Corporate tax moves
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In the complex world of global finance, the line between strategic financial planning and aggressive tax avoidance is often drawn in the sand of a distant shore. A significant body of research has illuminated a pervasive trend — the strategic use of tax havens not just to hide profits, but to issue debt.
While the public imagination often pictures tax havens as repositories for illicit cash, for modern multinational corporations, they function more like high-efficiency conduits for capital.
This phenomenon is particularly visible in emerging markets like India, where major conglomerates in sectors such as telecommunications and renewable energy (to name a few) have historically utilised subsidiaries in tax haven jurisdictions (like Singapore and the Netherlands) to optimise their tax liabilities and access global capital markets.
Offshore Debt Issuance
The primary motivation for issuing debt through a tax haven is often a potent mix of tax arbitrage and capital accessibility. When a company borrows money, the interest it pays is typically tax-deductible, reducing its overall taxable income. This tax shield is a standard feature of corporate finance.
However, multinational firms can supercharge this benefit by routing the debt through a low-tax jurisdiction. In this model, a subsidiary is established in a tax haven to act as the primary borrower. This subsidiary issues bonds to international investors or takes loans from global banks. It then on-lends this capital to the parent company in the high-tax home country. The parent company pays interest to the subsidiary, claiming a tax deduction in its high-tax home jurisdiction, while the subsidiary receives that interest income in a jurisdiction where it is taxed lightly or not at all.
This structure creates a distinct financial advantage that goes beyond simple interest rate differentials. If the parent company were to borrow directly from foreign investors, it might face significant withholding taxes on the interest payments sent abroad. However, by inserting a subsidiary in a jurisdiction that has a favourable tax treaty with the home country, the company can significantly reduce or eliminate these withholding taxes.
This creates a smoother, less costly flow of capital. For companies in capital-intensive industries, like building telecom towers or wind farms, saving even a fraction of a percentage point on debt costs can translate to millions of dollars in savings over the lifespan of a loan.
Mechanics of ‘debt shift’
The operational mechanics of these transactions are sophisticated. A typical structure might involve, for example, an Indian parent company creating a subsidiary in Singapore. This Singaporean entity issues dollar-denominated bonds to international investors. Because the subsidiary is located in a high-rating financial hub, it might secure capital at competitive rates. The proceeds from this bond issue are then lent to the Indian parent company. The Indian parent pays interest on this intra-company loan. In India, this interest payment is treated as an expense, lowering the company’s taxable profit.
Meanwhile, the interest income received by the Singapore subsidiary is taxed at a low rate (or effectively shielded through various exemptions and incentives available to global trading companies).
This mechanism allows the corporate group to effectively shift profits out of the high-tax jurisdiction (India) and into the low-tax jurisdiction (For instance, Singapore or Netherlands). The academic literature highlights this as a form of base erosion, where the tax base of the developing country is eroded by deductible payments sent offshore.
For the companies involved, however, this is presented as a legitimate tool for balance sheet efficiency. It allows them to hedge against currency risks and tap into a pool of global liquidity that might not be available domestically. In sectors like infrastructure or telecommunications, where upfront capital expenditure is massive and revenue generation is spread over decades, this access to efficient global debt is often cited as a critical survival mechanism.
The Indian landscape
Regulators have not been blind to these practices. Over the last decade, the Indian government and global bodies like the OECD have tightened the screws on such structures. The introduction of the General Anti-Avoidance Rule (GAAR) in India and the global Base Erosion and Profit Shifting (BEPS) framework aims to curb treaty shopping i.e., the practice of routing funds solely to take advantage of tax treaties.
Under new norms, companies must demonstrate “substance” in the subsidiary wherein it cannot just be a mailbox in Amsterdam or a file folder in Singapore. It must have actual employees, office space, and genuine economic activity. This has forced many Indian companies to restructure their offshore operations, moving away from purely tax-driven vehicles to more substantive international holding structures.
The use of tax havens for debt issuance is a testament to the fluidity of global capital. It highlights a fundamental tension in the global economy i.e., the friction between national tax laws and the borderless nature of modern finance. For the companies involved, routing debt through tax havens to some extent remains a rational economic decision driven by the imperative to minimise costs and maximise shareholder value.
However, as scrutiny intensifies and regulatory nets tighten, the free pass of the offshore conduit is disappearing. The future of corporate finance will likely demand more transparency, forcing companies to justify their offshore presence not just with tax returns, but with genuine economic purpose.
Williams is the Head of India at Sernova Financial; Nupur is a PhD scholar at Kiel Institute for the World Economy
Published on December 17, 2025
