A tax haven, or “offshore financial center,” is a country (or state) in which foreign investors pay taxes at an abnormally low rate, possibly even zero. By shifting their funds into or through tax havens, businesses and other investors can avoid paying taxes in high-tax countries. Residency or business presence is typically not required in order to benefit from a tax haven's policies (though it may be in tax-free countries. Additionally, tax havens share little or none of their investors' financial information with foreign tax authorities.
These policies attract a generous amount of capital inflow for tax havens, which may impose mild fees, charges, or a minimal tax on foreign investments in order to generate government revenue. This inflow of funds, which is substantial even with the haven's low-to-zero tax rates, facilitates economic growth in the tax haven country.
Top 10 Tax Haven Countries in the World - Tax Justice Network 2021 (CTHI value):
- British Virgin Islands — 2,853
- Cayman Islands — 2,653
- Bermuda — 2,508
- Netherlands — 2,454
- Switzerland — 2,261
- Luxembourg — 1,814
- Hong Kong — 1,805
- Jersey — 1,724
- Singapore — 1,714
- United Arab Emirates — 1,664
Legal issues with tax havens
Tax havens exist in a legal gray area in that many of the activities associated with them are legal, but many are not. For example, using a tax haven to store funds earned overseas, thereby avoiding paying higher taxes in one's home country, is legal. So is funneling investments in a trust or company through a tax haven. On the other hand, using a tax haven to hide earnings entirely, or to launder money earned through illegal means, is not legal.
Although the definition of what exactly counts as a tax haven differs from source to source, modern tax havens typically adhere to guidelines set out by regulatory bodies such as the Organization of Economic Cooperation and Development (OECD) and the U.S. Government Accountability Office. Modern corporate tax havens have high levels of OECD compliance and establish bilateral tax treaties, which are legal agreements between two countries that reduce the rate of taxation for businesses located in one country but earning money in another. Many tax havens have the ability to legally enable tax treaties close to zero by using base erosion and profit shifting tools (BEPS).
The world's most renowned tax havens
British Virgin Islands
Considered by many to be the world's leading tax haven, this British Colony's economy holds more than 5,000 times its worth in foreign investments. Local officials claim the country is not a tax haven, but this argument is undermined by the fact that the BVI has a mere 36,000 residents, but is the listed home of more than 400,000 companies and holds approximately $1.5 trillion (USD) in assets.
One of the world's richest countries, Luxembourg is also one of the world's leading tax havens. 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, web retailer Amazon.com funnels all of its sales in Europe through its official European headquarters in Luxembourg.
The Cayman Islands recently held banking assets equal to one-fifteenth of the world’s $30 trillion in total 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 the corporate and income tax rates are 0%, even on interest or dividends earned on an investment. The Caymans are home to subsidiaries of Fortune 500 companies such as Pepsi, Marriott, and Wells Fargo.
Most consumers know this U.K. island territory for its tourist-friendly beaches, but those in the financial sector may also know it as a notoriously popular tax haven. Bermuda's Gross Domestic Product (GDP) per capita is abnormally high thanks to its lack of taxes on corporate income, interest, dividends, and royalties. These tax rates have induced companies such as Google and Nike to park billions of dollars in accounts in Bermuda, thereby avoiding U.S. taxes.
The Netherlands' former finance minister, Jan Kees de Jager, has been quoted as saying the country's financial systems are far less exploitable than those of Switzerland or the Cayman Islands. However, it is likely that Google, Fiat Chrysler, IBM, and the many Fortune-500 companies lowering their taxes by funneling their profits through Dutch subsidiaries feel otherwise.
Switzerland is known worldwide for the secrecy of its banking sector, which holds the details of its clients' financial accounts and dealings in strict confidence. This trustworthiness makes it easy for both individuals and corporations alike to hide wealth with great effectiveness. Moreover, although some of Switzerland's laws regarding secrecy have been removed, the country's tax rates remain quite favorable.
Although not a tax haven to the same degree as the other countries listed, the United States offers a unique tax scenario thanks to the fact that each state sets its own income tax rates. As such, states with no income tax, such as Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming, can often be utilized as tax havens by countries wishing to minimize their tax burden.