Tax Havens

By pjain      Published Oct. 17, 2019, 1:57 a.m. in blog Fin-Plan-Strategy   

[TOC] * Part of Tax Series Tax Planning 101

Tax Havens -- Key takeaways for you!

Tax Havens 101

Tax avoidance has led to up to $32 trillion in lost revenues in banking systems across the world.

What is a Tax Haven?

  • According to OECD three markers define a tax haven
    1. No or Only Nominal Taxes
    2. Secrecy - Protecting Personal Information
    3. Lack of Transparency - Extra Protection for Big Corporations

What is the Overall burden of Taxes?

Why : for wealthy Families

Why : Tax Havens are used heavily by MNCs

Some companies that have historically been known for offshore, tax haven holdings include Apple, Microsoft, Alphabet, Cisco, and Oracle.

Well over half the profits that American companies report earning abroad are still booked in only a few low-tax havens — places that, of course, are not actually home to the customers, workers, and taxpayers facilitating most of their business. A multinational corporation can route its global sales through Ireland, pay royalties to its Dutch subsidiary and then funnel income to its Bermudian subsidiary — taking advantage of Bermuda’s corporate tax rate of zero.

  1. The effective tax rate varies greatly from 6-10% lows (Ireland,Caribbean, Switzerland, Netherlands and Singapore), to most countries at 25-35% to high tax rates in Europe (Germany 45%, France 55%)

  2. Clearly US MNCs use tons of tricks to book profits in low tax jurisdictions. Since wages are less than 30% of consumer goods revenues, a 6x multiplier of wages means profits far in excess of sales, i.e 2-4x (for Ireland 8x wages) are booked. All this is done by tricks such as royalties, payments for IP and patents, franchise fees, etc - but nearly all this flows to tax havens at expense of high tax countries.

  3. US MNCs benefit by far from these havens in global profits shifted to tax havens.

    • 50% U.S. multinationals
    • 25% EU
    • 10% other OECD
    • 15% Developing countries
  4. Ironically, US gets higher tax revenues as their MNCs exploit tax havens. This may explain U.S. hostility to OECD (mainly EU) attempts in curbing Ireland's BEPS tools.

Use by Individuals

Taxation of US-sourced Income

All income earned by U.S. individuals and businesses is subject to taxation.

Territorial Tax Allocation Schemes eliminate Tax Haven manipulation

Many have advocated for a switch to a "territorial" tax system, as most other nations use, which would remove U.S. multinational need for tax havens.

In 2016, Hines, with German tax academics, showed that German multinationals make little use of tax havens because their tax regime, a "territorial" system, removes any need for it.

Indian Crony Capitalism and Tax Havens

European Tax Avoidance

Resources

Use by MNCs

US Taxation on foreign income of US-HQ corporations and Avoidance

There can be exemptions, credits, and special situations that can apply for foreign investments.

Offshore investing can also create a lot of opportunity for illegal activities.

  • Note the US cut taxes and increased global taxation via Tax Cuts and Jobs Act (TCJA), which passed in December 2017

    1. It set the effective corporate rate of U.S. taxes at 21%
    2. It has allowances for businesses to benefit from low or no tax rates offered in foreign countries
    3. Foreign Income reporting mandatory as per GAAP, IFRS
    4. Foreign debt needs to be reported

TCJA legislation in 2017 was a partial shift to a hybrid "territorial" tax system framework.

The 2017 TCJA has a 15.5% repatriation tax on over $1 trillion of untaxed offshore profits built up by U.S. multinationals with BEPS tools from non-U.S. revenues. Had these U.S. multinationals paid taxes on these non-U.S. profits in the countries in which they were earned, there would have been the little further liability to U.S. taxation. Research by Zucman and Wright (2018) estimated that most of the TCJA repatriation benefit went to the shareholders of U.S. multinationals, and not the U.S. exchequer. - wiki

Apple

Amazon

Various public disclosures in 2016 of Amazon Inc's Project Goldcrest tax structure, which showed how closely the State of Luxembourg worked with Amazon for over 2 years to help it avoid global taxes.

Microsoft

Alphabet

Other US Tech: Cisco, and Oracle.

