A tax haven or offshore financial center is any country or jurisdiction that offers minimal tax liability to foreign individuals and businesses. Tax havens do not require businesses to operate out of their country or the individuals to reside in their country to receive tax benefits.
Criteria for Tax Havens:
In 1998, the Organization for Economic Cooperation and Development (OECD) gave a number of factors to identify tax havens. Similarly, some of the most common factors are given below:
- No or nominal tax on relevant income
- Lack of effective exchange of information
- Lack of transparency
- No substantial activities
Benefits to government:
- Tax havens are not completely tax-free. They charge a lower tax rate than other countries. Low tax jurisdictions generally charge high customs or import duties to cover the losses in tax revenues.
- Tax havens may charge a fee for new registration of companies and renewal charges to be paid every year. Additional fees may also be charged such as license fees. Such fees and charges would add up to a recurring fixed income for the tax havens.
- By attracting foreign individuals or businesses, even if they are only charged a nominal tax rate, the country may earn substantially more in tax revenues than it would otherwise. Also, the country may benefit from corporate investments in business operations that offer jobs to the country’s residents.
- To Tax Haven Countries – The countries benefit by way of attracting capital to their banks and financial institutions, which can then be used to build a thriving financial sector.
- To Individuals or Businesses – The individuals and businesses benefit by saving tax, which in tax haven countries may range from zero to low single digits compared to high taxes in their country of citizenship or domicile.
Top tax havens in the world:
- Bermuda – Declared the world’s worst (or best if you’re looking to avoid taxation) corporate tax haven in 2016 by Oxfam with zero percent tax rate and no personal income tax.
- Netherlands – Most popular tax haven among the world’s Fortune 500. The government uses tax incentives to attract businesses to invest in their country. One such tax incentive cost an estimated 1.2 billion euros in 2016 to Netherlands.
- Luxembourg – It gives benefits such as tax incentives and zero percent withholding taxes.
- Cayman Islands – No personal income taxes, no capital gains taxes, no payroll taxes, no corporate taxes, and the country does not withhold taxes on foreign entities.
- Singapore – Charges reasonable nominal corporate taxes. Reasonable corporate tax rates are provided through tax incentives, lack of withholding taxes, and what appears to be substantial profit shifting.
- The Channel Islands – No capital gains taxes, no council taxes, and no value added taxes.
- Isle of Man – No capital gains tax, turnover tax. or capital transfer tax. It also imposes a low income tax, with the highest rates at 20%.
- Mauritius – Low corporate tax rate and no withholding tax.
- Switzerland – Full or partial tax exemptions depending on the bank used.
- Ireland – Referred to as a tax haven despite officials asserting that it is not. Apple discovered that two of the company’s Irish subsidiaries were not classified as tax residents in the United States or Ireland, despite being incorporated in the latter country.