Tax Havens- An overview

Tax Havens- An overview

A tax haven is a country or territory where certain taxes are levied at a low rate or not at all. Individuals and/or corporate entities can find it attractive to move themselves to areas with reduced or nil taxation levels. This creates a situation of tax competition among governments. Different jurisdictions tend to be havens for different types of taxes, and for different categories of people and/or companies.

A Tax Haven can favor a individual or corporate entity in below mention ways:

1. Nil or low tax rates.  This makes a good place for persons who want to save taxes. For this they have to register themselves as resident of that tax haven and they will be out from the control of their home country laws.
2. Protection of personal information.  These tax havens have rules and laws to protect personal information of a person. So other country law persons can’t find the original beneficiary behind the transaction.
3. Lack of Transparency. This makes other countries law difficult to impose on a person.  They can’t determine the situation of a taxpayer situated in tax haven.

Most tax havens have a double monetary control system which distinguish residents from non-resident as well as foreign currency from the domestic one. In general, residents are subject to monetary controls but not non-residents. A company, belonging to a non-resident, when trading overseas is seen as non-resident in terms of exchange control.

It is possible for a foreigner to create a company in a tax haven to trade internationally; the company’s operations will not be subject to exchange controls as long as it uses foreign currency to trade outside the tax haven.

Tax havens usually have currency easily convertible or linked to an easily convertible currency. Most are convertible to US dollars, euros or to pounds sterling.

There are several reasons for a nation to become a tax haven. Some nations may find they do not need to charge as much as some industrialized countries in order for them to be earning sufficient income for their annual budgets. Some may offer a lower tax rate to larger corporations, in exchange for the companies locating a division of their parent company in the host country and employing some of the local population. Other domiciles find this is a way to encourage conglomerates from industrialized nations to transfer needed skills to the local population. Still yet, some countries simply find it costly to compete in many other sectors with industrialized nations and have found a low tax rate mixed with a little self-promotion can go a long way to attracting foreign companies. Some Tax Havens are Mauritius, Hong Kong, Panama and Switzerland.

Most believe the true tax haven is Switzerland as Swiss bank has long history of hiding money of many countries without leaking their information. Nearly half of Indian black money is stored in Swiss banks and now Indian government is talking to Swiss government to show records of money held in Swiss banks.

Now other countries are taking action against these tax havens. On 2^nd April 2009, G-20 countries define a blacklist for these tax havens countries. Even Organization for Economic Co-operation and Development (OECD) is trying to control these so called tax havens. These safety measures are being taken to control black money or unaccounted money which is following through these tax havens.