What is Tax Haven Jurisdiction?

Ankita Tiwari

06 Mar, 2023

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.

What is Tax Haven?

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.

Why have countries become Tax Haven?

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. 

How do Governments earn from Tax Haven?

• Tax havens may have a low to nil tax rate however, they generate their income from charging higher import and customs duties. This helps tax havens meet their losses in tax revenues.
• Tax havens charge fees for new registration of companies and also require renewal charges to be paid every year. Additional fees like license fees may also be charged given the nature of the business. These fees act as a source of fixed income for tax havens.
• Despite charging a nominal rate of tax, the tax havens earn substantially more tax revenues by attracting foreign investments. Investments by large companies also generate job opportunities for the residents of tax havens.

What are the advantages of Tax Haven Jurisdiction?

Tax haven Jurisdictions are beneficial in the following ways:

• Minimal Tax
  The major reason for investing in a tax haven is to minimize or nullify tax liability. The low to nil tax rate is what makes tax havens a business-friendly places for investors.
• Maximum Privacy
  Tax havens also known as secrecy jurisdictions provide the utmost privacy to individuals and corporations who do not want to disclose their company’s presence in public or even information about their corporate bank account. Tax Havens provide absolute secrecy on these terms.
• High Security
  Tax Haven gives leverage to corporate to reduce their burden by providing a safe region to operate business activities without the worry of paying taxes. Whereas other countries consider the non-payment of tax a crime. The legal framework of tax havens does not allow any investigation so pulling out information is difficult from tax havens. Further, they do not have any Tax Information Exchange Agreements (TIEAs) as well.
• Convenient
  The process of incorporation of a company in a tax haven is not lengthy and is completed within a short period with a meager registration fee. Few tax havens even allow business incorporation without the business investors visiting the country.
• Economic Development
  The tax haven country also gains significance as it attracts new investments leading to the generation of revenue and job opportunities and the development of a tax haven.

Disadvantages

Just like any other thing, Tax Haven Jurisdiction also have some disadvantages which are as follows:

• Tax haven jurisdictions encourage secrecy by hiding the income of non-residents arising from other high-tax rate jurisdictions. This secrecy is provided by legal and quasi-legal structures in tax havens like trusts, anonymous companies, or opaque banks which prevent tax officials from tracking the untaxed wealth brought into tax haven from abroad.
• Tax haven jurisdictions may lead to legal issues. Tax havens are considered as the grey area of tax. In tax havens activities are mostly legal, however, tax havens can be used to hide earnings entirely to avoid payment of tax or for laundering money earned through illegal means.
• Tax havens tend to harm the global financial system as they facilitate both tax avoidance as well as tax evasion. Where tax avoidance is legal, tax evasion is illegal. The non-report of income in tax havens is a form of dodging tax. This makes tax havens the laundromats for corrupt, illicit, and uncounted wealth.
• Tax Havens are also a threat to the stability of the international financial system.
• Tax Haven jurisdictions may lead to irregular growth from the side of residents as high import duty is imposed on imported goods.
• The tax haven process lacks transparency which might lead to the betrayal of parties.
• Business deals undertaken in tax havens can be made up and may mislead other parties.

Conclusion

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 Companies
International Tax Compliance Advisory Services- An Overview