Tax havens. Sometimes these are seen as a blessing. Others treat them as a curse word. Do they really have a benefit to our society? Here are the pros and cons of tax havens to consider.
What Are the Pros of Tax Havens?
1. They protect personal financial information.
Tax havens are proactive and zealous about protecting the personal financial information of investors. There is generally some type of formal law that prevents foreign tax officials from being able to access this information. The tax haven will also not share or only share minimal information about who is investing and in what amount to foreign authorities.
2. There are very few taxes involved.
Tax havens will impose a nominal tax, if anything at all. There is no set definition of what a tax haven can actually impose, but the goal is to offer a place where a foreign individual or business with money to invest can escape their own domestically high taxes. There may also be rebates available and other incentives in addition to the lack of taxation.
3. There is a lack of transparency.
Tax havens often create the machinery needed to maintain their presence out of the public eye. Negotiated tax rates, secret rulings, and other administrative components are not generally accessible to anyone beyond those who may qualify to put their money into a tax haven.
4. A local presence is not generally required.
You don’t have to live or own property in a tax haven in most circumstances in order to park your money there. It is possible to put a nameplate up at a locate and claim tax benefits, even if you aren’t conducting commerce, trade, or manufacturing from that location.
5. It is easy to incorporate a business.
Tax havens are really offshore financial centers for individuals and business. It takes about as much effort to incorporate an offshore business for a tax haven as it does to balance your personal checking account in most circumstances. Although you would need to do more than just set up a shop to take advantage of what a tax haven can provide, most investors can complete this process in a very short amount of time.
What Are the Cons of Tax Havens?
1. There can be political or economic instability.
When there is a lot of money present, there is also a lot of greed present. Putting money into a tax haven can become dangerous when the government becomes unstable or decides to embrace exchange controls as a way to control outside investments.
2. The paperwork can be extensive.
Most tax havens operate successfully because they have multiple treaties with multiple nations that create conflicting jurisdictions over taxation requirements. Tax avoidance treaties are particularly popular, especially if there are information sharing prevention loopholes built into the agreements.
3. There may be legal consequences.
In 2008, Germany investigated a Liechtenstein banking trust that many citizens were using as a way to evade local taxes. This investigation was created from a local leak. People and businesses involved with a tax haven are always looking for a better deal. If the authorities are closing in, it only takes one person to jump ship for the whole thing to come crashing down. Sometimes the consequences may even involve jail time.
4. It may encourage illegal activities.
Tax havens may encourage money laundering or other legal activities. This might benefit some in the short-term, but the long-term consequence is that the world economy becomes hurt. When multiple tax havens are brought under investigation at the same time, a global recession can occur very quickly. We saw this occur in 2007-2009.
5. The costs to operate in a tax haven are typically higher.
The costs to operate in a tax haven may be more than 2.5 times what it costs to operate domestically. Although the purpose is to limit taxation, some investors and businesses may find that it costs more to avoid the taxes than it does to actually pay them and stay outside of the legal shades of grey that a tax haven sometimes provides.
6. Laws in tax havens may be applied in an unequal fashion.
If you want to get something done in a tax haven, there is a good chance that bribery or “fees” are going to be involved so the process can be expedited. You may even be required to hire someone specific to represent your finances inside the tax haven.
The pros and cons of tax havens will always be hotly debated as long as these regions exist. In some ways, a tax haven can control greed. In other ways, it can encourage it. Finding the right solution must be an ongoing process based on the evidence already provided by the tax havens themselves.