What is the current situation with offshore tax havens?
A crucial problem in the on-going debate about tax havens is that there is no agreed definition of what the term “tax haven” actually means. Typically, the term is applied to countries or territories that offer favourable tax regimes for foreign investors. Low income or corporate tax rates are often a feature, but there are a variety of other elements, such as bank secrecy laws that are equally or more important.
A crucial problem in the on-going debate about tax havens is that there is no agreed definition of what the term “tax haven” actually means. Typically, the term is applied to countries or territories that offer favourable tax regimes for foreign investors. Low income or corporate tax rates are often a feature, but there are a variety of other elements, such as bank secrecy laws that are equally or more important. Given the importance of the issue and the international commitments in this area, it might be expected that identifying tax havens would be straightforward; however this is not the case. Probably the best known definition of a tax haven is that used by the Organisation for Economic Co-operation and Development (OECD) which identifies three key factors in considering whether a jurisdiction can be regarded as a tax haven:
1. Reduced or nominal tax rate
Tax havens impose no or reduced taxes. Individuals or corporate entities can find it attractive to establish subsidiaries or move themselves to areas with reduced or nil taxation levels compared to the typical international taxation. If the home nation of a business does not have a tax treaty with the country where a subsidiary is located, the business might be required to pay tax on the same income to both countries. To avoid this situation, a company may set up a holding company in a jurisdiction that has tax treaties with both countries.
2. Protection of personal financial information
Tax havens typically have laws or administrative practices under which businesses and individuals can benefit from strict rules and other protections against scrutiny by foreign tax authorities. This prevents the information being disclosed about taxpayers who are benefiting from the low tax jurisdiction.
3. Lack of transparency
A lack of transparency in the running of the legislative, legal or administrative provisions is another factor used to identify tax havens. The OECD is concerned that laws should be applied openly and consistently, and that information needed by foreign tax authorities to determine a taxpayer’s situation is available. Lack of transparency in one country can make it difficult for other tax authorities to apply their laws effectively. ‘Secret rulings’, negotiated tax rates, or other practices that fail to apply the law openly and consistently are examples of a lack of transparency. Limited regulatory supervision or a government’s lack of legal access to financial records are contributing factors.
Corporations, in order to achieve effective tax avoidance, use multiple types of tax havens. Three types of tax haven form what can be referred to as a “Dutch Sandwich” or “double Irish” - two terms which are often heard when talking about this subject.
Primary tax havens: Is the location where financial capital is held. Subsidiary shell or holding companies there have obtained rights to collect profits from corporate intellectual property (IP) by transfers from their parent.
Semi-tax havens: Locations that produce goods for sale predominantly outside of their territorial boundaries and have flexible regulations to encourage job growth, such as free trade zones and territorial-only taxation.
Conduit tax havens: Locations where income from sales, primarily made outside their boundaries, is collected, and then distributed. Semi-tax havens are reimbursed for actual product costs. The remaining profits are transferred to the primary tax haven, because it holds rights to profits due to the corporate intellectual property.
Large international companies may have many different entities interacting with each other. Each tax haven can claim that it does not satisfy definitions that attempt to place all tax havens into a single class. Even increased transparency does not change the effectiveness of tax avoidance entirely.
Recent years have seen dramatic changes in the regulatory environment across the Financial World, with greatly increased emphasis on financial disclosure and the reporting of overseas assets. In the United States, the introduction of FATCA now requires US tax residents to disclose any accounts held outside the country, and foreign financial institutions to report to the IRS information about their US clients.
One of the side effects of the excess of new legalisation and automatic exchange of information agreements is that all companies must now maintain and lodge full and proper accounts. In addition, banking bureaucracy and disclosure has also dramatically increased resulting in both the opening and maintenance of bank accounts becoming more thorough and therefore expensive. For anyone considering opening an offshore company, one alternative to the typical tax haven whilst in keeping with the new legislation is choosing to incorporate in low-tax jurisdictions such as Cyprus, Singapore, Hong Kong or Malta. The businesses striving to be legitimate whilst reducing maintenance costs should be aware of the changes taking place and keep up with them.
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