Tax Havens: All You Need to Know

When Christopher Columbus left side in search of the New World, he was looking for routes for developing trade and commerce for Queen Isabella of Spain. A noble motive positively! But times have changed. When the explorers of the New World leave their shores now, they are often looking for carries to new tax havens. Their motive is to avoid paying taxes.

In a world wherein levying taxes is compared to the plucking of a goose, there is no lack of demand for tax havens. But before you even think of searching for a tax haven, read on to find out what tax havens are and why you should be conscientious. (For related insight, read about the pros and cons of offshore investing.)

Tax havens have been everywhere for quite some time, with some historians even mentioning their existence in the form of isolated isles during the time of the ancient Greeks. The oldest tax havens of our times include Liechtenstein, Switzerland, and Panama – each of which is imagined to date back to the 1920s. But even after so many years of existence, there is no universal definition of a tax haven. The Plan of Economic Cooperation and Development (OECD) – a Paris-based group of 30 developed countries – uses three key characteristics for identifying whether a jurisdiction is a tax haven:

First and foremost, tax havens impose no or only minor taxes. The tax structure varies from country to country, but all tax havens offer themselves as a place where non-residents can diversion high taxes by putting their assets or businesses in that jurisdiction. Different tax havens are popular for rebates on dissimilar kinds of taxes. But this attribute alone is insufficient to identify a tax haven. Many well-regulated countries offer tax spurs for attracting outside investment but are not classified as tax havens. Which leads to the second, and most important, attribute of a tax haven.

Tax havens zealously protect personal financial information. Most tax havens have formal law or administrative practices that put a stop to scrutiny by foreign tax authorities. There is no or minimal sharing of information with foreign tax authorities.

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

But that’s not all. Apart from the aforesaid three features, the United States Government Accountability Office has listed two additional attributes of a tax haven.

Tax havens typically do not make outside entities to have a substantial local presence. Such a concession could lead to interesting situations. For model, one building in the Cayman Island is said to house supposedly 12,000 U.S.-based corporations. This suggests that you can require tax benefits by merely hanging your nameplate in a tax haven. There is no need for actually producing goods or services or leading trade or commerce within the boundaries of the country. For all practical purposes, tax evaders may continue their business in Florida while commanding to be residents of the Bahamas when it comes to paying taxes.

In the end, tax havens are all about marketing. They help themselves as offshore financial centers. Many like to call themselves “international financial centers.” Tax havens repeatedly promote themselves as places where incorporating a company or opening a bank account takes as much time as it advocate d occupies to balance your checkbook.

Other than lower taxes and secrecy, there are several other socioeconomic facts that make a particular destination a popular tax haven:

1. Political and economic stability. Without political and economic soundness, no amount of tax inducement can bring outside investors. Switzerland, for example, became famous for its political and economic stability.
2. Need of exchange controls. Putting assets in a country subject to exchange controls could be dangerous for outside investors.
3. Agreements. Many tax havens like Mauritius have become popular due to loopholes in multiple tax avoidance treaties signed with divers jurisdictions. Some are becoming less popular due to various information-sharing treaties signed with different governments.​​​​​​​
4. Corporate laws. Productive corporate laws make entry and exit for companies easier. This also means lower compliance set someone backs for companies.
5. Communication and transportation. As the experience of Hong Kong and Singapore shows, better communication and transport facilities act as an carrot for outside investors.​​​​​​​
6. Banking, professional and support service. Destinations like Switzerland and Austria, although not strictly tax havens, are everything considered popular for offshore banking services and a safe destination for assets.​​​​​​​