WHAT YOU NEED TO KNOW ABOUT TAX HAVEN
A business or an individual can use tax havens to reduce their tax obligations. Read on to find out what a tax haven is, and its characteristic, and benefits.
What is a tax haven?
A tax haven also called an offshore financial center, is jurisdiction or country that offers minimal or low tax liability to foreign businesses or individuals. The Organization for Economic Cooperation and Development OECD model defines a tax haven as a country that imposes very low or no taxes at all. Besides, wealthy individuals or multinational firms can use it for tax avoidance purposes. They allow foreign businesses or individuals to receive the benefits even if they don’t operate or live in that country.
Characteristics of tax havens
The OECD gave many factors of identifying a tax haven. They include:
- Little or no tax obligations.
- High rate of confidentiality in banking or commercial businesses.
- no form of exchange control
- political stability
- Offers professional advisors.
- offers good climate and good communication technology to attract investors
- Favorable and convenient disposal of foreign capital.
- Create offshore banking secrecy.
How government earn from tax haven
Offshore centers are not entirely tax-free but charge lower tax rates than other countries. These countries charge high import duties and customs to recover revenue losses.
They charge a fee for new registration and a renewal fee per year. Offshore companies also charge clients extra fees such as license fees. These companies can also offer jobs to the country’s business; hence they benefit from corporate investments. Tax haven provides a high degree of privacy of the details of corporate.
How a tax haven operate
A business or an individual can register a corporate or any financial income with an offered financial center. The most available corporate company to use can either be an offshore company or an offshore trust. These two companies are;
- Offshore company. It is a company in a low tax jurisdiction overseas. It allows one to minimize corporate tax and have access to other financial benefits.
- Offshore trust. It is a trust in a low tax jurisdiction and offers safe protection from extra taxes and risk to individuals’ assets.
Other way of taking advantage of tax haven includes;
- Owning an offshore bank account in a low tax jurisdiction county.
- Registering as a fully permanent resident of a low tax jurisdiction country.
Who can use a tax haven
Any corporation or individual who needs to reduce their tax liability legally can use a tax haven. These include Multinational corporations who need to maximize their profits. Or investors who want to set up multinational enterprises. Wealthy individuals can also use tax havens to protect their assets.
For example, Apple uses Ireland as its tax haven. If they had not used Ireland as a tax haven, they would owe the US government $65.4 billion in taxes. Nike also uses Bermuda as a tax haven, and they would have paid 3.6 billion in tax if they did not use tax havens.
Examples of jurisdictions that offer tax advantage include;
- Cayman’s Island,
- Bahamas
- Netherlands
- Cook Island
- Mauritius
- Ireland
- Singapore
- Switzerland
Advantages of using tax havens
Privacy and confidentiality
Tax havens offer high confidentiality. There are a few audits or reports to get information about the company. It is also a crime to reveal or disclose banking details and the number of directors or shareholders. But in few instances, some experience leakages, such as the Panama, Paradise, and Pandora papers.
Reduced tax liability
Individuals or companies who live in a highly progressive tax system lose significant amounts of their income to tax. So they use offshore centres to reduce their tax liability by paying little to no tax. For instance, on Cayman’s Island, an individual pays zero percent income tax and nil capital gain tax. Besides, most tax havens have no tax regimes.
Protection of assets
Tax havens protect assets since they operate away from the regulations and legal jurisdiction. Besides, local courts cannot claim assets or taxes from offshore companies. They also don’t share information with western nations. This makes it difficult for Western countries to scrutinize tax havens for tax avoidance purposes.
Convenience
Tax haven attracts investors in many ways. For instance, they offer an excellent financial environment, and they enjoy cash inflows from offshore investors. Besides, they can register a company in less than a week. They also offer low registration fees, which attracts investors. The annual operating fee is at the lowest side with no exchange control.
Disadvantages of using tax havens
Difficulty in getting investors
They are prone to scrutiny and audit since many governments believe they act as tax evasion centers. As a result, many investors shun away because of the risk that may arise.
Income Scrutiny
Due to many negative comments about the tax havens, businesses that use them are subject to scrutiny for their local. They are also prone to tax audits from revenue authorities to establish if the income is legit. Most suspicious investors may shy away from investing in offshore centers.
Challenges in opening corporate bank accounts
Tax havens are high risk. So an individual may hesitate to open a corporate account. They fear the financial risks the corporation may face in case of information leakages.
Most multinational corporations and wealthy individuals use tax havens to plan their taxes. As a result, they pay little to no taxes. Even so, tax haven is legal, and any person can use it.
