July 14: Can Tax Havens Work In Your Favor

by David Jenyns on July 14, 2007

Initially, it should be noted that tax havens are an essential part of offshore investing. Many countries that set themselves up as tax havens did so because they had very little infrastructure or industry that could have been utilized to sustain the country. These countries generally have exceptional confidentiality and privacy regulations, and in countless cases, some of the world’s top banks reside upon their shores. In Vanuatu for instance, the ANZ and Westpac Banks may be found, while the Bahamas boasts more than 600 banks.

Now that we’ve looked at the usefulness of tax havens, we can move on to defining it. Simply put, tax havens are countries that have laws and regulations in place allowing foreign investors, whether they are corporations or individuals, to reduce their tax liability by the use of offshore vehicles such as International Business Corporations, trusts, foundations, bank accounts and credit cards. Although there are currently over 200 jurisdictions that offer these types of special incentives to foreign investors, in reality there are fewer than 35 true tax havens left.

Tax havens impose heavy penalties for individuals or companies that disclose information pertaining to shareholder or client banking information. These penalties range from large fines to prison sentences; in Vanuatu the fine for disclosing the shareholder of a Vanuatu registered company can be up to US$ 100,000.

While the common misconception is that the use of tax havens must in someway be illegal, this is incorrect; while ‘tax evasion’ is illegal, ‘tax avoidance’ is not. This distinction is crucial – in fact, the US Supreme Court stated in Gregory vs Helvering (1935) 293 US 465 that taxpayers can arrange their affairs so as to make their taxes as low as possible.

As more and more counties recognize the benefits that becoming a tax haven have on tourism and foreign investment, they find themselves competing for the offshore dollar. As a result there are many types and variations on the tax havens concept.

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