Tax Haven - Explained
What is a Tax Haven?
If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.
- Marketing, Advertising, Sales & PR
- Accounting, Taxation, and Reporting
- Professionalism & Career Development
Law, Transactions, & Risk Management
Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
- Business Management & Operations
- Economics, Finance, & Analytics
Table of ContentsWhat is a Tax Haven?How Does a Tax Haven Work?Factors for Identifying Tax HavenLists of Tax Haven CountriesThe United States Corporations and Tax HavensHow Governments Earn Money from Tax HavensBenefits Associated with Tax HavenTo Tax Haven Countries To those with Businesses About Secrecy JurisdictionAcademic Research on Tax Havens
What is a Tax Haven?
A tax haven refers to those places or countries that exempt foreign investors who come to do business in their countries from paying taxes. Tax liability in such countries is either very low or not there at all. Tax havens do offer a very low tax liability and also financial privacy which benefits the foreign investors.
How Does a Tax Haven Work?
Tax haven, in other words, can be said to provide means through which business entities or individuals escape their countries tax law by doing business in other countries where they are not taxed. Top secrecy is the major tool used in this kind of business operation. Note that when it comes to a tax haven, private investors are not required to operate away from their country of origin. In other words, a person operating the business is not mandated to reside in these countries in order to benefit. They can still operate and benefit from the tax haven while they reside in their own countries of origin.
Factors for Identifying Tax Haven
There are a number of factors that are used to categorize tax haven as stipulated by the Organization for Economic Cooperation and Development. Tax haven can be identified using the following:
- There is no transparency
- Exchange of information is not effect
- There is either nominal or no tax on pertinent income
- The business activities are not significant
Lists of Tax Haven Countries
Note that there are no definitive lists of tax havens. The available lists of tax haven do exist depending on how they are listed by different international bodies. Some of the tax haven countries which have been identified include the following: British Virgin Islands, the Channel Islands, Cook Islands, Netherlands, Singapore, Hong Kong, Belize, The Bahamas, Andorra, Mauritius, The Isle of Man, Lichtenstein, Monaco, Panama, Nevis, St. Kitts, Costa Rica, Dominica, Belize, Anguilla, Luxembourg, Bermuda, Ireland, The Cayman Islands among others.
The United States Corporations and Tax Havens
Following the United States Tax Cuts and Jobs Act endorsed in December 2017 it set a 21% corporate tax rates. This enables companies in the United States such as Apple, Alphabet, Microsoft, and Cisco among others to maintain foreign tax haven amounting to billions of dollars with low tax rates. This makes it inexpensive for companies based in the United States to borrow funds.
How Governments Earn Money from Tax Havens
- By tax haven countries allowing investors to operate their businesses in their countries, the business operations create jobs for their citizens.
- Also, note that tax liability in tax haven countries is not completely free, but rather offered at lower rates, meaning that the governments still get some revenue. For this reason, their customs or import duties are placed at a higher rate so that they can redeem what they lost in tax revenues.
- Again, the tax haven countries also benefit from charges such as new registration of business and business renewal, which is done on a yearly basis. There is also an additional fee from the licenses which businesses are required to pay to the government.
Benefits Associated with Tax Haven
Tax haven is beneficial to the tax haven countries and to those operating businesses in the following ways:
To Tax Haven Countries
There is more capital attraction to the banks operating in tax haven countries. This means that the financial sector of those particular countries is able to flourish because of the increased capital in their financial institution.
To those with Businesses
For those individuals or businesses operating in tax haven, they are able to benefit from all the money they save from the taxes. This is because tax haven countries exempt them from either paying taxes or their taxes are placed at very low rates which enables them to save. This is contrary to the high taxes in their countries of origin where all individuals and businesses must pay all taxes due to government.
About Secrecy Jurisdiction
To be able to maximize the tax they receive, the countries governments usually ensure continuous pressure on tax haven to give out information about offshore accounts for their citizens. However, the secrecy aspect attached to tax haven usually hampers their efforts to get hold of the accounts. Note that there are different offshore offers whereby some countries have financial regulations that are not strict while some offer secret banking. Some like the United Kingdom do not have secret banking, however, it offers several offshore services and this includes financial regulations that are not strict. Nonetheless, compared to capital inflows these governments get from tax haven, it outweighs the revenue from tax compliance making it more beneficial.