What is a Tax Haven?

Meaning of Tax Haven

A tax haven is an authority offering favorable conditions regarding tax and other economic circumstances to its taxpayers relative to foreign or other administrations. A tax haven can, therefore, be a country offering minimum tax liability to foreign businesses or individuals in environments that are economically and politically stable, having no or little financial information shared with tax jurisdictions from foreign regions. There is no universal definition of what gives a country the authority to be a tax haven, but there is variation in the activities which are mostly associated with such regions.

Classifications of Tax Havens

There are three types of tax havens that corporations usually use to minimize overall taxation. The types of the tax havens are the primary, semi-tax, and conduit tax havens. The primary tax havens are the places where the winding up of financial capital happens. The subsidiary companies of the shell businesses in such locations can obtain, through transfers, profits from the corporate intellectual property.

The semi-tax havens are the regions which manufacture goods to mainly sell outside their boundaries of territory and enhance the growth of employment opportunities through flexible regulations. The job opportunities grow in areas such as the territorial-only taxation, free trade zones among other zones having similar inducements.

Conduit tax havens, on the other hand, are the locations where the collection and distribution of the sales revenue, mainly from the foreign sales, is done. There is the reimbursement for the actual costs of products and the transfer of the extra profits to the primary tax haven. The reason for the transfers for the additional profits is that the primary tax haven is entitled to the profits due to the corporate intellectual property.

Pressuring Tax Havens

Foreign governments maximize their tax receipts through maintenance of relatively constant pressure on tax havens. The pressure helps in releasing information about the offshore accounts of their citizens. However, some forms of financial leverage are necessary for countries that try to obtain tax havens to change their ways since there are more benefits of capital inflows seeking tax relief than the tax compliance benefits.

Examples of Tax Havens

Tax havens constitute approximately 15% of the world countries. The countries are mostly affluent and small. Also, the countries with good governance and regulations have a high possibility of becoming tax havens and consequently be successful. Some examples of tax havens are Switzerland, Netherlands, the United States, Ireland, Luxembourg, Jersey, British Overseas Territories, Isle of Man, Puerto Rico, and Delaware.