The Role of Tax Havens in Wealth Management
Tax havens enable individuals and multinational corporations to avoid government tax collection obligations, thus exacerbating wealth inequality globally, according to new research.
Tax avoidance and tax evasion should not be confused; tax avoidance involves legal measures designed to decrease liability while the latter involves illegal means to conceal assets and avoid taxes.
Lower Tax Rates
Tax havens have the distinct advantage of offering lower (or no) taxes than most countries, thus drawing capital from individuals and businesses looking to escape higher tax bills in other nations.
US residents investing in tax havens through foreign subsidiaries of their own companies often choose tax havens as a strategy to defer taxes on investment income if its parent company doesn’t have significant presence there, thus protecting assets from being subject to US federal government levy.
Tax havens may also help businesses reduce the effective tax rate by providing complex BEPS tools and PTRs that bring their “effective” corporate tax rates closer to zero, potentially costing high-tax countries billions annually in lost tax revenue (Crivelli, de Mooij and Keen 2015; Cobham and Jansky 2018).
Confidentiality
Tax havens offer clients greater protection, enabling them to safeguard their assets against lawsuits and creditors – an especially useful service for businesses, high-net-worth individuals and celebrities.
Tax havens provide multinational firms with an effective tool for shifting profits away from their home country of tax residence, thus decreasing their tax base. However, this effect can be offset by opaque intra-firm trade and nonaffiliates not reflecting profit shifting in service transactions between non-affiliates.
Tax havens can cause governments to miss out on tax revenue that they need for public services and infrastructure, worsen income inequality by only allowing wealthier individuals or corporations to afford tax havens, as well as be used illegally for both tax avoidance and evasion; yet with increasing pressure from international organizations like TIEAs and MLATs it may become harder for tax havens to maintain their competitive edge.
Transparency
Tax havens provide secrecy that conceals non-residents’ wealth from tax authorities in other countries, providing an opportunity to evade or avoid taxes and facilitate money laundering activities that involve funds originating in illegal/criminal activity returning into the financial system.
Tax havens provide criminal enterprises with a covert way to funnel illicit proceeds through offshore entities and decouple criminal proceeds (e.g. drug trafficking, bribery and fraud) from their actual owners/actors – so that these profits may later be reinvested into legitimate global markets.
Tax havens have come under attack from international initiatives designed to restrict their carefree existence, with international agreements like Tax Information Exchange Agreements (TIEAs) and Mutual Legal Assistance Treaties making mandatory financial data sharing across borders possible; this may ultimately lead to their businesses closing as access is lost to large markets.
Ease of Doing Business
Tax havens may be associated with illegal activity, but they can also offer legal solutions to reduce tax liabilities for both individuals and companies. By shifting profits and investments into low-tax jurisdictions, corporations and individuals can reduce their overall tax bills while still reaping the rewards of their activities.
Tax havens can be defined as countries offering low or no income taxes, providing secrecy for non-residents, and permitting asset relocation without leaving behind paper trails. Such characteristics enable both individuals and multinationals to structure their affairs to reduce tax liabilities more easily.
Though tax havens may present various challenges to global economies, many experts believe their short-term benefits for taxpayers far outweigh any long-term harm due to money laundering and illicit activity taking place in them. This is particularly evident since these havens typically possess weak or opaque regulatory frameworks.
