Tax Haven: Is it Good or Bad?
February 18, 2016
The term “tax haven” appeared relatively recently. Being neither official nor scientific it is used to name countries which are considered as offshore financial centres (OFCs). They are also called international financial centres or offshore jurisdictions. The term has negative meaning among many countries. Therefore people unfamiliar with the subject consider a tax haven to be something bad. But hard-headed businessmen and experienced investors seriously avail of benefits provided by such centres.Tax havens are the countries which provide significant tax, privacy and other benefits for companies being incorporated by non-residents. Such countries apply 2 different policies towards abroad investors and its domicile entrepreneurs and companies’ owners. On the one hand offshore countries’ residents are obliged to pay taxes in order to fill the budget and have limited access to benefits provided to foreigners. Nonetheless some jurisdictions may provide benefits for both domestic and offshore businesses. On the other hand foreign business owners avail of an opportunity not to pay income tax at all or to be a subject to an extremely reduced tax rate. The same refers to offshore bank accounts holders. The company incorporated in any area providing tax benefits is called an offshore company and doesn’t perform its business within the country.
Tax havens are usually the countries with lack of resources and advanced technologies. Having a weak economy such country succeeds to strengthen it by attracting foreign capitals. Many businesspeople have already transferred their capitals to offshore jurisdictions escaping from taxes in their domicile countries and it is not weird because tax deductions in some countries may reach more than a half of the income. Such situation meets reprobation by countries which suffer from national capital outflow as it essentially influences the ability to fill the budget.
Therefore politicians tried to limit the ability to create offshore companies by issuing special laws and levying fines on such activities. But scale economic processes which happen in the world such as globalization, internationalization and blurring of boundaries lead to complexity of money movement control. Besides such activity is supported by many countries and corporations involved into the World trade as well as by the World Trade Organization, the Organization for Economic Co-operation and Development and the World Bank.
Moreover it is very difficult to control money movements because of offshore jurisdictions’ policy aimed to protect offshore companies or bank accounts owners’ confidentiality, to guaranty the complete secrecy of bank operations and not to enter in any information sharing agreements. That is why tax havens are put under pressure in association with attempts to bring down such policy. This fight takes place under the guise of anti-drugs, anti-terrorist and anti-money-laundering operations. But it is still very difficult to influence the policy of tax havens as their stability and development completely depend on external capitals.
Taking Advantage of Tax Havens
There are several distinctive features except of favorable tax regime which allow for understanding whether a jurisdiction is a tax haven or just a low-tax country:
- It is allowed to appoint a nominee director and shareholder in order to avoid real owner public appearance
- The possibility to set up a company fast and even without personal presence
- Bank secrecy is on the highest level and any bank information is safely protected. The data may be disclosed to law enforcement agencies only as a result of a serious criminal investigation
- The country doesn’t have any information sharing agreements with other countries
- High level of economic stability within the jurisdiction
- No requirements to reporting and bookkeeping. Tax advice, legal and accounting services are easily accessible due to a developed financial system
- Tax havens may boast with perfect tourism infrastructure
Despite these distinctive features it is not so easy to make a clear distinction between offshore jurisdictions and other territories. Thus various financial organizations provide different lists of tax havens.
When seeking for registering an offshore business or bank account it is also important to understand that some tax paradises specialize on serving individuals while others serve companies although there are countries which combine the two policies.
Tax haven is international financial centers or offshore jurisdictions. It provides significant tax, privacy and other benefits for companies.
So despite the fact that certain part of the world community actively fights tax havens’ existence such jurisdictions bring much use to investors and corporation owners. This is a legal and widely practiced way to improve company’s profitability and optimize the organizational structure.