Over recent years people have become increasingly annoyed with organizations and public figures taking advantage of tax havens. The use of tax havens allows people and companies to pay lower rates of tax than they would in their native countries and this isn’t a small issue.
Five point three trillion pounds about 8% of the world’s wealth is estimated to be stored in offshore tax havens. Moody estimates that the giant U.S. tech companies alone kept 1.4 trillion pounds offshore at the end of 2016.
The tax justice network estimates that corporate and personal tax avoidance cost the world’s governments 700 billion dollars a year in lost tax receipts. So let’s go through the basics what are tax havens how do they work and why is it all so controversial?
What are tax havens?
So as we’ve already touched on the use of tax havens is a financial technique that allows people and organizations to pay less tax. A tax haven is a term used to describe any country which offers your systems and businesses lower rates of tax than your nation does.
There are numerous tax havens across the world that have favourable tax laws allowing people to pay lower tax rates. These include famously Bermuda, the cayman islands, jersey, the Bahamas, Belize, the British virgin islands and Dora and many more countries.
There are a number of different ways in which businesses and individuals can avoid taxes using tax havens. First, let’s start with corporate tax avoidance. One of the biggest ways that organizations can utilize tax havens is called corporate profit shifting.
This is where a business registers its headquarters in another country that has a lower rate of corporate tax than its native country.
For example, the UK corporate tax rate is 19 per cent so if a UK business moved its headquarters to Switzerland, they’d be able to pay the lower 8.5 per cent tax rate instead.
The difference would be even bigger if the business moves to the cayman islands, where there’s a zero per cent corporate tax rate. By doing this, the company books its profits in the tax haven and only has to pay the lower tax rate instead of paying the country where the sales actually took place, allowing the company substantially reduce its tax bill. And this isn’t a rare occurrence.
In 2016 nearly two-thirds of the profits made by American multinational companies were booked in six low or zero-tax countries: these being Luxembourg, the Netherlands, Bermuda islands, Singapore and Switzerland.
One technique that is very popular with big companies is to move their patents code formula or algorithms to outposts in lower-tax countries, this then makes their very valuable assets legally reside in the low-tax country.
The benefit of this is that the valuable asset then belongs to the branch of the company existing in the low-tax area. So for example, a U.S. Business could move its patents to Ireland, a lower tax location, and then the patents would belong to the Irish branch of the company.
At which point the Irish subsidiary could charge the U.S company to access the patents, making it easy to funnel profits made in the u.S. To Ireland, just passing them off as payments for the patents. Once the money’s moved into Ireland, it can then be taxed at a much lower rate again saving a big tax bill.
Individuals can do a similar thing. Becoming a resident of a country with a lower tax rate allows people to pay less income tax than they would have done previously.
However, there are also other methods that allow people to live in one country while paying their taxes in another. This is done using trusts. Very simply, this allows a person to move their assets into a trust where they’re managed by appointed trustees.
These trustees are in charge of the trust and they manage the assets to provide value for the beneficiaries. In this scheme, the beneficiary would be the person who placed the assets and trust with the trustee’s permission.
Assets within the trust can be given to beneficiaries at virtually any time. Very often, the trustees have very little real control over what happens to the assets.
Instead, they’re just paid by the person who owned the assets to put their name to the trust and appear as if they’re in control of it all. Using this technique, a British person could put their car within a trust in a tax haven. They can then make themselves a beneficiary, thus giving themselves full access to the car.
The individuals would still own the vehicle, and they could still use it however they wished, but because it technically belonged to the trust and was under the protection of the trustees, he’ll be out of the UK government’s remit as it will be registered to the tax haven and subject to their tax laws, this system does still result in some tax being paid.
When the beneficiaries are paid, they’ll still have to pay income tax on those earnings. However, the major benefit is that no capital gains tax is paid and no tax is paid on a profit made from investing the money which is given to the trust.
No matter which technique is used, a tax haven is very simply a place that charges lower taxes than your country. This attracts people and corporations to move their money to these countries to avoid paying the high tax rates in their own countries.
So, is this a good deal for the tax haven? Will the country even want to be a tax haven? Well, having low levels of tax allows the countries to benefit from giving themselves a form of the financial services industry.
Often, countries that become tax havens tend to have little other industry to bring in revenue. They’re frequently smaller island nations whose economies don’t have much industry besides tourism.
Becoming a tax haven brings in vast amounts of money. The nation often tax havens still do have a tax rate, even though it’s incredibly low so even if a tiny percentage of the total money brought in by a nation is taxed, it’s likely still war money than it previously would have earned. On top of this, there are benefits related to job and business creation, as tax havens often offer services such as trust management.
There’s even been talk that the UK might become a tax haven after Brexit. Leaving the EU would give the UK more flexibility to become a tax haven. If it wanted to but is this something the UK is actually likely to do? What’s your thought?
