A Tax Havens History in Short.
October 13, 2016
The appearance of such notion as “tax haven” runs as deeply as the countries’ resolution to charge duties from their residents.
What makes a tax haven? – Various jurisdictions take various measures to attract businessmen from the regions with high taxes. Some countries keep their tax rates low; some nominate separate cities or areas low tax or tax-free zones. It helps to boost local economy and gain the loyal attitude of native population.
Ancient Rome can’t but should be mentioned as the first attempt to introduce the tax-free areas, something like free economic activity zones. The first case recorded goes as far as the 2nd Century BC: to undercut the Greek island Rhodes’ state the Romans proclaimed the port on the island of Delos duty free. Notwithstanding the fact that Rhodes charged only 2% on trade, the new tax-free port drew away all its trade. In fact the island’s era as a commercial power ended.
Rome widely used taxation policy to penalize enemies and reward friends. Tax-free status was often granted to the cities and areas loyal to Rome. The territories, not loyal to the Empire were obliged to pay tribute and often at sword’s point. Judea, the antique kingdom, lost its freedom, because it refused to sign the treaty of friendship with Rome. The treaty should have led to a tax-free status of the territory, but in fact Jews lost their country for 18 centuries.
Muslim conquerors practiced introducing taxation policy as a means of proselytizing on the new territories. The original Muslims seized a great territory between what is now Spain and Pakistan. Though they demonstrated relative tolerance toward monotheists, like Christians and Jews, they also charged special tributes from those individuals, who refused to be converted to Islam. So, a little number of the native inhabitants became fervent Muslims in the conquered lands.
The colonial powers of Europe, vice versa, – attracted incomers to the New World introducing favorable laws on taxation. The citizens of England, Holland and Spain were suggested low tax rates as an encouragement for taking a long voyage over the ocean and settling in wild places, often with the unfriendly natives. Ironically, American Revolution emerged after the attempt of English government to raise levies in American colonies, so that they pay for their administration and defense.
The majority of economic experts agree that Switzerland was the “true” original tax haven and Liechtenstein followed it. The Swiss banking system has been long known as a capital heaven, especially for those individuals and entrepreneurs, who ran away from social disturbance in their countries of origin, like Germany, Russia, South America, etc.
In the very beginning of the XX century, after World War and the consequent devastation a lot of European governments increased taxation rates to cope with the post War reconstruction. Being neutral most of the time during World War, Switzerland did not have to use such measure. There was no need to rebuild Swiss infrastructure. In such a way the state gained the position of the low tax base and it resulted into the significant capital flow into the country for tax-related reasons.
The term “Tax Haven” has undergone several changes in meaning in course of the time, particularly after World War II. Between 1920’s and 1950’s it mostly stood for the “states where a person could retire and minimize the post-retirement tax burden.” Later on, however, business entities started to use such zones more and more to reduce their overall financial obligations.
As a rule the tax-reduction strategies are based on the double taxation agreements signed between the jurisdictions. Corporations structure the company ownership in such a way that they can benefit from the double taxation treaties and decrease their tax burden. They pay less in the countries with low tax liability.
Incongruously, but the United Kingdom should be named the first nation to bear the most responsibility for tax havens coming into existence. In 1960’s-1970’s Great Britain encouraged lots of its overseas territories to become independent, so that they could develop their own economic systems and depend less on the financial aid from the Whitehall. At the same time, in the end of 1960’s the Labour government of the country introduced the unprecedented 90% top marginal tax rate.
By mid-1980’s the prevalent number of tax havens changed their laws to improve corporate instruments, so that they could become “hypothecated” and released from local taxes. In the majority of cases, such legal entities could not do business locally. The vehicles were then referred to as “exempt companies” or IBCs – international business companies/corporations.
A present-day tax haven may even not necessarily be a separate country. In the USA, for instance, the shift of businesses and capital was observed from high regulation, high taxation rate states like California, New York and Illinois, to low tax states like Florida or Texas. These states use taxation policy cleverly to develop industry, create jobs and, finally, increase tax returns at the expense of the former.
Contact us to get more details as to the corporate vehicles in the jurisdictions best matching your business.