Why Do Tax Havens Exist
Tax avoidance is a reduction in taxes by legal means whereas evasion is tax avoidance by illegal means. Tax havens In this context, a tax haven is a territory where certain taxes are levied at a much lower rate or not at all while offering due process, good governance and low corruption rate. Tax havens do not tax havens just because they have low taxes. What makes a tax haven is its opacity of financial information. This is why tax havens are often more accurately referred to as ‘secrecy jurisdictions’ and that gives rise to many additional problems apart from tax evasion.
The Organisation for Economic Co-operation and Development (OECD) identifies three key factors in considering whether or not a jurisdiction is a tax haven.
- Nil or only nominal taxes: Tax havens impose nil or only nominal taxes (generally or in special circumstances) and offer themselves, or are perceived to offer themselves, as a place to be used by non-residents to escape high taxes in their country of residence.
- 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 transmittance of information about taxpayers who are benefiting from the low tax jurisdiction.
- Lack of transparency: A lack of transparency in the operation of the legislative, legal or administrative provisions is another factor used to identify tax havens. The OECD is concerned that law should be applied transparently 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, if not impossible, 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 is contributing factors.
While the legal regimes that tax havens set up to enable this secrecy are complex. Their basic outline is simple — banks, companies, trusts, or other financial actors in the country are allowed to accept money from basically anywhere without reporting it to the authorities in the country where it originates or from which it is controlled. In some cases, it is actually illegal to disclose that information, but in many places, it is simply because the banks or other entities aren’t required to disclose it and there is no mechanism to force them to do so.
The benefits of tax havens can be summarized as follows:
- Inheritance planning can be done more effectively.
- The transfer of the estate to heirs is cheaper, faster and away from public eyes.
- Planning can be done more efficiently through a tax haven.
- Offers asset protection against possible litigation.
- Minimize tax liability by having assets and business dealings away from home jurisdiction in safe offshore haven investment activities.
the wct rate in up However, while there are benefits, there is certainly a flip side, too, which must be kept in mind before one venture to use tax havens to one’s advantage.