan, more closely for obvious reasons. Of course there are no doubts that tax havens can be abused by those who want to evade taxes in their home countries or hide illicit income.

This concern has led the Organisation for Economic Co-operation and Development (OECD) to establish clear definitions of tax havens. One of the compelling definitions is the lack of transparency and reluctance to share tax information.

The Tax Information Exchange Agreement (TIEA) was developed to address these concerns. In 2009, the G-20 group released to the public a list of countries which did not comply with the OECD standards. It suggested that several international agreements such as TIEA and double tax agreements be complied with to prevent tax evasion and “aggressive tax planning”. As a result, a number of countries known as tax havens agreed to follow the OECD standards.

Since then, the global community has been working hard to increase transparency and accountability on offshore transactions. The Global Forum on Transparency and Exchange of Information for Tax Purpose, comprising 100 or so countries, has the responsibility of ensuring that global standards are implemented and met. Malaysia is one of the countries which has implemented these standards.

The ongoing development of tax laws and other regulations is aimed at reducing cross-border fraud and evasion of taxes for illicit income. At the same time, the same laws give enough opportunities to the large corporations to undertake tax planning in order to remain competitive and commercially viable.

In conclusion, we can say that legality of a transaction pretty much depends on its substance rather than its form.

Poovarni Rajagopal is a chartered accountant. She runs a tax consultancy in Kuala Lumpur.

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