what is a tax haven?

offshore jurisdictions explained

A tax haven is a country that exempts foreign investors who hold bank accounts or set up companies in its territory
from taxes. Typically, two different tax systems exist together:
While citizens and corporations residing in the country are required to pay their taxes like elsewhere in the world,
foreign investors enjoy, in most cases, total exemption, or at least a substantial reduction of taxes to be paid.
Provided they do not carry on business within the tax haven itself. States that apply this kind of tax policies do so with
the intention of attracting foreign deposits to strengthen their economy. Most of them are tiny nations with few natural
or industrial resources. Their whole existence would be threatened were it not for the booming financial industry
growing in the shadow of foreign capital.
Tax havens, also called offshore jurisdictions, have attracted an increasing number of foreign investors, especially in
recent decades. Usually they are people and businesses fleeing their own countrys tax collecting voracity in search
of a more favorable business environment. This is not surprising, since in some countries with high taxes, especiall y
in Europe, the taxes paid by a person or business account for up to 50% of their profit.
This capital flight, of course, is not viewed favorably by tax officials of the countries that suffer from it, as in the end an
important part of their tax revenue gets away. Therefore, they have tried to react with different measures to hinder the
transfer of assets to tax havens or to make it unattractive.
But the new world order that emerged with the globalization of the economy makes it difficult to exert effective control
over the movement of money. Trying to hinder the free flow of capital clashes with the claims of global trade
liberalization, which is defended by, besides most companies and governments, also by such important institutions as
the World Bank, the WTO (World Trade Organization) and the OECD (Organization for Economic Co-operation and
Development).
On the other hand, the legal measures taken with the intention of hindering the outflow of capital, and which usually
consist of an unfavorable tax treatment of investments in tax havens, have not yielded the expected results either.
This is because it is relatively easy to hide the ownership of offshore corporationsor offshore bank accounts, so
many people have simply opted to conduct their operations in secret.
what can be done then against tax havens?
The main actions have been aimed at putting pressure on the governments of tax havens seeking to limit their
confidentiality laws and bank secrecy. This is currently being done through various international organizations,
usually under the banner of combating terrorism, drug trafficking and money laundering networks.
The OECD, the G-20 and the FATF (Financial Action Task Force) are the most active bodies in this field. In any case,
the solution to the problem is very complex, since for many of these countries their own survival as a nation is what is
at stake, having no other viable economic alternatives.
So far we have seen that the main feature of an offshore jurisdiction is a tax policy favorable to foreign investment.
But it is far from the only one. There are several additional features that make a country to pass from bei ng
considered a simple low-tax country to a real tax haven.
Personal data of owners and shareholders of companies are not listed in public records, or the use of formal
representatives (called nominees) is allowed.

There are strict rules on bank secrecy. Data about account holders are only available to the authorities if
there is evidence of serious crimes such as terrorism or drug trafficking.

Signing treaties with other countries involving exchanges of banking or tax information is avoided. Although
this situation is changing in recent years.

Stability and monetary policy are promoted. Who would invest in a place with continuous coups d'tat, wars
or rampant inflation?

They have an excellent range of legal, accounting and tax advice services.

They often have good tourist and transportation infrastructure.

Despite the above features, the line between being and not being a tax haven is often very blurred. Being listed in
one or the other category by the OECD and other bodies is often more responsive to political and economic interests
of its members than to purely objective criteria.
It is also good to know that there are differences between one tax haven and another. Some of them focus more on
serving individuals, while others seek to promote the establishment of corporations. And there are of course those
who seek both.
There are elitist jurisdictions, specializing in vast fortunes, interesting only to high net worth individuals with a good
amount of money in their bank account. This applies especially to those in Europe. But this is not the norm by far.
Most tax havens willingly accept also less affluent customers.
The latter are precisely those that have contributed to the spectacular growth of the financial industry in recent
decades. With globalization and the development of the Internet, it is not necessary anymore to travel to distant
places to set up a company or open a bank account. Operating costs have become very cheap, so that investing in a
tax haven is available to almost anyone now.