What Is Offshore Tax Haven?

Constantly, businesses make moves that are aimed at giving them a greater advantage over their competitors. However, there is one thing businesses run away from and can go extra mile to avoid – taxes. As a means of avoiding tax payment, companies are always on the lookout for offshore tax havens.

Meaning Of Offshore Tax Haven

An offshore tax haven is a geographical location where corporate bodies and individuals have the option of avoiding taxes legally. In addition to privacy, its service rate is very affordable, thereby making it an irresistible choice for foreign investors.

Offshore tax havens are well ingrained in the global financial industry, being able to influence what goes on in the market. They first came to be as a support for World War II-affected countries whose economies were ruined, and since then, they evolved to cater to wealthy individuals and big businesses who wish to find a way around tax payment.

Large scale economic drain of countries worldwide has been linked to offshore tax havens. Reports have it that even a good number of Fortune 500 companies make use of the services of offshore tax havens.

Understanding Offshore Tax Haven

The most remarkable trait of offshore tax havens is the minimal to zero tax obligations that come with them. Nevertheless, the tax structure differs from one country to another. It is important to note that an offshore tax haven is different from countries that provide tax incentives. Both of them indeed make tax payments more bearable but one thing that separates the two is privacy.

Offshore tax havens are known for their level of secrecy when it comes to the personal financial information of their clients. It is actually a part of their law, which makes it difficult for foreign tax authorities to meddle in their affairs. There is minimal or zero exchange of information between offshore tax havens and foreign tax authorities.

How It Works

The best way to understand how it works is through an example. Let’s assume there is a big company based in the US named Sky Crown Inc., with its headquarters in New York, earning a lot of profits from its business activities that span different continents. However, with respect to the US tax codes, this company finds itself under the corporate tax bracket of 30%.

Now, in a bid to reduce its tax burden, Sky Crown decides to create a shell company called Ostrich in Jersey, a well-known choice for offshore tax haven seekers. The shell company will neither be into commerce or trade nor will possess any meaningful asset.

So, as Sky Crown continues to make profits and acquire properties, they will be transferred offshore to Ostrich Ltd, where they will be taxed according to Jersey’s tax law. The icing on the cake in this scenario is that no tax will be paid by Ostrich Ltd because corporate income is not taxed in Jersey.

By so doing, Sky Crown Inc. has found a way not to pay the 30% tax and it is all legal. This is possible because of a loophole in the US tax laws, which businesses take advantage of to avoid tax payments.

The Good about Offshore Tax Havens

Secrecy of Information

Offshore tax havens take the privacy of their clients very seriously. They go to great lengths to ensure that both the financial and personal information belonging to their clients are protected. Such information is kept hidden, especially from foreign tax authorities and only with the client’s consent can their private information be divulged.

Extremely Low Tax Rates

The tax rates from offshore tax havens are highly insignificant, which companies in their jurisdictions will happily pay, though the rates vary from one country to another. Their services are not free, of course, but at the same time, they are not excessive. Clients are required to pay a very small fee for services rendered.

No Substantial Activities Required

Foreign companies are not required to move their operations such as the production of goods and service delivery to the jurisdiction of the offshore tax haven. To simplify things for them, all they have to do is to open a head office in the offshore tax haven country or to create shell companies or subsidiaries in tax havens. This way, their major financial transactions will be sent for the singular purpose of avoiding being heavily taxed by their home country.

Corporations taking this route are simply saying that they’d rather be taxed by the offshore tax haven country instead of the country where their income is generated because the former is cheaper.

The Bad about Offshore Tax Havens

Offshore tax havens seem to benefit only wealthy people and big businesses, while those in the low or middle class are left to their fate. These individuals are forced to pay taxes on their little earnings while the money bags send theirs to offshore just to avoid losing a cent more than they have to.

American companies are always looking for ways to evade taxes and this is costing the US government over $90 billion yearly. Like in 2010, General Electric found a way around tax laws and ended up paying the government zero taxes.

Avoiding tax payments can be good for the corporation or individual, after all, it saves them money, but it’s the government that feels its impact. One of the major ways a country earns revenue is through taxes and taking it away can be harmful to its economy.

How Governments Earn From Offshore Tax Havens

The fact they are called tax havens does not mean their clients do not pay tax. The only difference is that the rate is far less than what tax-paying countries charge. However, countries that are tax havens find other ways to earn money – through customs and import duties, which they attach high rates to.

Companies who wish to open branches in tax haven jurisdictions may be required to pay a registration fee, and a certain amount will be paid as renewal charges yearly. In addition, offshore tax havens use the strategy of volume to earn more in tax revenues: the greater the number of foreign investors, the greater the revenue.

So, even though the tax rate is nominal, the high number of investors will make their gain substantial. The tax haven countries also benefit when their citizens gain employment in foreign companies.

Top 10 Offshore Tax Havens Globally

Bermuda: ranked in 2016 as the worst corporate tax haven in the world. However, companies will beg to differ on that title, since it’s in their favor. Bermuda does not tax personal income and its tax rate is zero.

Netherlands: a popular destination for Fortune 500 companies. The government lures investors with mouth-watering tax rates.

Luxembourg: clients enjoy tax incentives in this tax haven as well as zero percent withholding taxes.

Cayman Islands: a very common offshore tax haven and the reason it is so great is that it has no corporate taxes and zero capital gains tax. Also, personal income is not taxed.

Singapore: practices profit sharing and corporations are made to pay very little tax rates.

The Channel Islands: zero taxes on capital gains. Council taxes and value-added taxes are nonexistent.

Isle of Man: income tax is very low, with its maximum being 20%. Capital transfer tax, capital gains tax and turnover tax are zero.

Mauritius: no withholding tax and an insignificant corporate tax rate.

Switzerland: every bank has its own rule. Some offer clients full tax exemptions while others offer partial exemptions.

Ireland: a country whose tax haven membership is still debatable. Officials insist it isn’t one while companies having subsidiaries in its jurisdiction enjoy tax exemptions.

Conclusion

Offshore tax havens play a vital role in the financial industry as it helps to maintain a balance in the creation of tax laws. The tax havens help keep tax-paying countries in check to stop them from bleeding the wealthy dry all in the name of taxes. Their existence is a gift to taxpayers but can also lead to their downfall when they begin to use offshore tax havens for illegal activities.

The secrecy associated with offshore tax havens can be tempting to an investor, who may decide to launder money through them, later get arrested and prosecuted. Therefore, users of offshore tax havens need to be cautious to avoid run-ins with the law.