What is a Tax Haven and what are the implications of using them?

What is a Tax Haven and what are the implications of using them?

In definition, a tax haven is a country or place with very low “effective” rates of taxation for foreign investors. In some traditional definitions, a tax haven also offers financial secrecy. Tax havens do not require businesses to operate out of their country or for the individuals to reside in their country to receive tax benefits.

How can you identify a Tax Haven?

There is not one clear definition of what a tax haven actually is, however The Organization of Economic Cooperation and Development (OECD) uses the three key attributes at identifying whether a jurisdiction is a tax haven:

1. No or Only Nominal Taxes

First and foremost, tax havens impose no or only nominal taxes. The tax structure varies from country to country, but all tax havens offer themselves as a place, where non-residents can escape high taxes by putting their assets or businesses in that jurisdiction.

2. Lack of Effective Exchange of Information

Tax havens protect personal financial information. Most tax havens have formal law or administrative practices that prevent scrutiny by foreign tax authorities.

3. Lack of Transparency

In a tax haven, there is always more than what meets the eye. The legal and administrative machinery of a tax haven is opaque. There are always chances of behind-closed-doors secret rulings or negotiated tax rates that fail the test of transparency.

So with that all said…

Is a Tax Haven Legal?

The short answer would be Yes! As the tax is set by the governments of those countries, however, similar to Shell companies which are also legal but only become illegal if used for criminal purposes, like hiding assets and avoiding tax obligations.

A big case that came to light was of mega superstar footballer Lionel Messi. In 2017 he, along with his father were prosecuted for using tax havens in South America as well as Shell companies across Europe to avoid paying taxes in Spain, totalling over 4 million euros between 2007 and 2009. The outcome of the trail was Messi sentenced to 21 months in prison, this however was reduced to him paying a fine of 257,000 euros along with a voluntarliy payment of 5 million Euros as a “corrective payment”, equal to the alleged unpaid tax plus interest, in August 2013.

What countries are considered a Tax haven?

There are several countries across different continents that are considered a tax haven but the top 5 are:

  • Bermuda – Declared the world’s worst (or best if you’re looking to avoid taxation) corporate tax haven in 2016 by Oxfam with a zero percent tax rate and no personal income tax.
  • Luxembourg – It gives benefits such as tax incentives and zero percent withholding taxes.
  • Cayman Islands – No personal income taxes, no capital gains taxes, no payroll taxes, no corporate taxes, and the country does not withhold taxes on foreign entities.
  • Switzerland – Full or partial tax exemptions, depending on the bank used.
  • Ireland – Referred to as a tax haven despite officials asserting that it is not. Apple discovered that two of the company’s Irish subsidiaries were not classified as tax residents in the United States or Ireland, despite being incorporated in the latter country.

Some of the companies which are known to take advantage of Tax havens are Apple, who have squirreled away a staggering $214.9 billion dollar offshore, Nike who holds $10.7 billions dollars offshore and Goldman Sachs who also hold offshore another $28.6 billion dollars. But they are not the only ones, Microsoft, IBM, General Electric, Pfizer, Chevron and Walmart are amongst the 50 top US offshores who combined have a total of $1.6 trillion dollars offshore!

What are the implications of using a Tax haven?

Using a tax haven may be good for your bank balance but as we have seen time after time, using one could lead to someone exploiting it and using it illegally! Money launderers love to use a tax haven to launder their money and with the lack of any transparency and exchange of information, it makes it easier for the laws to be broken or bent.

If you are found to be evading your tax bill or even being involved in illegal activity, hefty fines and even imprisonment will be in order.

Let’s recap…

What is a Tax Haven?

A tax haven is a country or place with very low “effective” rates of taxation for foreign investors. In some traditional definitions, a tax haven also offers financial secrecy. Tax havens do not require businesses to operate out of their country or the individuals to reside in their country to receive tax benefits.

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