Tax Havens are countries that offer a little or no tax liability to foreign individuals and businesses, in a politically and economically static environment. It is basically an offshore cash keeper which helps in minimizing corporate taxes.
Tax havens share almost no information with the foreign tax authorities and they also do not require residency or business presence for individuals or businesses to avail the benefits from their tax policies, due to which an increasing number of U.S. corporations such as Microsoft, Apple, Alphabet, etc. are involved in keeping their cash in offshore tax havens.
Some of the most popular tax havens are The Cayman Islands, The British Virgin Islands, Panama, Nevis, and Bermuda. They have a very strict bank and corporate secrecy laws in their jurisdictions.
How does their Government Make Money?
There might be an obvious question that if they have a relatively minimal income tax revenues, then how exactly do these jurisdictions raise enough money to pay for things like education, healthcare, and law enforcement.
The 3 Golden Ways
1. By Imposing Customs and Import Duties
Tax havens are not completely tax-free, despite what their name might imply. There might be a low-income tax for individuals and businesses there, but the cost of living could be high because of the taxes that are imposed on goods imported into the country.
These are known as customs and import duties, which are a form of indirect taxes and are applied to the price of items before being sold locally. These low-tax jurisdictions supplement their lost government revenues by imposing high import and customs duties on imported goods.
2. By Corporate Registration and Charging Renewal Fees
As the name suggests, tax havens are an opportunity for corporate organizations to operate in the jurisdiction and minimize their corporate and personal taxes, in a legal and economically static environment. So, the tax havens earn by imposing a registration fee on all those companies that are newly incorporated in their jurisdiction. They also charge a renewal fee every year, so as to make the company still be recognized as an operating company.
Moreover, they also impose and additional fees on the companies depending on the type of business activities the companies are engaged in. These various fees add up to create a strong recurring revenue for their governments.
3. By charging Departure Tax
If you visit a tax haven, you are most welcome! But if you want to leave, you make your departure by paying tax to the Government. Yes, that’s right. Some of the tax havens are tourism hubs, which welcome thousands and millions of visitors each year. The Government of these countries earns by levying a tax on people upon their exit from the country, known as the departure tax.