Manipulation of Havens and Global Tax reporting/Regulation

The haven systems become rubber stamps! Especially true for smaller ones like Antigua, the Seychelles, and Jersey. But even the largest still are highly user friendly for overseas powerful Finance-Legal Firms.

Tax havens are described as captured by their offshore finance industry, where the legal, taxation and other requirements of the professional service firms operating from the tax haven are given higher priority to any internal State needs.

  1. Start as Trading Centers

  2. Attract major banks

  3. By process of friction, legal precedents are set to support They can eventually become "captured" by "powerful foreign finance and legal firms who write the laws of these countries which they then exploit".

  4. Babus evolve customary procedures to support this capture process to streamline for large clients.

Examples of Captured states

  1. Various public disclosures in 2016 of Amazon Inc's Project Goldcrest tax structure, which showed how closely the State of Luxembourg worked with Amazon for over 2 years to help it avoid global taxes.

  2. The Dutch Government removed provisions to prevent corporate tax avoidance by creating the Dutch Sandwich BEPS tool, which Dutch law firms then marketed to US corporations

TCJA mandatory foreign income reporting for US HQ

  • Note the US cut taxes and increased global taxation via Tax Cuts and Jobs Act (TCJA), which passed in December 2017

    1. It set the effective corporate rate of U.S. taxes at 21%
    2. It has allowances for businesses to benefit from low or no tax rates offered in foreign countries
    3. Foreign Income reporting mandatory as per GAAP, IFRS
    4. Foreign debt needs to be reported

FATCA - US reporting of foreign assets by individuals

  • Foreign Account Tax Compliance Act (FATCA) - US tax laws mandate reporting of foreign income by U.S. citizens and non-U.S. citizens.

  • FATCA requires the filing of a Schedule B and/or Form 8938 which provides disclosure of foreign account holdings when investments exceed a specified level.

  • Balances of $10k+ need reporting. Foreign account holders are also required to file Form 114, Report of Foreign Bank and Financial Accounts with the U.S. Treasury Department’s Financial Crimes Enforcement Network if foreign financial accounts exceed $10,000.

  • FATCA

Automatic Exchange of Financial Information in Tax Matters program by OECD

Tax havens provide minimal reporting of income within their provinces - this secrecy and opacity is one of their key features.

To combat this, programs such as OECD cooperation have penetrated this. This program requires participating countries to automatically transmit tax-related banking information of non-citizen depositors for use by countries of citizens in the facilitation of taxes on income, earnings, interest, dividends and royalties.

CFCs rules

A controlled foreign corporation is a corporate entity that is registered and conducts business in a different jurisdiction or country than the residency of the controlling owners.

Swiss opening up some secrecy

Cyprus bailout enforced tax reporting

Cyprus’s financial sector built on the country’s tax haven status collapsed in 2013. The European Commission, European Central Bank, and International Monetary Fund predicted the $11.8 billion bailout on the country’s agreement for compliance with more robust tax reporting and participation with the Automatic Exchange of Financial Information in Tax Matters program.

Data Leaks reduce value of Tax Havens

Comparing features of Tax Havens beyond major countries

No or Only Nominal Taxes

The most important criteria for tax havens is they impose no or only nominal taxes. Offshore countries with little or no tax liabilities for foreign individuals and businesses are generally some of the most popular tax havens.

The tax structure varies from country to country, but all tax havens offer themselves as a place where non-residents can escape high taxes by putting their assets or businesses in that jurisdiction.

Different tax havens are popular for rebates on different kinds of taxes.

However, many well-regulated countries offer tax incentives for attracting outside investment but are not classified as tax havens.

Secrecy Index - Protecting Personal Information

Perhaps the most important, attribute of a tax haven is the secrecy it provides its "investors".

Tax havens zealously protect personal financial information. Most tax havens have formal law or administrative practices that prevent scrutiny by foreign tax authorities. There is no or minimal sharing of information with foreign tax authorities.

Financial Secrecy Index FSI

  • FSI rankings as of 2018 ("FSI") rankings) by Secrecy Score

  • A Really Really Secret - anything goes for billionaires! Secrecy vital to their economies!

    • Vanuatu
    • Antigua and Barbuda
    • Bahamas
    • UAE - includes financial center Dubai
    • Bahrain
    • Paraguay, Bolivia
    • Cayman Islands
    • Panama
    • Anguilla - British
    • Samoa - British
  • B Secret Economies - but is money safe?

