Taking A Look At Tax Havens

By Manoj Singh on August 20, 2009 A A A

Filed Under: Bahamas, Capital Gains Tax, Caribbean, Corporate Law, Corporate Tax, G-
20, Hong Kong,Income Tax, International Markets, Investment Tax, Laws &
Regulation, Panama, Personal Tax,Switzerland, Tax Evasion
When Christopher Columbus left in search of the New World, he was looking for
routes for developing trade and commerce for Queen Isabella of Spain. A noble
motive indeed! But times have changed. When the explorers of the New World
leave their shores now, they are often looking for routes to new tax havens.
Their motive is to avoid paying taxes. In a world where levying taxes is
compared to the plucking of a goose, there is no shortage 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 careful. (To learn more,
see The Pros And Cons Of Offshore Investing.)

The Smoke Screen
Tax havens have been around for quite some time, with some historians even
mentioning their existence in the form of isolated islands during the time of the
ancient Greeks. The oldest tax havens of our times include Liechtenstein,
Switzerland and Panama - each of which is believed to date back to the 1920s.
But even after so many years of existence, there is no universal definition of a
tax haven. The Organization of Economic Cooperation and Development (OECD)
- a Paris-based group of 30 developed countries - uses three key attributes for
identifying whether a jurisdiction is a tax haven:
1. No or only nominal taxes. First and foremost, tax havens impose no or
only nominal taxes. The tax structure varies from country to country but
all tax havens offer themselves as a place where non-residents can
escape high taxes by putting their assets or businesses in that
jurisdiction. Different tax havens are popular for rebates on different
kinds of taxes. But this attribute alone is insufficient to identify a tax
haven. Many well-regulated countries offer tax incentives for attracting
outside investment but are not classified as tax havens. Which leads to
the second, and most important, attribute of a tax haven.
2. Protection of personal financial information. Tax havens zealously
protect personal financial information. Most tax havens have formal law
or administrative practices that prevent scrutiny by foreign tax
authorities. There is no or minimal sharing of information with foreign tax
authorities.
3. Lack of transparency. In a tax haven, there is always more than meets
the eye. The legislative, legal and administrative machinery of a tax
haven are opaque. There are always chances of behind-closed-doors
secret rulings or negotiated tax rates that fail the test of transparency.
But that's not all. Apart from the aforesaid three attributes, the United States
Government Accountability Office has listed two additional attributes of a tax
haven:
4. No requirement of substantial local presence. Tax havens typically
do not require outside entities to have a substantial local presence. Such
a concession could lead to interesting situations. For example, one
building in the Cayman Island is said to house supposedly 12,000 U.S.-
based corporations. This suggests that you can claim tax benefits by
merely hanging your nameplate in a tax haven. There is no need for
actually producing goods or services or conducting trade or commerce
within the boundaries of the country. For all practical purposes, tax
evaders may continue their business in Florida while claiming to be
residents of the Bahamas when it comes to paying taxes.
5. Self-promotion as an offshore financial centre. In the end, tax
havens are all about marketing. They promote themselves
as offshore financial centers. Many like to call themselves "international
financial centers". Tax havens often promote themselves as places
where incorporating a company or opening a bank account takes as much
time as it takes to balance your checkbook.
Socioeconomic Factors
Other than lower taxes and secrecy there are several other socioeconomic
factors that make a particular destination a popular tax haven:
1. Political and economic stability. Without political and economic
stability, no amount of tax inducement can bring outside investors.
Switzerland, for example, became famous for its political and economic
stability.
2. Lack of exchange controls. Putting assets in a country subject to
exchange controls could be dangerous for outside investors.
3. Treaties. Many tax havens like Mauritius have become popular due to
loopholes in multiple tax avoidance treaties signed with different
jurisdictions. Some are becoming less popular due to various information-
sharing treaties signed with different governments.
4. Corporate Laws. Efficient corporate laws make entry and exit for
companies easier. There also means lower compliance costs for
companies.
