A tax haven, or “offshore financial center,” is an offshore country where taxes are levied at a very low “effective” rate for foreign investors. Residency or business presence is typically not required in order to benefits from their tax policies. Additionally, tax havens share limited or no financial information with foreign tax authorities.
Tax havens attract a generous amount of capital inflow and impose fees, charges, and even low tax rates to generate government revenue. While high-tax countries lose corporate tax revenue from businesses shifting profits elsewhere, tax havens can reduce the cost of financing investment in those countries, indirectly facilitating economic growth.
While tax havens may seem questionable, investing through a trust or company in a tax haven is legal.
Regulatory bodies, such as the Organization of Economic Cooperation and Development (OECD) and the U.S. Government Accountability Office, monitor modern tax havens. This being said, modern corporate tax havens have high levels of OECD-compliance and have bilateral tax treaties. These tax havens still have the ability to enable tax treaties closer to zero, like traditional tax havens, by using base erosion and profit shifting tools (BEPS).
The top ten tax havens in the world are:
- Cayman Islands
- Isle of Man
- the Bahamas
Luxembourg is considered to be the best tax haven in the world. According to a report from Citizens for Tax Justice and U.S. PIRG Education Fund, approximately 30% of U.S. Fortune 500 companies have subsidiaries in Luxembourg. For example, Amazon funnels all of its sales in Europe through its official European headquarters in Luxembourg.
The Cayman Islands currently hold banking assets equal to one-fifteenth of the world’s total $30 trillion in banking assets. In addition to having no corporate tax, the Cayman Islands impose no direct taxes on residents, including property, income, and payroll taxes. The Caymans are especially popular with hedge fund managers because there is no corporate or income tax even on interest or dividends earned on an investment. The Caymans have subsidiaries with Fortune 500 companies such as Pepsi, Marriot, and Wells Fargo.
A list of the world’s most notorious tax havens can be found here.