How do offshore tax havens work

However, these countries have also encouraged unfair tax competition due to a reduction in the tax base of other countries where taxes would have been due and payable. The BEPS project is aimed to reduce schemes used to shift profits offshore, often to tax havens. One of these measures is country-by-country reporting, which requires large multinationals to report their global tax affairs to their local revenue authority for information exchange with other revenue authorities.

Through this, transparency will be enhanced and tax administrations will have adequate information to assess transfer pricing and base erosion risks. BEPS is now taking it further by applying pressure to all tax havens that are attracting foreign investors without requiring any economic substance. In light of this, world-renowned tax havens, such as Mauritius, have started to implement substance requirements to combat tax haven abuse.

Much of these substance requirements relate to having a local presence in the tax haven as well as maintaining effective management and control from within the jurisdiction. Consequently, companies are denied any tax benefits where these requirements are not met. In light of the BEPS action, plans and the drive for increased information exchange through country-by-country reporting, tax havens can still be used legally by multinationals.

This can only be achieved where companies are willing to operate transparently with sufficient economic substance and are prepared to put the appropriate structures in place. Please enable JavaScript. Viewing offline content Limited functionality available. My Deloitte. Undo My Deloitte. Where American enterprises once contributed about one-third of overall federal revenues through their profits and associated corporate taxes, tax avoidance practices have resulted in these businesses now only contributing about one-tenth of federal tax revenues.

Americans for Tax Fairness reported that U. Using a tax haven to shift profits is not technically illegal, and therefore enables businesses and wealthy individuals to avoid having to pay considerable amounts in income tax and corporate tax rates on their profits and personal wealth. Many corporations choose never to bring the profits home and never pay U.

While this provides more revenues and profits for businesses, it also creates considerable problems for American economic growth. Despite these corporations leveraging and using public services and other American structures to support their businesses, using corporate tax havens creates an imbalance of tax liability, with smaller companies and middle class consumers having to make up the share of the burden from enterprises that use tax havens, Corporate Tax Haven Index explained.

These practices also stem the possibility of significant economic growth, particularly when one considers the amount of federal funding that could be generated through corporations paying their required corporate tax rates, and wealthy individuals paying their income tax.

Corporate Tax Haven Index includes a ranking for the current leading tax haven countries used by multinational corporations. These countries have the type of attractive tax jurisdictions that limit tax liability and enable businesses to pay little or no taxes on their offshore profits.

Although the current tax loophole practice of shifting profits and wealth outside of the U. As of mid, federal legislation is under consideration to help prevent the use of tax havens.

In the meantime, multinational businesses and wealthy individuals are still free to shift profits and personal wealth to tax haven countries and avoid paying income and corporate tax rates.

Join thought-provoking conversations, follow other Independent readers and see their replies. Want to bookmark your favourite articles and stories to read or reference later? Start your Independent Premium subscription today. Recommended Why are the Tories so quiet on tackling offshore tax evasion? What is the difference between tax avoidance and tax evasion?

Recommended Panama Papers show why tax havens are driving inequality. More about Paradise Papers Tax Havens tax evasion tax avoidance. Already subscribed? Log in. Forgotten your password?

Tax havens have been around for quite some time, with some historians even mentioning their existence in the form of isolated islands during the time of the ancient Greeks. The oldest tax havens of our times include Liechtenstein, Switzerland, and Panama—each of which is believed to date back to the s.

But even after so many years of existence, there is no universal definition of a tax haven. The Organization of Economic Cooperation and Development OECD —a Paris-based group of 37 developed countries—uses the three key attributes below for identifying whether a jurisdiction is a tax haven. First and foremost, tax havens impose no or only nominal taxes. The tax structure varies from country to country, but all tax havens offer themselves as a place where non-residents can escape high taxes by putting their assets or businesses in that jurisdiction.

Different tax havens are popular for rebates on different kinds of taxes. But this attribute alone is insufficient to identify a tax haven.

Many well-regulated countries offer tax incentives for attracting outside investment but are not classified as tax havens. This leads to the second attribute of a tax haven. Tax havens zealously protect personal financial information. Most tax havens have formal law or administrative practices that prevent scrutiny by foreign tax authorities. There is no or minimal sharing of information with foreign tax authorities.

In a tax haven, there is always more than meets the eye. The legislative, legal, and administrative machinery of a tax haven is opaque. There are always chances of behind-closed-doors secret rulings or negotiated tax rates that fail the test of transparency. But that's not all. Tax havens typically do not require outside entities to have a substantial local presence.

Such a concession could lead to interesting situations. For example, a Government Accountability Office report found that one building in the Cayman Islands housed 18, mostly international companies.

This suggests that you can claim tax benefits by merely hanging your nameplate in a tax haven. There is no need for actually producing goods or services or conducting trade or commerce within the boundaries of the country. For all practical purposes, tax evaders may continue their business in Florida while claiming to be residents of the Bahamas when it comes to paying taxes.

In the end, tax havens are all about marketing. They promote themselves as offshore financial centers. Many are also considered to be important international financial centers. Other than lower taxes and secrecy, several other socio-economic factors make a particular destination a popular tax haven:. The Cayman Islands have some of the best secrecy laws, while other countries that also rank high in secrecy and have low-to-no taxes are the British Virgin Islands, Bermuda, Guam, Taiwan, and Jersey.

With mounting pressure from international organizations like OECD and the G , tax havens may find it difficult to sustain their carefree existence.