5. Communication and Transportation. As the experience of Hong Kong
and Singapore shows, better communication and transport facilities act as
better inducement for outside investors.
6. Banking, professional and support service. Destinations like
Switzerland and Austria, although not strictly tax havens, are
nevertheless popular for offshore banking services and a safe destination
for assets.
7. Location. Location is always an important factor in the popularity of
certain destinations. The Bahamas has been a popular offshore
destination for U.S. corporations due to its proximity to Florida.
Some Popular Tax Havens
Andorra
Located in Western Europe between France
and Spain in the PyreneesMountains. No
income tax, gift, inheritance or capital transfer
tax. Website: http://www.andorra.ad/
The Bahamas
Located off southeast cost of Florida. No
personal income tax, nor are capitals gains tax
or inheritance tax.
Website:http://www.bahamas.gov.bs/
Belize
Located in Central America on the Caribbean
sea between Mexico and Guatemala. No
Capital Gains Tax.
Website: http://www.belize.gov.bz/
Bermuda
Located east of North Carolina in the Atlantic
Ocean. No income tax, capital gains tax,
capital transfer tax.
Website: http://www.gov.bm/
British
Virgin
Islands
Located 60 miles southeast of Puerto Rico in
the Carribean. No capital gains tax, capital
transfer tax. Famous destination among
offshore companies.
Website:http://www.loc.gov/
Cayman
Islands
Located in the western Caribbean just south of
Cuba. Famous offshore banking centre.
Website:http://www.gov.ky/
Channel
Islands
Located 40 miles north of France and 110
miles south of UK in the English channel.
Non-residents are not taxed on foreign
income. Website:http://www.gov.gg/
Cook Islands
Located between Samoa to the west and
French Polynesia to the east in the south
Pacific. Famous for bank confidentiality.
Website:http://www.cook-islands.gov.ck/
Hong Kong
Located south of mainland China on the south
China sea. No taxes on capital tax. Other taxes
are also low.
Website: http://www.info.gov.hk/
The Isle of
Man
Located between Ireland and England in the
Irish Sea. No corporation tax, capital gains
tax, inheritance tax or wealth tax.
Website:http://www.gov.im/
Mauritius
Located in the Indian Ocean east of
Madagascar. A low tax heaven.
Website:http://ncb.intnet.mu/govt/house.htm
Liechtenstein
Located in western Europe bordered by
Switzerland and Austria. Famous for low
taxes.
Monaco
Located in western Europe on French coast of
Mediterranean sea. No personal income tax or
capital gains tax.
Panama
Located between the North Pacific Ocean and
the CarribeanSea. No tax on foreign source
income.
Website:http://www.presidencia.gob.pa/
Switzerland Located in western Europe. Famous for
offshore banking and lower taxes.
St Kitts and
Nevis
Located west of Antigua in the lesser Antilles
of the Caribbean Sea. Up to 15 year tax
holiday as an investment incentive. Bank
secrecy. Website:http://www.embassy.gov.kn/
Information current as of December 2009.
Tax Haven or Trap?
With mounting pressure from international organizations like OECD and the G-
20, tax havens may find it difficult to sustain their carefree existence. Growing
numbers of Tax Information Exchange Agreements (TIEAs) and Mutual Legal
Assistance Treaties (MLAT) between tax havens and other countries like the
U.S. would take away tax havens'competitive advantage.

TIEA makes it compulsory to share tax information between signatories and
MLAT requires co-operation in matters of legal enforcements and criminal
investigations. To make matters worse, some of the tax havens have had to
deal with trouble of their own making. Investors thinking of using tax havens
and offshore banking locations should take note of the Liechtenstein banking
scandal that shook the world in 2008. This scandal came to light when Germany
initiated a series of tax investigations based on bank account information sold
by a bank technician. Many citizens of Germany who took advantage of a
Liechtenstein-based trust structure for evading tax in Germany found
themselves in a noose. The leaked data also puts tax evaders in the U.S., the
UK, France and many other countries at risk for tax investigations. (For more,
read Reporting A Tax Cheat.)

Conclusion
The existence of tax havens has many effects. At one level, the lower taxes or
no taxes in one country put pressure on other countries for keeping their taxes
low. This is good for taxpayers in the short term, but the secrecy and opacity
associated with some of the tax havens may encourage money laundering or
other illegal activities that can harm the world economy in the long term. The
crackdown on tax evaders in some countries shows that taxpayers need to
tread with caution. There could be a landmine right under your feet.