A tax haven is a territory where assets can be held without any local tax liability or the tax is substantially less. These centres may be used by multinationals to conceal their income or avoid taxes. These countries do not have tax treaties or treaties regarding information sharing with other countries. Thus while they provide channel for legitimate tax avoidance, they may also offer a shield for unaccounted and illegal moneys flowing into them.
Types of Tax Heavens:
Tax havens of the world can be grouped into four types:
1. Tax havens that have no income or capital gains or gift and estate tax. This includes many of the tax havens in the Caribbean, scch as Bahamas, Bermuda, and the Cayman Islands. In the Cayman Islands, foreign owned companies are guaranteed against taxes for 20 years. It has no tax treaties and has moderate corporate and incorporation fees.
2. Tax havens with very low rate of taxes. British Virgin Islands, and Netherlands Antilles are examples of this type. Income taxes arc very low, and there are special tax privileges to shipping, aviation and holding companies.
3. Tax heavens that tax income from domestic sources, but exempt all income from foreign sources. Hong Kong and Panama fall in this type. In Hong Kong a nominal tax of 15% is imposed on Hong Kong-sourced income; foreign-source income is completely exempt. There is no tax on capital, capital gains or dividends remitted to foreign shareholders.
4. Tax havens with special tax privileges and suitable only for selected purposes. These countries are trying to promote development in certain regions or encourage industrialisation within the country. They include Republic of Ireland, Puerto Rico, Switzerland, Netherlands and Liechtenstein. Republic of Ireland exempts taxation for export earnings of corporations that set up manufacturing op-erations in certain regions.
Tax evasion is not a criminal offence in Switzerland. The local banks will refuse requests for information even to Swiss federal tax authorities. Netherlands is a tax haven for holding companies which do not pay any tax on income and capital gains emanating from their direct participation in either domestic or foreign subsidiaries.