Introduction of Tax Havens: Part 1.
When someone says tax havens or offshore banking, the first thought that pops into mind is illegal financial transactions and money laundering, followed very closely by dons and mafia heads. These are just stereotypes promoted by the media and movie makers , but then one might ask, what exactly is a tax haven? Simply put, a tax haven is an offshore jurisdiction with lower tax rates, which attracts corporations to register with them as legal entities and benefit from lower tax rates of zero tax rates on certain types of income.
As tax havens as a term, sometimes have negative connotations, the emerging trend is to call them corporate tax havens. The nomenclature is different but the purpose is the same. It is an offshore financial center which has tax friendly legislature, that allows companies registered within it to operate at greater profits by paying lower or zero taxes.
Unlike common misconceptions not all offshore corporate tax havens are glamorous islands with bikini clad babes! Yes quite a few of them are islands in warm locations but there are other locations like Delaware in USA and Isle of Man which are considered to be tax havens too. These offshore financial centers offer comparable levels of tax to more exotic offshore locations and, in some cases, offer far greater benefits. Unsurprisingly, the Offshore Financial Centers friendly to corporate also include the famous tax havens of the Cayman Islands and Bermuda.
Why would a country want to declare itself as a tax haven? Because by offering a number of tax benefits enticing corporations to register in their domicile, the government of the country benefits from increased local employment and naturally taxation of the employees upon their income, which would not have occurred otherwise.
Despite being seen by the OECD as ‘harmful to the global economy’, one could argue that offshore tax havens actually promote business and revenue. An illustrative example would be :If a company is just breaking even, it is unlikely to prosper and grow. The business owner may well give the business up and move on to a different venture. If the company is domiciled in a corporate tax haven, then the owners have to pay less tax. This makes the business substantially more viable and more likely to grow and develop and become a prosperous business in time. Therefore, it could be argued that tax havens and corporate offshore financial centers actually help businesses to keep making money and employing staff and, consequently, becoming successful.
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Both individuals and companies move their ventures offshore to gain from the free remittance of profits & capital, reduce costs and enhance the value of their assets. Some select places around the world provide these individuals and companies tested legal system, banking privacy and most importantly a reduced tax benefits.
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