Most of the businesses globally strive relentlessly seeking ways to circumnavigate their largest financial loads; taxes. Some even go the extra mile of seeking tax havens to increase their profit margins.
Businesses always implement strategies that they believe will give them an edge over their competitors. But, they all invest a lot of time and expertise in seeking the best ways of avoiding any unnecessary taxes. Offshore tax havens come in handy when businesses aim to avoid tax payments.
What Is An Offshore Tax Haven?
This type of tax haven is a geographical country where individuals and corporates get the option of avoiding taxes legally. Apart from privacy, its service rate is quite affordable making it an attractive option for foreign investors.
The offshore tax havens are meticulously integrated into the global financial sector and they can influence what goes on in the market. Initially, they came as a support for World War II-affected countries whose economies were destroyed by the war. Since that time, they have changed to cater to big businesses and wealthy individuals who want to find a way around tax payment.
Notably, the extensive economic drain of various countries globally has been connected to offshore tax havens. Reports suggest that even the biggest brands in the world incorporate the services of offshore tax havens.
How Offshore Tax Havens Work
The most attractive trait of these havens is the minimal to zero tax obligations that are associated with them. But, the tax ecosystem changes from one country to the next. Please note that an offshore tax haven is not the same as a country that offers tax incentives. Both make tax payments more bearable but privacy separates the two.
When it comes to personal financial information, offshore tax havens are famous for their high levels of secrecy. It is a part of their law that makes it challenging for the foreign tax authorities to meddle in any of their affairs. There is minimal to zero information change between foreign tax authorities and offshore tax havens.
How Does It Work?
For instance, let us assume there is a big firm based in the United States named Top Crown Inc. It has its headquarters in Boston earning huge profits from its activities that span different continents. But, according to the US tax codes, the company is categorized under the corporate tax bracket of 30%.
While trying to minimize the tax burden, Top Crown decides to set up a shell company by the name Tiger in Jersey which is a renowned option for the offshore tax haven seekers. This shell company is not into commerce or trade and will not possess any significant assets.
Now, as Top Crown continues to acquire properties and make properties, they are transferred to Tiger Ltd. In this place, they are taxed according to the Jersey tax law. The best part of this arrangement is that no tax will be paid by Tiger Ltd since corporate income is not taxed in Jersey.
By doing that, Top Crown Inc. Has created a way of not paying the 30% tax and it is legal. That is possible since there exists a loophole in the US tax laws that businesses exploit to avoid paying taxes.
Benefits of Tax Havens
These offshore tax havens have several advantages that suit the companies and individuals that use them.
Secrecy of Information
These tax havens take the privacy of their customers quite seriously. They also strive to make sure that both the personal and financial information that belongs to their clients are protected. This information is considered sensitive and kept hidden mostly from foreign tax authorities. The information can only be shared with the client’s consent.
Considerably Low Tax Rates
The tax rates associated with the offshore tax havens are considerably small. Companies that shift there gladly pay these small taxes while avoiding to pay high tax rates within their jurisdictions. However, tax rates vary from one offshore tax haven country to the next.
Though the services in the havens are not free, they are also not expensive. Clients pay a low fee for the services rendered.
Not Much Activity Needed
The foreign companies do not need to move any of their operations to the jurisdiction of the offshore tax haven. Thus, they will not incur extra costs moving their production of goods and service delivery from their local jurisdictions. All the companies have to do is open a head office in the tax haven country or set up a shell company or subsidiary in the tax haven.
This method ensures that the company’s major financial transactions are sent for the sole purpose of evading heavy taxes charged by their home country. Companies that go down this road are indirectly saying that they prefer being taxed by offshore tax haven countries instead of their home countries since the havens are cheaper.
These tax havens seem to benefit just the big businesses and wealthy people while those in the middle and low class are left to their taxation fate. The latter groups are forced to pay huge taxes on their little earnings while the moneyed send theirs to offshore just to evade the probability of losing even a cent more than they have to.
Most American companies are constantly seeking ways to avoid taxes which currently costs the US government more than $90 billion annually. For instance, in 2010 General Electric used this strategy and paid the government zero taxes.
Avoiding tax payments is good for individuals and corporations since it saves them money. But, the government feels the heat through revenue loss which proves to be harmful to the economy.
How Do Governments Earn From Offshore Tax Havens?
Though they are known as tax havens, it does not mean that their clients do not pay taxes. But, the rate is far less compared to what the tax-paying countries charge. These tax haven countries find other means of earning money particularly through customs and import duties which they link high rates to.
Companies and individuals seeking the services of the tax haven jurisdictions may be needed to pay a registration fee. In some cases, a certain amount is paid as annual renewal charges. Furthermore, these offshore tax havens use this method of volume to earn more in tax revenues. The bigger the number of foreign investors, the greater the revenue.
Thus, although the tax rate is quite nominal, the big number of investors make their gain significant. These tax haven countries also benefit whenever their citizens secure employment opportunities in foreign companies.
The Best Offshore Tax Havens Worldwide
Many tax havens exist around the world. Here are some of the top-ranked destinations.
In 2016 it was ranked as the worst corporate tax haven globally. But, companies may differ with that opinion since it works in their favor. The country does not tax personal income and its tax rate is zero.
Most of the Fortune 500 companies see it as a viable tax haven since the government lures investors with attractive tax rates.
This tax haven provides its clients with tax incentives and zero percent withholding taxes.
This popular offshore tax haven charges no corporate taxes and offers zero capital gains tax. Moreover, personal income is not taxed there.
This haven practices profit sharing and corporations are charged very little tax rates.
Isle of Man
The income tax charged in this place is quite low capped at a maximum of 20%. On the other hand, capital gains tax, capital transfer tax, and turnover tax are zero.
The Channel Islands
Capital gains are not charged anything while the value-added taxes and council taxes are nonexistent.
Every bank in this country has its own rule. Some of them offer full tax exemptions while others offer partial exemptions.
The corporate tax rate is insignificant while withholding taxes do not exist.
This is a country that some say should not feature in the tax haven membership list. Officials believe that Ireland is not a tax haven. But, the companies that have subsidiaries in this jurisdiction continue to enjoy tax exemptions.
The offshore tax havens play an integral role in the financial sector since it helps in the maintenance of balance in the creation of tax laws. All these tax havens help to keep tax-paying countries in check to ensure that they do not milk the wealthy dry all in the name of tax charges.
The existence of the tax havens is a gift for the taxpayers. However, it may also lead to their downfall when they consider using these offshore havens for illegal activities. The secrecy that comes with offshore tax havens is quite tempting for any business or investor.
Some may decide to use them for illegal activities like money laundering and later on get arrested and prosecuted. Thus, the users of offshore tax havens must always be cautious to avoid any forms of run-ins with the law.