Also called a tax shelter, secrecy jurisdiction or international financial center, a tax haven is any region that provides financial secrecy to its customers. In other words, a tax haven has a financial or economic infrastructure that’s based on confidentiality and relaxed laws. Foreign businesses and individuals that work with tax havens can rest assured their financial information won’t be open to scrutiny by any foreign government, state or tax authorities.
A tax haven could be a country, state or city. For instance, Panama, Switzerland and the United Kingdom are tax havens. Even London’s considered a tax haven. The account holder need not reside or do business in a particular country to seek tax haven services.
A region must have the following to qualify as a tax haven:
- Reputable banks for attracting business
- Low tax rates (sales tax, income tax and other fees)
- Increased opacity, or confidentiality
- Intentionally created laws and regulations for primarily benefiting non-residents
- Ability to accept or move funds in huge quantities, without asking too many questions
Generally, banks in tax havens, such as Panama, are prohibited from disclosing customer account information to any third party and could be heavily fined in case of violations. The disclosure can happen only if the court orders one or the account holder is suspected to have committed serious offenses, such as drug trafficking or terrorism.
Fundamentally Not Illegal
At its core, a tax haven isn’t illegal. The concept of high privacy and low taxes doesn’t violate any civilized society rules. But the people using the services mar a tax haven’s reputation. In other words, account holders’ failure or unwillingness to report their incomes to tax authorities at home is what that gives these havens a negative image.
Generally, people resort to tax haven services because the banks or financial institutions in their home countries do not offer such benefits or incentives. An individual or organization may seek a tax haven’s service for the following reasons:
- To evade tax obligations in home country
- To hide criminal activities such as money laundering
- To hide wealth or keep personal/business financial details anonymous
- Significantly lower bank interest rates or tax rates in tax havens when compared to banks in home or other countries
In the recent past, foreign governments or tax authorities are constantly at tax havens to acquire tax revenue details about their citizens or identify high-profile, wealthy citizens who’ve been avoiding taxes. This has caused tax havens to sign treaties or agreements with different countries that provide countries unhindered access to the erstwhile confidential financial data.
Generally, business or individuals prefer tax havens that has no such disclosure agreement with their home country. For instance, if Panama has no financial exchange information with India, an Indian depositor who’s seeking top-level concealment or anonymity for his wealth may prefer Panama over other tax havens that have signed disclosure agreements with India.