Offshore Tax Havens

What are Tax Havens?  We have all read watched spy films where money is located in glamorous, far-flung locations in numbered accounts, for example.  These offshore jurisdictions are commonly referred to as Tax Havens.  However, although we are all familiar with Switzerland and Belize as offshore jurisdictions, actually identifying a tax haven is more complex than one would assume.

The international organisation OECD (Organisation for Economic Co-operation and Development) indicates that there are 4 key criteria to determine if an offshore financial center is a tax haven.  These are:

  • Level of taxation: Whether there is openness and consistency of taxation
  • Legislation that prevents the exchange of information with the home governments
  • No requirement for activity to be substantial
  • Levels of Taxation in Tax Havens: Contrary to popular belief, this is not the only criteria which make an offshore financial center a tax haven.  The other identified factors, above, have to be in operation in order for it to be thus named.

In actual fact a tax haven will not always have zero tax. There are, in reality, three levels of taxation within Tax Havens:  zero tax, low rate tax and normal rate tax. A Zero Tax Haven will, as the title suggests, not charge any tax on income or investments.

A Zero Tax Haven will be a small economy, possibly a former British Colony, which makes up its income from indirect taxation instead of direct. A Low Rate Tax Haven is usually a smaller economy, too. Like the zero tax haven, it may have been a former colony or dependency of Britain. These offshore jurisdictions entice business and investors through offering a lower rate of taxation which it attractive to the depositor.

Again, this offshore financial center will supplement its income in indirect taxation, by adding VAT to products for instance. A Normal Rate Tax Haven will charge the standard rate of tax upon income, savings and investment income. So, what makes it a potential tax haven? The fact that it will offer additional benefits to residents or investors would make it a potential tax haven.

The Republic of Ireland, for instance, will offer a lower rate of tax to the manufacturing industry in an effort to encourage manufacturers to set up and invest there.

Openness & Consistency of Taxation

Where a jurisdiction is open about its taxation policy and transparent in the levels applied to individuals, it will not be considered a Tax Haven. Transparency is about having consistent taxation legislation with a sharing of the relevant documentation.

If an offshore financial center doesn’t require detailed documentation or paperwork and does not share this information with an individual’s home jurisdictions, then it may be considered (along with the other three requirements) a Tax Haven. This brings us on to the next criteria of Tax Havens:  information sharing.

Legislation On Information Sharing

If offshore financial centers have legislation preventing information sharing, then this is one of the criteria for tax haven status.

Most jurisdictions have signed up to an agreement with another country or group of countries (i.e. Europe) to share information. This information sharing still takes the individual’s financial privacy into consideration and would only take place if a specific request were made by one government of another.  It is only at that time that any financial information may be released. By their very nature, tax havens value financial privacy above all other things.

It is how their economies survive. Tax Havens do not share financial information about their account holders and investors. Indeed, some offshore tax havens have legislation which actively prevents this – even, in some cases, resulting in imprisonment of the banking staff if information is divulged.