Taxes are a compulsory levy or charge imposed on an individual or organization by a governmental entity: the entity might be local, national or regional. There are various forms of tax, but the most common form of tax is the income tax which is usually a deduction of a set percentage of the income an individual or organization is able to generate. Another recognizable form of tax is the property tax which is applied based on the assessed value of a given asset.
In some countries, some individuals or organizations view the taxes levied on them by their governments as being too high, so they find means of evading making the high tax payments. The most common way in which such individuals evade paying taxes to their parent countries is through tax havens. A tax haven is a state or country that provides individuals and organizations with a stable economic and political environment for their bank deposits without levying any tax or levying a minimal amount on the deposits made. Tax havens are also very popular with gangsters, celebrities, wealthy aristocrats and illegal businesses as a way of evading the high taxes charged by their governments or hiding their illegal earnings.
The use of tax havens isn’t illegal as long as the depositors pay the tax required by the state or country acting as their tax haven. The countries with tax haven status tend to profit from their status since the profits earned are invested back into the country. For a state or country to be categorized as a tax haven, the country or state has to meet a set of criteria set by the organization for economic co-operation and development (OECD). These specifications are:
- the country levies nominal or no tax on the incomes of individuals and organizations.
- There is no exchange of financial information between the financial institutions and the said government.
- There is usually complete financial secrecy.
Under these specifications, tax havens don’t only offer individuals a means of tax evasion, but they also provide the individuals and organizations with an escape route from criminal liability, financial regulations and declarations of their actual net worth. There are two categories of tax heavens:
- Intranational tax havens are states that charge no income tax, making them attractive for individuals and organizations seeking to pay low taxes. Though in intranational tax havens, one cannot avoid paying federal taxes. Examples of such states in the US are Tennessee, Washington, Wyoming, Texas, Nevada, Alaska, Florida, South Dakota and Delaware. Most organizations prefer Delaware as the best choice for incorporation since it does not impose any corporate tax on organizations incorporated in Delaware but conducts their businesses elsewhere.
- Offshore tax havens – these are countries that impose minimal or no levies on bank deposits made in the country. Some of the most prominent offshore tax havens include Cayman Island, Bermuda, the Netherlands, Jersey, British Virgin Islands, Seychelles, Marshal Islands, Mauritius, Curaçao, St. Vincent, Hong Kong, Gibraltar and Nauru.
Tax havens are also grouped into three groups: the UK-based tax havens, transitional economies tax havens and the European tax havens.
After the financial crisis of 2008, the western tax havens were massively affected, thus causing a shift in the tax haven hierarchy with most individuals and organizations preferring the gulf states. Once viewed as the most sought-after tax haven, Switzerland has witnessed the most drastic shift in its position after its banks disclosed the details of their depositors to at least 40 European countries.
The problem of tax evasion has become very serious, with most nations seeking ways that they can use to be able to regulate and arrest said tax evaders. Also, through tax havens, there has been an uptake in criminal activities since criminal enterprises can be easily funded and run through money laundering. Money laundering involves transferring funds through shell companies based in these tax havens until the money or the owner can’t be traced.
To regulate such outcomes, most governments have put in place measures to regulate these tax havens. These regulations include minimizing tax receipts by constantly applying pressure on the tax havens to release the information of the various offshore accounts. Another way for foreign governments to regulate these tax havens is by the creation of the Automatic Exchange of Financial Information, which is run by the Organization for Economic Co-operation and Development, which aims at enforcing the reporting of all offshore investments. The Automatic Exchange of Financial Information program requires all participants to report any tax-related banking information of non-citizens depositors to their country of origin.
The Organization for Economic Co-operation and Development also created the Base Erosion and Profit Shifting initiative to ensure transparency between the multinationals and the governments of their country of origin. While the United States passed the Tax Cuts and Jobs Act which set the corporate tax at 21% and intended to discourage foreign investments while exempting foreign profits from taxation. The Tax Cuts and Jobs Act also had provisions for high returns resulting from foreign profits. To avoid tax evasion by its citizens, the government of the United States requires its citizens to file Form 8938, which aims at disclosing any foreign account that exceeds $50,000. In contrast, non-citizens are required to file Form 114, a Foreign Bank and Financial Accounts report.
In other circumstances, a crisis has been required so that these tax havens conform with the set regulations. An example is Cyprus, whose economy was mainly based on its tax haven status. When its economy collapsed for the country to receive a bailout, the European Central Bank, International Monetary Fund and European Commission required Cyprus to comply with the set tax regulations.
Tax havens are primarily used to manipulate profits made by specific individuals and organizations, which is a bad practice since it denies their countries the revenue it deserves. More research is needed to understand tax havens’ inner workings fully. The rules and laws of tax haven countries keep changing to enable them to retain their tax haven statuses since most of their economies depend on the profits generated by their tax haven status. Remember, it’s your civic duty to pay taxes no matter the rates since it’s through those taxes that your government can be able to run the country efficiently.