International Business: Cases and Exercises CASE 45 premiums paid for reinsuranc

Question

International Business: Cases and Exercises CASE 45 premiums paid for reinsurance in order to avoid taxation. Dan reasons that if his small California insurance company relocates, or establishes a subsidiary in Bermuda, he would have a DIVING INTO A TAx HAVEN: SHOULD WESTERN CALIFORNIA LIFE MOVE TO BERMUDA? the company would be able to avoid taxation is also boards his flight back to California, he is excited about the prospect of establishing an operation in Bermuda, but he wonders if he should consider other tax-haven countries. While on board, Dan reads in the newspaper that the Organization for Economic Cooperation and Development (OECD) has recently listed 35 countries as possessing unfair tax practices. The Paris-based organization accuses the 35 tax-haven countries of "poaching" tax revenue from other countries and has asked for world pressure to be brought on these countries to end their policies. The tax-haven countries respond that they, as sovereign nations, have the right to make their countries attractive to foreign investment, much the same as other countries have done through other incentives appealing, As Dan Dan Richardson, CEO of Western California Life Insurance, is an avid SCUBA diver. He often dives in the waters off his home state of California, and he frequently travels to the Florida Keys to engage While in Bermuda he has discovered that many insurance companies have established operations on this island off the East Coast of the United States. Bermuda, the Bahamas, the Caymarn Islands, Belize, San Marino, and other countries are often referred to as tax havens, since they do not tax income or profits. Technically the IRS considers any country with a lower tax rate than the U.S. a tax haven; however, certain countries (many in the Caribbean) are specifically known for their lack of taxation. Tax-haven countries earn revenue for their treasuries by assessing licensing fees. Although tax havens have existed for many years, they have recently become a famous shipwrecks. Dan feels worried; however, he is somewhat reassured as he reads that Bermuda has not been placed on the list because government officials in Bermuda have agreed to share financial information with the OECD. As Dan heads back to California, he begins to plan for a Western California Life subsidiary in Bermuda, although he is not completely certain that it is the right thing to do more popular means of avoiding personal and corporate taxation. Approximately 1,500 insurance companies operate on this tiny island of 57,000 residents. Bermuda is a self governing British colony GDP of over $26,000US per capita. The k English, and the political environment is considered stable. The Bermuda dollar is pegged at parity to the U.S. dollar (1 Bermuda dollar-1 U.S. dollar) and is freely convertible. One can reach the island quickly and easily from many cities along the East Coast, including New York City. Dan has been told that he h a corporate presence in Bermuda in 24 hours for only a few thousand dollars. Insurance companies frequently channel investment income to their subsidiaries in Bermuda, in the form of

Explanation / Answer

1.
It is not ethical to establish a subsidiary in Bermuda for the sake of avoiding tax or reducing the tax payment in the USA. There are two terms, one is tax exemption and another is tax avoidance. Tax exemption is as per the given regulations, and tax avoidance is the misuse of the regulations to save taxes. Here, the company is planning to opt for the tax avoidance. Further, the action of setting up a subsidiary can be established on the basis of deontological approaches of the ethics. Here, the intention of the action of setting up a subsidiary is not to spread business development, but to avoid tax payment in the parent country. Such intentions are not considered morally high, so it is not ethical for the company. Besides, the utilitarian approach also examines that the tax avoidance only makes the owners to be profitable, but not the majority of society in the USA where the parent company serves. So, the action of setting up a company is not ethical.

2.
There are following disadvantages:
A.   There is an increased scope of scrutiny of the company that can negatively affect the business.
B.   The spread of negativity in the market can affect the business as insurance business is based upon the reputation and goodwill among the people.
C.   Increased chances of action against the company if the IRS found that the company tool illegitimate means to syphon the funds out of the country

3.
At present Dan Richardson should not establish a subsidiary for the sake of tax avoidance only. If he wants to establish the company in Bermuda, then it should be for the business development and actual commercial and trading activities so that Dan can make the subsidiary formation to be legitimate. Though, it should not come at the cost of existing business in the USA.

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