Offshore Tax Havens

Faces of Earth

Much international debate has been taking place about offshore tax havens, re their tax policies, role in the global economy, influence on investment and international business patterns. Offshore tax havens are countries with fiscal regimes that provide tax benefits and privileges to corporate bodies. Very often, the governments of offshore tax havens are accused of designing tax laws to attract foreign investors, capital and capturing the tax bases of other countries. Due to this, the negative publicity circulated by international tax agencies has been aimed at not only creating international tax uniformity but to reduce international tax competition which is a corollary of lower taxes that exist in countries.

Up to date, a specific definition has not been given to ‘tax havens’, but four main criteria have been set by the European Commission for identifying what countries are referred to as tax havens. Some of these criteria include ring fencing, which means that the special offshore tax benefits provided are made available only to companies registered by non-residents (offshore tax free companies); no or nominal taxes; the absence of foreign exchange controls for non-residents and non-resident corporations; and strict privacy rules. Despite this however, any country can be considered an offshore tax haven due to the mere fact that countries all have different tax systems, will have tax rates that are lower than those of another and as a result appeal to foreign investors.

The notion of harmonizing worldwide tax systems was introduced by the Organization for Economic Co-operation and Development (OECD) based on its belief that the outflow of capital to tax havens negatively impacted the earnings made from local taxes in EU countries with welfare programmes, and that rely on taxes for providing special social services such as universal education and primary health care. Many measures were taken against offshore tax havens, forcing them to strike off several offshore entities, like Panama companies, from their registries and request the withdrawal of offshore banks. The economies of offshore tax havens which depended on offshore tax free financial services to achieve sustainable development were adversely affected as offshore banks voluntarily withdrew their services, causing major job losses.

One of the best examples of the attempts taken by the OECD to claw back on offshore activity include the passage of the European Union withholding tax, which was instituted under the EU Savings Tax Directive. This piece of legislation was a major blow as withholding tax was imposed on the interest earned by residents of the EU who held offshore tax free bank accounts in fellow EU countries. These EU offshore tax havens were also subjected to information exchange agreements. Although forced to comply with some of the measures of the EU’s offshore tax harmonization initiative, Switzerland was one of the offshore tax havens that boldly refused to compromise the confidentiality of its offshore account holders by disclosing their names, assets and other private banking information. Other offshore tax havens, some of which are EU member states, dependencies of EU countries and non EU member countries such as Liechtenstein, Turks and Caicos Islands, Andorra, British Virgin Islands, Monaco, the Netherland Antilles, Isle of Man, Belgium, Austria and Lebanon which follow Switzerland’s example subject offshore account holders to the EU withholding tax, but make the necessary EU withholding offshore tax payments in lump sums. In this way, the personal details of offshore tax free accounts are kept private.

Offshore tax havens, however, continue to ‘pop up’ as a corollary of the economic challenges that several countries face and demand that tax laws be revised and rates reduced in order to prevent local capital and investors from fleeing. International agencies that fight to harmonize taxes now face the challenge of increased tax competition within the EU, now causing a shift from the initial focus on small Caribbean islands towards the EU itself.

All of this brings out the importance of tax havens in the global economy, not only as ‘reserves’ of large sums of foreign currencies in offshore tax free accounts, but as promoters and major players in the globalization of business and commerce, which increases as technology continues to advance and capital and information become more mobile. Likewise, offshore tax havens tend to compel governments to revise their tax laws, especially if they do not provide companies and citizens alike with essential tax breaks and incentives that promote wealth, growth and investment. It is unfortunate that people are often over burdened by taxes, which are levied on almost anything; ranging from salaries, tips, wages, goods, remittances, gifts and death. An offshore tax haven, though may impose some of those taxes on their own citizens, allow non-residents and foreign companies to achieve a certain degree of tax relief by simply making possible the opportunity to be exempt from such taxes.

Offshore tax havens within the Caribbean region are constantly developing new and innovative ways in compliance with international banking and financial standards to develop themselves as offshore financial centers. Caribbean tax havens such as Anguilla, St. Kitts, Nevis, Dominica, St. Vincent, Panama, Belize and Bermuda keep abreast with offshore tax and legal developments by making the necessary amendments to their offshore legislations as global market trends and capital flows evolve. Legislation implemented by these tax havens for the formation of offshore vehicles have been patterned on long standing corporate forms that allow for legally conducting worldwide business and making significant savings on taxes within a framework which is safe and private.

Some of the corporate structures that can be incorporated in offshore tax havens in the Caribbean region include offshore foundations, which are based on the classic Liechtenstein Foundation and for which Panama, for example, is well known; exempt trusts, which provide safety of funds that can be set aside for children who are under age or incapable of managing their inheritance; international business companies, which are sound vehicles for almost any type of business operation; and offshore hedge funds, which represent a significant number of the offshore entities domiciled in the Cayman Islands.

Although the current offshore literature provided by international tax organizations tend to identify “top offshore tax havens” based on the level of access and exposure that these havens give to client information in satisfying tax information exchanges, especially to countries that levy taxes on international income, the ideal offshore tax haven is one that complies to the necessary international due diligence measures and provides legal offshore free tax savings entities and services, while being fully and legally capable of protecting itself without having to compromise the privacy of its offshore clients.

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