Tax haven

Offshore consultant

what is a tax haven?

 offshore jurisdictions explained

A tax haven is a country that exempts foreign investors who hold bank accounts or set up companies in its territory from taxes. Typically, two different tax systems exist together:

While citizens and corporations residing in the country are required to pay their taxes like elsewhere in the world, foreign investors enjoy, in most cases, total exemption, or at least a substantial reduction of taxes to be paid. Provided they do not carry on business within the tax haven itself. States that apply this kind of tax policies do so with the intention of attracting foreign deposits to strengthen their economy. Most of them are tiny nations with few natural or industrial resources. Their whole existence would be threatened were it not for the booming financial industry growing in the shadow of foreign capital.

Tax havens, also called offshore jurisdictions, have attracted an increasing number of foreign investors, especially in recent decades. Usually they are people and businesses fleeing their own country’s tax collecting voracity in search of a more favorable business environment. This is not surprising, since in some countries with high taxes, especially in Europe, the taxes paid by a person or business account for up to 50% of their profit.

This capital flight, of course, is not viewed favorably by tax officials of the countries that suffer from it, as in the end an important part of their tax revenue gets away. Therefore, they have tried to react with different measures to hinder the transfer of assets to tax havens or to make it unattractive.

But the new world order that emerged with the globalization of the economy makes it difficult to exert effective control over the movement of money. Trying to hinder the free flow of capital clashes with the claims of global trade liberalization, which is defended by, besides most companies and governments, also by such important institutions as the World Bank, the WTO (World Trade Organization) and the OECD (Organization for Economic Co-operation and Development).

On the other hand, the legal measures taken with the intention of hindering the outflow of capital, and which usually consist of an unfavorable tax treatment of investments in tax havens, have not yielded the expected results either.

This is because it is relatively easy to hide the ownership of offshore corporations or offshore bank accounts, so many people have simply opted to conduct their operations in secret.

What can be done then against tax havens?

The main actions have been aimed at putting pressure on the governments of tax havens seeking to limit their confidentiality laws and bank secrecy. This is currently being done through various international organizations, usually under the banner of combating terrorism, drug trafficking and money laundering networks.

The OECD, the G-20 and the FATF (Financial Action Task Force) are the most active bodies in this field. In any case, the solution to the problem is very complex, since for many of these countries their own survival as a nation is what is at stake, having no other viable economic alternatives.

So far we have seen that the main feature of an offshore jurisdiction is a tax policy favorable to foreign investment. But it is far from the only one. There are several additional features that make a country to pass from being considered a simple low-tax country to a real tax haven.

  • Personal data of owners and shareholders of companies are not listed in public records, or the use of formal representatives (called nominees) is allowed.

  • There are strict rules on bank secrecy. Data about account holders are only available to the authorities if there is evidence of serious crimes such as terrorism or drug trafficking.

  • Signing treaties with other countries involving exchanges of banking or tax information is avoided. Although this situation is changing in recent years.

  • Stability and monetary policy are promoted. Who would invest in a place with continuous coups d'état, wars or rampant inflation?

  • They have an excellent range of legal, accounting and tax advice services.

  • They often have good tourist and transportation infrastructure.

Despite the above features, the line between being and not being a tax haven is often very blurred. Being listed in one or the other category by the OECD and other bodies is often more responsive to political and economic interests of its members than to purely objective criteria.

It is also good to know that there are differences between one tax haven and another. Some of them focus more on serving individuals, while others seek to promote the establishment of corporations. And there are of course those who seek both.
There are elitist jurisdictions, specializing in vast fortunes, interesting only to high net worth individuals with a good amount of money in their bank account. This applies especially to those in Europe. But this is not the norm by far. Most tax havens willingly accept also less affluent customers.

The latter are precisely those that have contributed to the spectacular growth of the financial industry in recent decades. With globalization and the development of the Internet, it is not necessary anymore to travel to distant places to set up a company or open a bank account. Operating costs have become very cheap, so that investing in a tax haven is available to almost anyone now.

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