Tax haven

Categories: Taxation

A tax haven is a place where certain taxes are levied at a low rate or not at all. Among tax havens, different jurisdictions tend to be havens for different types of taxes, and for different categories of people and/or companies.

One way a person or company takes advantage of a tax haven is by moving to, and becoming resident for tax purposes in, the tax haven (U.S. citizens see below). Another way for an individual or a company to take advantage of a tax haven is to establish a separate or subsidiary legal entity (an offshore company, trust or foundation) in the tax haven. Assets are transferred to the new company or trust so that gains may be realised, or income earned, which otherwise would be realised or earned by the beneficial owner.

Whether all this is tax avoidance or tax evasion is not always entirely clear and depends upon the legislation of the countries involved and the particular circumstances of the companies or individuals.

Many countries (particularly OECD countries) have laws that make it difficult for their residents to own a company (or have an investment) in a tax haven without paying tax either in the tax haven or where they are resident. For example, income or gains arising to the offshore company or investment may attributed for tax purposes to the owner or investor under CFC or other laws. Although many countries also have bilateral double taxation treaties to prevent their residents from paying tax twice (although, typically, the higher rate of tax charged in the two countries is due), few countries have tax treaties with tax havens.

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U.S. Citizens

Most countries impose taxes which are based on source of income (if the money is earned there it's subject to tax), or they tax based on residency (if you live there then your worldwide income is subject to tax). But most countries do not impose tax based on citizenship alone. The United States is unlike other countries in that its citizens are subject to U.S. tax on their worldwide income no matter where in the world they reside. US citizens therefore find it difficult to take advantage of personal tax havens. Although there are some offshore bank accounts that have been advertised as tax havens, U.S. law requires reporting of income from those accounts and failure to do so constitutes tax evasion. Some nationals choose to give up their U.S. citizenship rather than be restricted by the U.S. tax system.

However, U.S. citizens who reside (or spend long periods of time) outside the U.S., may be able to exclude up to US$80,000 (or foreign equivalent) of salaried income earned overseas (but not other types of income), as well as foreign housing expenses. Additionally, the U.S. will normally allow a U.S. citizen to subtract any foreign income taxes paid on foreign sourced income, from the U.S. income tax due on that income. Also U.S. citizens do have the option of setting up an offshore foundation or trust, which can be used as a tax reporting free entity.

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Examples of Tax Havens

  • The UK is a tax haven for people of foreign domicile, even if they are UK resident (residence and domicile being separate legal concepts in the UK), in that they pay no tax on foreign income not remitted to the UK. Similar arrangements are to be found in a few other countries including Ireland.
    • In the Channel Islands, no tax is paid by corporations or individuals on foreign income and gains. Non-residents are not taxed on local income. Local taxation is at a fixed rate of 20.0% in Jersey, Guernsey, & Alderney and 0% in Sark.
    • the Isle of Man, does not have corporation tax and income tax from local sources is 10% and 18% and non-local sources, 18%.
    • In Gibraltar, tax exempt companies, which must not trade or conduct any business locally, are taxed at a flat rate of up to £300 a year.
  • Switzerland is a tax haven for foreigners who become resident after negotiating the amount of their income subject to taxation with the canton in which they intend to live. Typically taxable income is assumed to be five times the accommodation rental paid.
  • Monaco does not levy a personal income tax and neither does Andorra.
  • The Bahamas levies neither personal income nor capital gains tax, nor are there inheritance taxes.
  • Vanuatu, an island archipelago state in the Micronesian Pacific, is a tax haven that does not release account information to other governments and law enforcement agencies. In Vanuatu, there is no income tax, no withholding tax, no capital gains tax, no inheritance taxes, and no exchange controls.
  • Campione d'Italia
  • Hong Kong's tax rates are so low that it can be considered a tax haven.
  • Luxembourg
  • San Marino
  • Belize
  • Cayman Islands
  • Seychelles
  • Bermuda
  • Saudi Arabia
  • United Arab Emirates
  • Liechtenstein
  • Panama
  • Nevis
  • WARNING Most if not all tax havens including many of the ones listed above DO charge income tax as well as other taxes such as capital gains, inheritance tax, and so forth. The only distinction usually tends to lie in whether or not one is a citizen of that country or whether a person who moves to the tax haven makes money there. For example in the Cayman Islands and the Bahamas one pays no tax if they earn all their revenue from outside the country but DO pay tax if they earn income from within the country. This tends to be the case in almost all tax havens.
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Amounts

While incomplete, and with the limitations discussed below, the available statistics nonetheless indicate that offshore banking is a very sizeable activity. IMF calculations based on BIS data suggest that for selected OFCs (Offshore Financial Centers), on balance sheet OFC cross-border assets reached a level of US$4.6 trillion at end-June 1999 (about 50 percent of total cross-border assets), of which US$0.9 trillion in the Caribbean, US$1 trillion in Asia, and most of the remaining US$2.7 trillion accounted for by the IFCs (International Financial Centers), namely London, the U.S. IBFs, and the JOM (Japanese Offshore Market).([1])

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See also

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External links

es:Paraíso fiscal fr:Paradis fiscal ko:조세 피난처 he:מקלט מס ja:タックス・ヘイヴン pt:Paraíso fiscal zh:避稅港