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In recent times, tax has become a significant concern for businesses. Every Business is looking for a way to pay the least tax possible. Businesses use different tax planning strategies to save their taxes. They use different tax structuring techniques to save tax globally. One such technique used by several businesses is setting up an offshore company in a country or a jurisdiction with low to zero tax rates for non-residents. Such countries or jurisdictions are known as Tax Havens. For receiving tax benefits, tax havens do not require a business to operate from their country or an individual to be a resident of their country. In this blog, we will discuss Tax Haven Jurisdiction.
A tax haven is a country that offers low to zero rates of tax and various benefits and exemptions to investors. Tax Haven also has fewer compliances requirement. Further, to avail of the tax benefits, no proof of tax residency is required. Tax havens are also referred to as ‘secrecy jurisdiction’ which is used to indicate that these jurisdictions help their investors to hide their wealth and financial affairs from legal watchdogs and enable MNCs[1] to shift their tax out from their domestic country to reduce the tax liability. In other words, these are jurisdictions that have intentionally enacted policies that allow individual or business income to be taxed at lower rates as compared to other jurisdictions.
There is no definite definition of the term ‘tax haven’ however, it is universally understood as a country or a jurisdiction that allows non-residents to invest in their country to escape the rule of law by paying less tax than what they pay in their home countries. Tax havens aim to attract offshore investments to promote their economic growth and development. Tax Havens are used by people and businesses to reduce their tax liability as compared to what they would be liable to pay in their home country. They are generally used by MNCs to channel funds or transfer profits from a holding company to an operating company.
MNCs have vividly accepted the concept of tax havens. Tax havens are countries that have restructured and re-designed their tax system to enhance employment and revenue. In exchange for low to nil tax, tax havens get a branch or division of large corporate organizations set up in their jurisdiction which increases employment opportunities.
The tax havens charge registration fees, annual renewal fees, and license fees from business entities which is a substantial source of income for tax havens. The option of a tax haven is generally preferred by those investors who are willing to set up an international business, willing to maximize their wealth, looking to explore new markets or individuals who wish to protect their assets or who wish to purchase assets anonymously, and by startups interested in expanding their operations. These are the reasons which encourage countries to become tax havens.
Tax haven Jurisdictions are beneficial in the following ways:
Just like any other thing, Tax Haven Jurisdiction also have some disadvantages which are as follows:
Tax haven jurisdiction may encourage investors and taxpayers to invest their money in these jurisdictions to save the amount of taxes payable. However, tax officials often discourage investing money in tax havens. From an investor’s point of view, tax havens are beneficial as it saves tax. Even from the point of view of tax haven jurisdictions, they are beneficial as it encourages foreign investment which generates wealth and opportunities and brings in major technologies leading to the economic growth and development of the tax haven country. However, from the tax authority’s point of view investing in tax havens is a major means to evade tax or store unaccounted money. Few tax authorities have also suggested doing away with tax havens.
Also Read:How Does International Taxation Operate?International tax planning strategies for Global CompaniesInternational Tax Compliance Advisory Services- An Overview
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