The Working Mechanism of Tax Havens

A tax haven is a country or place with terribly low "effective" rates of taxation for foreign investors.

The History behind Tax Havens

While the term “tax haven” became common vernacular within the 1950s, tax minimization has been practiced for thousands of years. Later in history, many European countries incentivized colonization within the New World through advantageous tax policies. A number of these countries embrace England, Spain and the Netherlands. One among the first causes of the American Revolution was England’s efforts to raise taxes in its colonies after the area had been settled.

Switzerland and Lichtenstein became leading tax havens within the first few decades of the 1900s. Various countries in Europe and different areas around the world raised taxes to procure reconstruction after World War I. Because Switzerland remained neutral, it did not have to raise taxes to pay for reconstruction efforts.

World’s Best Tax Havens

  • Bermuda
  • Netherlands
  • Luxembourg
  • Cayman Islands
  • Singapore
  • Channel Islands
  • The Isle of Man
  • Ireland
  • Mauritius
  • Monaco
  • Switzerland
  • Bahamas
  • Malta
  • British Virgin Islands
  • Hong Kong

Which Countries are Considered Tax Havens?

Several dozen countries are considered to be tax havens, but they achieve this status in unique ways. For example, Bermuda is a popular tax haven because it has a zero per cent tax rate on corporate and personal income. The Cayman Islands also do not have a corporate or personal income tax. Cayman Islands do not withhold taxes on foreign businesses. The Netherlands specifically entices large businesses to conduct activities thereby offering huge tax incentives.

Who Uses Tax Havens?

Some of the various major corporations that use tax havens in other countries include Walmart, Chevron, IBM, Microsoft, Exxon Mobil, Pfizer and General Electric. These and other major U.S. multinational companies collectively hold more than $1.6 trillion in havens.

Individuals also use havens to reduce their tax liability. This involves avoiding the estate tax and other substantial individual taxes. Some people legally establish small businesses in foreign countries, and they run legitimate businesses.

How Does a Tax Haven Work?

A tax haven may be used in other ways by persons and businesses. Countries that are considered to be havens normally profit substantially by enticing foreigners to conduct monetary activities in their jurisdiction. While they charge a lower tax rate overall than other countries, they are generating more monetary via taxation than they otherwise would be able to earn.

Some countries also generate revenue by charging registration or renewal fees. Nonetheless, it is still more monetary advantageous for businesses and individuals to pay these other fees and taxes than the alternative. Because tax haven jurisdictions profit financially, reform is challenging.

Conclusion

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