Top 5 Tax Havens – Tax Avoidance in Paradise

Tax havens are a mysterious and enchanting idea for many. A place where the government doesn’t take a large share of your, or your comapny’s, income. It is similarly criticised though, with many people saying it is a citizen’s duty to pay taxes for the country in which they live or work. Still, companies from Google to Pfizer, and people from your local dentist to the Queen of England use tax havens as a way to reduce the amount of capital that they have to pay to the government.

Banking in Paradise: The Top Havens for Offshore Banking

It is impossible to know anything exact about tax havens or tax avoidance. Because all these numbers take place in the dark and are undocumented, there is no way to know for sure. But it is estimated that e.g. England loses €12,5bn (£11,4bn) a year, and this is not decreasing. In 2013 at €14,30bn (£13bn) pounds, it increased by 5,0% to €14,96bn (£13,6bn) in 2017. Individuals and businesses can potentially benefit from low or zero taxes on income earned abroad, where loopholes, credits or other special tax considerations are allowed.

In the USA, the Tax Cuts and Jobs Act (TCJA), which was passed in December 2017, set the effective corporate income tax rate of U.S. taxes at 21%. Companies known in the past for their offshore operations in tax havens include Apple, Microsoft, Alphabet, Cisco and Oracle. Overall, tax havens can also offer advantages in the area of lending, as it can be cheaper for companies to borrow internationally. A conservative estimate assumes that $21 trillion are located in tax havens, 9.8 trillion of the world’s top 100,000 wealthy people alone.

  • 5% increase in tax avoidance
  • $21 trillion are located in tax havens
  • Apple, Microsoft, Oracle all used tax havens

What is a Tax Haven?

A tax haven is a State or territory that has no, or particularly low, taxes on income or assets. Theseare therefore attractive as a place of residence for individuals or as a business location. Common to all of them is the goal of not having to pay tax on income earned in high-tax countries. Legal certainty and political stability are important for a tax haven, as they guarantee the security of the capital invested. Good governance (i.e., efficient administrative structures and low corruption) and low tax rates have a decisive influence on the likelihood of inflows of money. Banking secrecy can be part of the legal framework. Secrecy, as well as possible loopholes all work to make some regions hotspots for tax avoidance.

How many Tax Havens are There?

In an investigation, finance ministers and experts of the European Union identified 17 countries as official tax havens. Furthermore, 47 states landed on a “grey list”, have also promised more transparency and a few reforms and are therefore under closer scrutiny. There are many lists such as

Are Tax Havens Illegal?

No. Many individuals with high income become residents of tax havens in order to pay less income taxes. This is not illegal. Although, some corporations funnel their income through shell corporations which are headquartered in tax havens such as Bahamas or Malta. This is illegal, because these companies are falsely reporting their income as less than what it is. For this reason, a main part of a tax haven country is that it acts secretly and does not reveal information to investigators from abroad.

Income Tax Rate for Different Countries – Comparison

Different countries have different income tax rates. Personal income taxes are taxes that a person pays when they report income such as salary, wages, or any other form of income. The highest income tax in the world is in the Ivory Coast, with an average personal income tax of 60%. In tax havens such as the Bahamas or the UAE, personal income tax is 0%. Below are some selected countries and their income taxes. There are other methods to reduce your personal income tax, such as those used by Donald Trump.

  • Ivory Coast – 60%
  • Germany – 45%
  • United Kingdom – 45%
  • USA – 21%
  • Bahamas, UAE, Cayman Islands, etc.- 0%

Corporate Tax Rates for Different Countries – Comparison

Corporate Tax is a tax based on the income of a coporation. To reduce this, many companies invest their profit directly back into the company, or move their headquarters to a tax haven. Tax havens have very low corporate tax rates, meaning companies which report income when headquartered here pay less taxes than they would otherwise. The highest coporate tax rate in the world is in Puerto Rico, 37,5%. The lowest corporate tax rate, and top tax havens are the Isle of Man, UAE, Bahamas, and Bermuda, all with 0% corporate tax.

  • Puerto Rico – 37,5%
  • Germany – 30%
  • USA – 21%
  • United Kingdom – 19%
  • Bermuda, Cayman Islands, etc. – 0%

List – Top Tax Havens Worldwide

Tax Havens can be countries, e.g. Panama, the Netherlands and Malta. Others are regions like the Isle of Man, Jersey, Delaware, or the Cayman Islands. Everyone from the Queen of England, ex-presidents and criminals use tax havens to minimize the taxes they pay.

