Co-operation between higher-tax states to combat tax havens could damage the economy and amount to a cartel between countries, warns a new paper.
The Institute of Directors' (IOD) paper examining the use of low-tax jurisdictions says many obvious responses to curbing the use of tax havens could have a negative effect on the economy.
Global leaders spearheaded by Obama, Brown, Sarkozy and Merkel have attacked ‘tax havens' in a bid to claw back tax and have introduced a raft of new measures to clamp down on tax evasion.
The IOD says national sovereignty must be accepted and therefore a state is entitled to set very low tax rates if it wants.
However, it points out other states are permitted to respond with legislation which would prevent its own residents from benefiting from such tax savings.
The paper found many of the obvious responses to the perceived tax haven problem would involve co-operation between higher-tax states, which some may perceive as ganging up on small financial centres.
The paper revealed while some co-operation could be beneficial in preventing tax evasion, it could also run the risk of damaging the economy, amounting to a cartel between powerful states.
"Even co-operation that merely lessens the pressure to reduce administrative burdens can be damaging," it says.
According to the IOD, tax havens have a positive role to play by allowing profit-sharing structures between joint investors to be implemented without affecting overall tax burdens.
Richard Baron, head of taxation at the IOD, admitted there are some bad jurisdictions, which facilitate tax evasion and worse.
"But we must also recognise that low-tax jurisdictions can oil the wheels of commerce.
"It is perfectly reasonable for other states to act to protect their tax revenues, but they must be careful not to throw grit into the mechanism," he says.
Baron says low-tax jurisdictions are a reminder that tax burdens need not be high.
"The most constructive response to them would be to chart a gently downward course for tax rates, thereby promoting economic growth," he says.
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