Tax haven

A tax haven is a place where certain taxes are levied at a low rate or not at all. This encourages wealthy individuals and/or firms to establish themselves in areas that would otherwise be overlooked. Different jurisdictions tend to be havens for different types of taxes, and for different categories of people and/or companies.

Since 2000, the term has fallen into disrepute. International organisations like the OECD, FSF and FATF gain a great deal of their power from the ability to label and categorise (Barnett and Finnemore 1999). The OECD’s efforts to regulate international tax competition since 1998 have provided a classic instance of how international organisations can achieve influence through their authoritative command of language. Various OECD component bodies like the Forum on Harmful Tax Practices and the Committee on Fiscal Affairs have moulded the meanings and connotations attached to the term ‘tax haven’ and have used this label to exert pressure on non-compliant jurisdictions by threatening their reputations. 'Tax haven' is now regarded as a pejorative, an unfavourable judgement on a jurisdiction’s stability, financial probity and reputation. ^*

Taxation worldwide

Most countries

Most countries impose taxes on income earned or gains realised within that country regardless of the country of residence of the person or firm. Most countries also tax their residents (individuals and companies) on all their worldwide income.

One way a person or company takes advantage of tax havens is by moving to, and becoming resident for tax purposes in, an appropriate country. Another way for an individual or a company to take advantage of a tax haven is to establish a separate legal entity (an offshore company, offshore trust or foundation), subsidiary or holding company there. Assets are transferred to the new company or trust so that gains may be realised, or income earned, within this legal entity rather than earned by the beneficial owner.

United States

The United States is unlike most other countries in that its citizens are subject to U.S. tax on their worldwide income no matter where in the world they reside. U.S. citizens therefore cannot avoid U.S. taxes either by emigrating or by transferring assets abroad. According to Forbes magazine some nationals choose to give up their United States citizenship rather than be subject to the U.S. tax system. ^*

However, U.S. citizens who reside (or spend long periods of time) outside the U.S., may be able to exclude up to US$80,000 (or foreign equivalent) of salaried income earned overseas (but not other types of income), as well as foreign housing expenses. Additionally, the U.S. will normally allow a U.S. citizen to subtract any foreign income taxes paid on foreign sourced income, from the U.S. income tax due on that income. Also, U.S. citizens do have the option of setting up an offshore foundation or trust, which can be used as a tax reporting free entity. However, constraints exist on how the income is used. For example, foundations stipulate that funds must be used for altruistic purposes.

Incentives for the tax haven

There are several reasons for a nation to become a tax haven. Some nations may find they do not need to charge as much as some industrialised countries in order for them to be earning sufficient income for their annual budgets. Some may offer a lower tax rate to larger corporations, in exchange for the companies locating a division of their parent company in the host country and employing some of the local population. Other domiciles find this is a way to encourage conglomerates from industrialised nations to transfer needed skills to the local population. Still yet, some countries simply find it costly to compete in many other sectors with industrialised nations and have found a low tax rate mixed with a little self-promotion can go a long way to lure companies to their domiciles.

Many industrialised countries claim that tax havens act unfairly by reducing tax revenue which would otherwise be theirs. It is claimed that money launderers also use tax havens extensively, although regulations in tax havens can actually make money laundering more difficult than in locations with a large black market such as New York City or London.

Examples of tax havens

Andorra. No personal income tax.
Anguilla
Antigua and Barbuda
Aruba
The Bahamas levies neither personal income nor capital gains tax, nor are there inheritance taxes.
Barbados - A 'Low-tax regime' not 'haven' - Because it has tax information exchange agreements.
Belize
Bermuda does not levy income tax on foreign earnings, and allows foreign companies to incorporate there under an "exempt" status. Exempt companies may not hold real estate in Bermuda or trade there, nor may they be involved in banking, insurance, assurance, reinsurance, fund management or similar business, such as investment advice, without a license. The island also maintains a stable, clean reputation in the business world. At present, there are no benefits for individuals. In fact, for a non-Bermudian to own a house on the island, they would have to pay a minimum of $15,000 a year in land tax alone.
British Virgin Islands: the 2000 KPMG report to the United Kingdom government indicated that the British Virgin Islands was the domicile for approximately 41% of the world's offshore companies, making it by some distance the largest offshore jurisdiction in the world by volume of incorporations. The British Virgin Islands has, so far, avoided the scandals which have tainted less well regulated offshore jurisdictions.
Cayman Islands
In the Channel Islands, no tax is paid by corporations or individuals on foreign income and gains. Non-residents are not taxed on local income. Local taxation is at a fixed rate of 20.0% in Jersey, Guernsey, & Alderney and 0% in Sark.
Cook Islands
Cyprus: this tax haven has exploded in popularity as of late and it is expected to grow even more. There are many incentives to own a holding company and the tax rates are the lowest of any EU country.
Dubai
Gibraltar
Hong Kong's tax rates are so low that it can be considered a tax haven.
Ireland does not tax the foreign income of authors and artists.
The Isle of Man does not have corporation tax. Income tax from local sources is 10% and 18% from non-local sources.
Latvia
Liechtenstein
Luxembourg
Macau
Malta
Monaco does not levy a personal income tax.
Nauru
Netherlands Antilles
Nevis
Panama
Samoa
San Marino
Sealand
Seychelles
St Kitts and Nevis
St Vincent and the Grenadines
Switzerland is a tax haven for foreigners who become resident after negotiating the amount of their income subject to taxation with the canton in which they intend to live. Typically taxable income is assumed to be five times the accommodation rental paid. Zug is a popular low tax canton.
Turks and Caicos
The UK is a tax haven for people of foreign domicile, even if they are UK resident (residence and domicile being separate legal concepts in the UK), in that they pay no tax on foreign income not remitted to the UK. Similar arrangements are to be found in a few other countries including Ireland.
Some states within the United States, particularly Delaware, offer incentives for businesses to locate there. Many banks and other financial companies are domiciled in the state of Delaware even though Delaware is one of the smallest states in the USA.
Uruguay no personal income tax.
Vanuatu, an island archipelago state in the Micronesian Pacific, is a tax haven that does not release account information to other governments and law enforcement agencies. In Vanuatu, there is no income tax, no withholding tax, no capital gains tax, no inheritance taxes, and no exchange controls.

Some tax havens including some of the ones listed above do charge income tax as well as other taxes such as capital gains, inheritance tax, and so forth. Criteria distinguishing a taxpayer from a non-taxpayer can include citizenship and residency and source of income. For example, in the Cayman Islands, one pays no tax if one earns all one's revenue from outside the country but one does pay tax if one earns income from within the country.

Amounts

While incomplete, and with the limitations discussed below, the available statistics nonetheless indicate that offshore banking is a very sizeable activity. IMF calculations based on BIS data suggest that for selected OFCs (Offshore Financial Centers), on balance sheet OFC cross-border assets reached a level of US$4.6 trillion at end-June 1999 (about 50 percent of total cross-border assets), of which US$0.9 trillion in the Caribbean, US$1 trillion in Asia, and most of the remaining US$2.7 trillion accounted for by the IFCs (International Financial Centers), namely London, the U.S. IBFs, and the JOM (Japanese Offshore Market). (^*)

The Tax Justice Network estimates that US$11.5 trillion of assets are held offshore by private individuals at a probable cost to their governments of US$255 billion a year in tax lost. This would be more than sufficient to fund the Millennium Development Goals as agreed by the United Nations. (^*)

External links

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