The Cayman Islands – Caribbean Paradise

A seaside hut in the Cayman Islands.

Palms, clear blue water, and luxury non-stop. Officially a British territory, the Cayman islands are perhaps the most famous tax haven in the world. Here it is possible for a corporation to be formed and retain assets without paying any tax. Neither income, profit, inheritance, etc. are taxed here. 40 of the world’s largest banks and 40% of the world’s hedge funds are based in the Cayman Islands. Companies from Wells-Farrgo to Pepsi all use the uniquely advantageous loophole present here.

  • GDP: $3.84 Bn
  • Population: 63k
  • Secrecy Rank (FSI): 3
  • Corporate tax: 0%
  • Income Tax: 0%

The Cayman Islands are situated just south of Cuba in Central America

The largest and most populous island, famous for its sea turtles and beaches, is Grand Cayman.

Malta – Mediterranean Money

An oceanfront in the mediterranean island Malta.

Malta is arguably Europe’s top tax haven. Which also means many investigations and public pressure. At the moment though, Malta is still a top destination for tax avoidance. Why? Malta has relatively high income tax and corporate tax… But Malta has a tax system in which companies pay the lowest profit tax (differenet from corporate tax) in the EU. Additionally, when applying for it, 30% of corporate tax can be reduced.

  • GDP: $11,00 Bn
  • Population: 441k
  • Secrecy Rank (FSI): 20
  • Corporate tax: 35,0%
  • Income Tax: 33,8%

Malta is a tiny island between Sicily and North Africa.

It is famous, among other things, for its beaches.

Ireland – Gold at the End of the Rainbow

A golden sunset on the Irish coast.

Ireland is often referred to as a tax haven, although Irish officials assure that their country is not one. Liz Nelson, Director of the Tax Justice Network, says: “Ireland allows for the shifting of profits, like some other jurisdictions,” Nelson told DW. “This is how a network of secrecy has been created,”. The tech-giant Apple, through its international subsidiaries has recorded more than $180 billion in offshore profits in Ireland, evading $59.2 billion in U.S. taxes. More than a quarter of the Fortune 500 companies have subsidiaries in Ireland.

  • GDP: $11,00 Bn
  • Population: 4,95mio
  • Secrecy Rank (FSI): 26
  • Corporate tax: 35,0%
  • Income Tax: 48,0%

Ireland is home to breathtaking landscapes in its highlands.

The Bahamas – Prototype Paradise

A view of the Bahamas from space.

The Bahamas have no capital gains tax, inheritance tax, income tax or gift tax. Additionally, there is high banking secrecy, and tax evasion is not considered a criminal offense.. U.S. companies reported profits of $10 billion to Bahamian subsidiaries in 2010, 123% of the country’s own GDP. Wells Fargo Bank and utility AES are a few of the 5% of Fortune 500 companies with subsidiaries in the Bahamas. At times, there were about 400 banks in the Bahamas. All this may also change however, as the country signed an agreement to exchange information and cooperate with foreign countries’ tax authorities.

  • GDP: $11,26 Bn
  • Population: 394k
  • Secrecy Rank (FSI): 19
  • Corporate tax: 0%
  • Income Tax: 0%

Situated just east of Florida, and North of Cuba, this is a Caribbean paradise.

Exuma Beach in the Bahamas is world-famous, and its clear blue waters and white sand uncomparable.

Luxembourg – Medieval Money Maker

A street in Luxembourg.

If there is a tax haven with the greatest international renown besides Switzerland, it’s Luxembourg. Her some companies have a tax rate of 1% or less. This is all not on paper, and only revealed in the “Luxembourg leaks” in 2014. It is common for companies like Deutsche Bank to move their profits to Luxembourg disguised as interest and pay virtually no tax on them. For Luxembourg, the low tax burden of corporations is also worthwhile. The status as a tax haven is a job creation program, as banks and investment companies have tens of thousands of employees – most of them from abroad.

  • GDP: $58,63 Bn
  • Population: 628k
  • Secrecy Rank (FSI): 6
  • Corporate tax: 25,0%
  • Income Tax: 45,8%
Luxembourg is a so-called micro-nation at the borders of Germany, France, and Belgium.

It is famous for its traditional European Architecture, and of course as a finance powerhouse.

Tax Havens – Beautiful and Cheap

Tax havens are truly a unique phenomenon, many are home to some of the most beautiful beaches, or idyllic streets, and behind the scenes, are financially completely unique. It is no wonder that People from all over the world become Puerto Rico nationals, when the ocean and the carribean is so close.