What is A Tax Haven?
The word “tax haven” would cause most people to envision some illegal scheme to move money where it cannot be found, taxed, or levied upon. Some of that is true, much is not.
There are several ways to describe tax havens, the most important of which is that the political district (the Haven) does not have treaty enforcement with the home country of a money depositor, and tax avoidance may occur. Putting investments into banks or companies (or even governments) overseas is not illegal. Some countries have historically strong and positive reputations as being depositories which can be trusted. However some of the indicia of a Tax Haven have been delineated by the US Government Accountability Office as:
1. “nil or nominal taxes.”
2. “lack of effective exchange of tax information with foreign tax authorities”
3. “lack of transparency in the operation of legislative, legal or administrative provisions,”
4. “no requirement for a substantive local presence, and”
5. “Self-promotion as an offshore financial center.”
Being involved with tax havens is often equivalent to being a money laundering site. Verification of documentation is very low level since many new accounts are simply created by a local agent – someone who has never seen the depositor and knows little about him. For example, Company A opens a bank account in the Cayman Islands into which millions of dollars are deposited. Cayman does not know or care where the funds originated, and if questions were asked, those inquiries would be directed to a local agent who might represent hundreds of such accounts, but has never met or even spoken with the overseas principals. When a withdrawal is made from that account to some other person or bank there is nothing over than a transaction fee and the money may or may not have been ‘cleaned.’
Lack of responsiveness to law enforcement demands is a strong indicator that a country is a tax haven. By treaty many of the major world powers have agreed to exchange information about bank accounts and transactions if proper procedures are followed (such as subpoenas in some cases). Being outside of the jurisdiction of the originating country courts, however, makes this a treaty issue and not one of compelling compliance by some court generated contempt order.
Some legitimate reasons countries to become tax havens include:
? Inducing foreign investment into the country by much lower or deferred tax rates,
? Benefiting from the capital brought into the country on deposit and maintained there for periods of time.
? Having little other viable manufacturing, agricultural or raw materials resources.
Examples of countries which meet these criteria are Switzerland, Monaco, the Bahamas, and the Seychelles. Each of these countries is small with limited resources with which they could be in a good position for international competition. Gaining some revenue from financial transactions or compelling a company to open a branch office is a positive method to induce investment in their otherwise small but stable economy. The use of a tax haven may be for the purpose of reducing income taxes on new money being generated from operations. Much of the existence of tax havens is for the purpose of avoiding capital gains or inheritance taxes on property in future transactions. Occasionally, the use of a tax haven is for the purpose of disguising the ownership, source, or destination of substantial sums of money.
Tax havens are not bad in and of themselves. They can be poorly used and uncooperative with law enforcement. They can be in violation of treaty and procedurally non-compliant in the international community. They can also be safe storage of funds in places where the political situation is not unstable or potentially dangerous. In summary, tax havens have good uses, bad uses and illegal uses. They should be closely monitored and investigated before inclusion in any financial program.
Read more details about havens and Territorial Tax Systems.
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