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A tax haven is a place where certain taxes are levied at a low rate or not at all. This encourages wealthy individuals and/or firms to establish themselves in areas that would otherwise be overlooked. Different jurisdictions tend to be havens for different types of taxes, and for different categories of people and/or companies. 'Tax haven' is generally regarded as a pejorative: an unfavorable judgment on a jurisdiction’s stability, financial probity and reputation.
Most countries Most countries impose taxes on income earned or gains realised within that country regardless of the country of residence of the person or firm. Most countries also tax their residents (individuals and companies) on all their worldwide income. One way a person or company takes advantage of tax havens is by moving to, and becoming resident for tax purposes in, an appropriate country. Another way for an individual or a company to take advantage of a tax haven is to establish a separate legal entity (an offshore company, offshore trust or foundation), subsidiary or holding company there. Assets are transferred to the new company or trust so that gains may be realised, or income earned, within this legal entity rather than earned by the beneficial owner. United States The United States is unlike most other countries in that its citizens are subject to U.S. tax on their worldwide income no matter where in the world they reside. U.S. citizens therefore cannot avoid U.S. taxes either by emigrating or by transferring assets abroad. According to Forbes magazine some nationals choose to give up their United States citizenship rather than be subject to the U.S. tax system. * However, U.S. citizens who reside (or spend long periods of time) outside the U.S., may be able to exclude up to US$80,000 (or foreign equivalent) of salaried income earned overseas (but not other types of income), as well as foreign housing expenses. Additionally, the U.S. will normally allow a U.S. citizen to subtract any foreign income taxes paid on foreign sourced income, from the U.S. income tax due on that income. Also, U.S. citizens do have the option of setting up an offshore foundation or trust, which can be used as a tax reporting free entity. However, constraints exist on how the income is used. For example, foundations stipulate that funds must be used for altruistic purposes. Incentives for the tax haven There are several reasons for a nation to become a tax haven. Some nations may find they do not need to charge as much as some industrialised countries in order for them to be earning sufficient income for their annual budgets. Some may offer a lower tax rate to larger corporations, in exchange for the companies locating a division of their parent company in the host country and employing some of the local population. Other domiciles find this is a way to encourage conglomerates from industrialised nations to transfer needed skills to the local population. Still yet, some countries simply find it costly to compete in many other sectors with industrialised nations and have found a low tax rate mixed with a little self-promotion can go a long way to lure companies to their domiciles. Many industrialised countries claim that tax havens act unfairly by reducing tax revenue which would otherwise be theirs. It is claimed that money launderers also use tax havens extensively, although regulations in tax havens can actually make money laundering more difficult than in locations with a large black market such as New York City or London. In 2000 the Financial Action Task Force published what came to be known as the "FATF Blacklist" of countries which were perceived to be uncooperative in relation to money laundering; although several tax havens have appeared on the list from time to time (including key jurisdictions such as the Cayman Islands, Bahamas and Liechtenstein), no offshore jurisdictions appear on the list at this time. Examples of tax havens Some tax havens including some of the ones listed above do charge income tax as well as other taxes such as capital gains, inheritance tax, and so forth. Criteria distinguishing a taxpayer from a non-taxpayer can include citizenship and residency and source of income. Amounts While incomplete, and with the limitations discussed below, the available statistics nonetheless indicate that offshore banking is a very sizeable activity. IMF calculations based on BIS data suggest that for selected OFCs (Offshore Financial Centers), on balance sheet OFC cross-border assets reached a level of US$4.6 trillion at end-June 1999 (about 50 percent of total cross-border assets), of which US$0.9 trillion in the Caribbean, US$1 trillion in Asia, and most of the remaining US$2.7 trillion accounted for by the IFCs (International Financial Centers), namely London, the U.S. IBFs, and the JOM (Japanese Offshore Market). (*) The Tax Justice Network estimates that US$11.5 trillion of assets are held offshore by private individuals at a probable cost to their governments of US$255 billion a year in tax lost. This would be more than sufficient to fund the Millennium Development Goals as agreed by the United Nations. (*) See also | ||||||||
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