    • Kenya
    • Liberia
  • C Asians Pretty good for secrecy esp - but CCP-visible

    • Maldives
    • Brunei
    • Thailand
    • HKO - but likely fully open to CCP monitoring - since thousands executed in China - dangerous!
    • Singapore - bit too liberal - for various citizenship and "corrupt-friendly" Malaysia preferred
    • Taiwan
  • C- Opening up - Swift, Not that good for Money Laundering

    • Luxembourg - oldest havens
    • Liechtenstein - oldest havens
    • Switzerland - still most secret
    • Monaco
  • D- Large standard economies

    • USA - astonishingly high - but money laundering, SWIFT, etc. make it not ideal for evasion
    • Germany

Lack of Transparency - Extra Protection for Big Corporations

In a tax haven, there is always more than meets the eye. The legislative, legal, and administrative machinery of a tax haven are opaque. There are always chances of behind-closed-doors secret rulings or negotiated tax rates that fail the test of transparency.

Local Presence Not Required

Tax havens typically do not require outside entities to have a substantial local presence. Such a concession could lead to interesting situations. For example, one building in the Cayman Island is said to house supposedly 12,000 U.S.-based corporations. This suggests that you can claim tax benefits by merely hanging your nameplate in a tax haven. There is no need for actually producing goods or services or conducting trade or commerce within the boundaries of the country. For all practical purposes, tax evaders may continue their business in Florida while claiming to be residents of the Bahamas when it comes to paying taxes.

Disguised as Banking Centers - How Tax Havens Market Themselves

Financial centers for safe banking money vs tax saving HQs Many promote themselves as offshore financial centers. Many like to call themselves "international financial centers."

In the end, tax havens are all about marketing. Tax havens often promote themselves as places where incorporating a company or opening a bank account takes as much time as it takes to balance your checkbook.

Selecting a Tax Haven

Political and economic stability

Without political and economic stability, no amount of tax inducement can bring outside investors. Switzerland, for example, became famous for its political and economic stability.

Citizenships and Passport accepted Index

Hard Currency freely interchangeable & Lack of Capital Controls

Lack of exchange controls. Putting assets in a country subject to exchange controls could be dangerous for outside investors.

Treaties. Many tax havens like Mauritius have become popular due to loopholes in multiple tax avoidance treaties signed with different jurisdictions. Some are becoming less popular due to various information-sharing treaties signed with different governments.​​​​​​​

Rule of Law, Corporate HQ Friendly Laws

Corporate laws. Efficient corporate laws make entry and exit for companies easier. This also means lower compliance costs for companies.

Infrastructure, Communication and transportation

As the experience of Hong Kong and Singapore shows, better communication and transport facilities act as an inducement for outside investors.​​​​​​​

Banking, professional and support service

Destinations like Switzerland and Austria, although not strictly tax havens, are nevertheless popular for offshore banking services and a safe destination for assets.​​​​​​​

Location - Proximity to Major Markets or Populations

Location is always an important factor in the popularity of certain destinations. The Bahamas has been a popular offshore destination for U.S. corporations due to its proximity to Florida.

Property Tax comparison

Rental Income taxation

Flat rental income at 15%.

In Singapore, rental income is subject to income tax, which can reach 22% on a progressive scale.

In the U.K., rental profits are also subject to income tax of as much as 45%, and if landlords rent out properties as a business, they need to pay an

Top for USA: Caribbean and LatAm Tax Havens

LatAm, Caribbean Havens Overview

Panama

One of the oldest tax havens believed to date back to the 1920s.

It has found popularity for Chinese rich that want extra protection over HKO and Singapore which are presumably infiltrated by Chinese government authorities.

Asian Tax Havens

Singapore as Tax Haven

Hong Kong

European Tax Havens

European Tax Havens Review

Europe is home to many tax havens that offer advantageous environments for capital gains taxes, income taxes, and corporate taxes.

The oldest tax havens of our times include Liechtenstein, Switzerland, and Panama – each of which is believed to date back to the 1920s.

Luxembourg

Various public disclosures in 2016 of Amazon Inc's Project Goldcrest tax structure, which showed how closely the State of Luxembourg worked with Amazon for over 2 years to help it avoid global taxes.

Monaco


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