The recent panama paper leak has brought the much needed attention over tax heavens, shady economies and black money. The “panama papers” are the 11.5 million leaked documents of Mossack Fonseca law firm. The firm helps in building offshore entities and paper work associated with it. A recent study shows that 8 percent of world’s wealth is stashed in offshore accounts while some of them are legitimate and some are not. All the money stashed offshore is not done by cheating the government rather with legal paperwork. The money is directed to their offshore entities where the taxation is less and on an overall basis the company ends up paying less tax. The tax havens are jurisdictions where the taxes are lowered to attract capital inflow.
Most of the times companies divert their earnings to offshore entities because of the stringent tax laws in the countries they operate. A restrictive and highly regulated framework increases the operational costs. At some point the companies find it highly unprofitable to operate and thus divert their earnings to cut down their taxes. This is not illegal but unfavorable to the country’s economy as it loses revenue. The point of concern arises when one thinks on how this money is used. Tax havens do not have transparency and the money can be easily used for illegal activities. Though these countries are not transparent with tax laws they have very less occurrences of money laundering and are in better position than highly regulated countries. In India the black money flowing into the real estate sector is higher than the money in offshore accounts.