Tax havens remain in high demand, but before you even consider searching for one, there are several things to consider.
What You Need To Know
- Non-residents can effectively escape high taxes by living in a tax haven, where there are no or only nominal taxes.
- Incentives for attracting foreign investment can include tax rebates and tax incentives.
- Other tax haven attributes include the protection of personal finance information and the absence of a substantial presence in the country.
- British Virgin Islands, Bermuda, Guam, Taiwan, and Jersey are examples of countries that rank high in secrecy and have low or no taxes.
There have been tax havens around for a long time, and some historians have even mentioned their existence as isolated islands during ancient Greek times. Liechtenstein, Switzerland, and Panama are three of the oldest tax havens in our time, each of which dates back to the 1920s.
The term tax haven is not universally understood after so many years of existence. For identifying whether a jurisdiction is a tax haven, the Organization for Economic Cooperation and Development (OECD)—a Paris-based group of 38 developed countries—uses the following three key attributes.
Taxes aren’t imposed or only nominal taxes are imposed
First, tax havens are places where non-residents can escape high taxes by putting their investments or companies there. Although tax structures vary from country to country, all tax havens offer their services to non-residents.
Refunds on various kinds of taxes are popular in different tax havens. However, this attribute alone is not sufficient to identify a tax haven. There are many well-regulated countries that offer incentives to attract foreign investment but are not classified as tax havens. This leads to the second characteristic of a tax haven.
Ineffective information exchange
There is no or minimal sharing of information with foreign tax authorities in tax havens as personal financial information is zealously protected.
It is always possible that a tax haven has behind-closed-doors secret rulings or negotiated tax rates that do not meet the test of transparency. There is always more to a tax haven than meets the eye. The legislative, legal, and administrative machinery of a tax haven is opaque.
Furthermore, a tax haven must also have two additional characteristics, according to the United States Government Accountability Office (GAO).
There is no need for local presence
Outside entities are rarely required to establish a substantial local presence in tax havens.10 Such a concession could lead to interesting situations. The Government Accountability Office reported in 2008 that one building in the Cayman Islands housed 18,857 mostly international companies.
If you simply hang your nameplate in a tax haven, you can claim tax benefits without producing goods or services or conducting trade or commerce within the boundaries of the country. It is practical for tax evaders to operate their businesses in Florida while claiming to be Bahamas residents in order to avoid paying taxes.
Identifying tax havens and marketing them
Many tax havens are also considered important international financial centers, which is why they market themselves as offshore financial centers.
Affecting socio-economic factors
The following socioeconomic factors contribute to a particular destination’s popularity as a tax haven besides low taxes and secrecy:
- It is impossible to bring outside investors to a country without political and economic stability. Switzerland, for instance, became famous for its political and economic stability.
- An absence of exchange controls. Investing in a country with exchange controls can be risky for outside investors.
- Some tax havens are becoming less popular due to various information-sharing treaties signed with different governments. Many have become popular due to loopholes in multiple tax avoidance treaties signed with different jurisdictions.
- Switzerland and Austria, although not strictly tax havens, offer offshore banking services and are safe places for assets to be held.
- A destination’s location plays a significant role in its popularity. The Bahamas has become a popular offshore destination for U.S. corporations because of its proximity to Florida.
A list of popular tax havens
In addition to having some of the best secrecy laws, some of the most popular tax havens are the British Virgin Islands, Bermuda, Guam, Taiwan, and Jersey.
Is this a tax haven or a trap?
International organizations such as the OECD and the G-20 may put immense pressure on tax havens to maintain their carefree existence. In the event of more Tax Information Exchange Agreements (TIEAs) and Mutual Legal Assistance Treaties (MLATs) between tax havens and other countries like the U.S., tax havens will lose their competitive advantage.
To make matters worse, some of the tax havens have had to deal with problems of their own making. The TIEA requires the exchange of tax information between signatories, and the MLAT requires cooperation in legal enforcement and criminal investigations. In 2008, the Liechtenstein banking scandal shook the world, so investors should be aware of this when considering tax havens and offshore banking locations.
As a result of a bank technician selling bank account information, Germany initiated a series of tax investigations. As a result of the Liechtenstein-based trust structure, many German citizens ended up in a noose for evading taxes in Germany. A number of tax evaders in the United States, the UK, France, and other countries will also be impacted by the leaked data.
Recent leaks about offshore companies have renewed interest and investigations.
A tax haven’s existence has many effects. It can put pressure on other countries to keep their taxes low as a result of lower taxes or no taxes in one country. This is good for taxpayers in the short term, but the secrecy and opacity associated with some of the tax havens may encourage money laundering or other illegal activities that can harm the world economy in the long term. Tax payers need to tread carefully in light of the crackdown on tax evaders in some countries.