A tax haven is an offshore financial center like a country or a place that allows foreign businesses, individuals, and companies to store their funds with minimum or no tax liability.
These centers offer an economically stable environment where outsiders can easily set up businesses. However, these places are also quite secretive and do not disclose details about the company and its owners.
These centers are also known as “secrecy jurisdictions.” International companies and wealthy businessmen can legally use these tax havens to store money while avoiding paying taxes in their countries. But unfortunately, these offshore bank accounts can also be used by criminals to illegally hide money from tax authorities.
Due to their secrecy policy, a tax haven may refuse to cooperate with foreign tax authorities to keep their owners’ identities safe.
Criteria for Becoming a Tax Haven
The Organization for Economic Cooperation and Development (OECD) issued a circular (1998) stating the factors an area must follow to identify itself as a tax haven. Some of the main factors are:
- No substantial activities
- Lack of effective exchange of information
- No or minimal tax
- Lack of transparency in the legislative and administrative system
What are the Benefits of a Tax Haven?
- The country or the place benefits by attracting outsiders to invest in their banks and financial institutions. They can then use the funds to develop their financial sector.
- All the individuals or businesses having an account in a tax haven usually benefit primarily by saving a lot on taxes. This is because the tax rate in these tax havens is as low as 0, much less than their country’s higher taxes.
What are the Top Tax Havens in the World?
According to a recent survey currently, there are 91 tax havens across the world. Some of the popular ones are:
- Switzerland: Depending on the bank, an account holder may avail of full or partial tax exemption
- The Channel Islands: This tax haven does not have any council taxes, value-added taxes or capital gains taxes.
- Luxembourg: This small European country offers benefits like 0% withholding taxes and tax incentives.
- Mauritius: This Island nation does not have any withholding tax and offers a low corporate tax rate.
- Isle of Man: This tax haven does not have any turnover tax or capital transfer tax and no capital gains tax. A big plus point of this haven is that they have a low-income tax (the highest rate is only 20%).
- Singapore: The country charges nominal corporate taxes and also offers tax incentives.
Why Would a Country or State Become a Tax Haven?
The only reason is to earn more money.
All the tax havens make huge amounts of money from the fee paid by all the account holders (businesses and wealthy individuals) who create and use shell companies.
Additionally, these places also create many job opportunities for secretaries, accountants, and lawyers.
How does the Government Earn Revenue from Being a Tax Haven?
- Only a handful of the tax havens worldwide are entirely tax-free. However, most of them charge a nominal tax rate much lower than other countries.
- All the low-tax jurisdictions usually charge a higher customs or import duty charge to cover the losses in tax revenue.
- By inviting more businesses and organizations, tax havens earn substantially more tax revenues, even if they charge a minimal tax rate. In addition to this, the country may also benefit from corporate investments in its business operations. Also, they create more job opportunities for their residents.
- Tax Havens may also charge a specific registration or renewal charge for the bank accounts that must be paid annually. They may also charge additional fees like license fees.
Therefore, these fees act as additional income for the tax havens.
What are the different types of tax havens?
1. International Tax Haven
Some states in the US do not charge any income tax. This makes them attractive for corporations and individuals looking to pay lesser taxes. However, they cannot avoid any federal taxes.
Delaware is a small Mid-Atlantic U.S. state and is the perfect choice for corporate incorporation. This is because the state does not impose any corporate tax on the companies and businesses that invest in Delaware but do business elsewhere.
2. Offshore Tax Haven
Offshore is anywhere outside the jurisdiction of your nation. Offshore tax havens directly benefit from the capital invested by the account holders into their economy. Simply speaking, the funds come in from individuals and businesses having accounts in banks and financial institutions located in these Offshore Tax havens.
The account holders (wealthy individuals and corporations) directly benefit from the minimal tax charges on income in these countries where credits and other special tax rebates are allowed.
3. Shell Company
A Shell company is a legal entity created in a specific tax haven. These companies only exist on paper and do not have a specific office or full-time employees. For example, a single building in one of the tax havens can be the home to over 10000 shell companies.
The terms may vary from one location to another. While some havens use the term “shell company,” others may also use the term “offshore company.”
Tax Havens are places where you can hide your money from the prying eyes of the government. However, these tax havens have come under surveillance, and with the increase in international political pressure, they are being forced to cooperate with the authorities to report foreign tax fraud.