Why will the use of tax havens be contracted?
The EU is coming up with strong measures to contract the use of jurisdictions that are considered to be tax havens. Strong popularity of companies from these jurisdictions is due to their cheap registration, no necessity to spend time and money on the relevant preparation and submission of accounting, tax and annual reports. But the main reason is the total freedom from taxes!
What will the changes involve? First of all, the EU assumes to draw up a comprehensive ‘black list’ of jurisdictions in 2017. Then according to this list, certain discriminatory measures will be applied to European companies that purchase goods or services from tax haven companies. Among these measures are banning of the cost acknowledgement for goods and services when calculating income tax or imposing withdrawal tax on the amount of goods or services, which means the European company will have to deduct an interest from the revenue (amount of goods and services purchased) and transfer this amount to the tax authority.
The black list of EU offshore companies
What was the black list based on? The following guides were used as benchmarks to analyse jurisdictions:
- How strong economic connections with the EU are.
- Financial activity within the jurisdiction with respect to its real economy.
- Jurisdiction attractiveness in terms of tax avoidance.
The analysis elicited a number of risk factors involved to create the black list of the EU tax havens:
- Transparency of information on a company’s structure, i.e. the availability of data on Directors and Shareholders in the State registrar as well as information exchange between the jurisdiction and the EU under the Double Taxation Avoidance Agreement or another information exchange treaty.
- Tax preferences, similar to the territorial taxation in Hong Kong, Panama and Singapore.
- Zero rate or absence of income tax like in Dubai.
This trend is painful for the economy of the countries that are considered traditional tax havens, among which are the Seychelles, BVI, Bahama Islands, Belize, the Cayman Islands, etc.
Banks cease to open accounts for classic tax havens
American banks began to withdraw correspondent accounts opened with Caribbean banks. One of the widely known and clamorous cases involved Loyal Bank located in Saint Vincent and Grenadine. Several years ago, one of the world banks closed USD correspondent accounts in this bank. Its clients had to withdraw money from other ATMs paying high commission interest and feeling stressed about daily withdrawal limits.
Apparently, governments of the countries have taken the best decision having used a dual approach to the tax avoidance issue. On the one hand, they imposed additional tax on the companies that cooperated with tax havens, and on the other hand, put pressure on the respective banks.
This issue is even more complicated – banks more frequently refuse to open accounts to the companies from tax havens, requiring jurisdictions with better standings.
Are there any options left to use classic tax havens?
Of course, there are! But if there is no vital necessity to open a bank account for the tax-haven company to be later used in combination with EU companies, the tax-haven company alone will be more than enough. Nevertheless, one should keep in mind that one day, tax havens can give in to the US and EU pressure and require accounting and annual reporting, which will increase the maintenance cost of such companies and may tip the scale for companies from low-tax jurisdictions.
One of the examples showing how to effectively use a company from a tax haven is a simple shareholding without dividend payment.
High time to change the taxation strategy
It’s high time to change the taxation strategy and decide in favour of tax payments. Where to pay them and in what extent is a matter of strategy. When deciding in favour of any strategy, it is of vital importance to realise the associated risks. This will require defining an economic subject of transactions and arrange the chosen tax strategy around it in order to minimise the tax burden.