offshore jurisdictions explained
A tax haven is a country that exempts foreign investors who hold bank accounts or set up companies in its territory from taxes. Typically, two different tax systems exist together:
While citizens and corporations residing in the country are required to pay their taxes like elsewhere in the world, foreign investors enjoy, in most cases, total exemption, or at least a substantial reduction of taxes to be paid. Provided they do not carry on business within the tax haven itself. States that apply this kind of tax policies do so with the intention of attracting foreign deposits to strengthen their economy. Most of them are tiny nations with few natural or industrial resources. Their whole existence would be threatened were it not for the booming financial industry growing in the shadow of foreign capital.
Tax havens, also called offshore jurisdictions, have attracted an increasing number of foreign investors, especially in recent decades. Usually they are people and businesses fleeing their own countrys tax collecting voracity in search of a more favorable business environment. This is not surprising, since in some countries with high taxes, especially in Europe, the taxes paid by a person or business account for up to 50% of their profit.
This capital flight, of course, is not viewed favorably by tax officials of the countries that suffer from it, as in the end an important part of their tax revenue gets away. Therefore, they have tried to react with different measures to hinder the transfer of assets to tax havens or to make it unattractive.
But the new world order that emerged with the globalization of the economy makes it difficult to exert effective control over the movement of money. Trying to hinder the free flow of capital clashes with the claims of global trade liberalization, which is defended by, besides most companies and governments, also by such important institutions as the World Bank, the WTO (World Trade Organization) and the OECD (Organization for Economic Co-operation and Development).
On the other hand, the legal measures taken with the intention of hindering the outflow of capital, and which usually consist of an unfavorable tax treatment of investments in tax havens, have not yielded the expected results either.
This is because it is relatively easy to hide the ownership of offshore corporations or offshore bank accounts, so many people have simply opted to conduct their operations in secret.
The main actions have been aimed at putting pressure on the governments of tax havens seeking to limit their confidentiality laws and bank secrecy. This is currently being done through various international organizations, usually under the banner of combating terrorism, drug trafficking and money laundering networks.
The OECD, the G-20 and the FATF (Financial Action Task Force) are the most active bodies in this field. In any case, the solution to the problem is very complex, since for many of these countries their own survival as a nation is what is at stake, having no other viable economic alternatives.
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What is a tax haven. – Tax Havens Guide