THE USE OF TAX HAVENS
Tax havens are one of the most important subjects
for an international entrepreneur or investor, yet few
understand and use them properly. One group discount
them as hiding holes for dirty money, which is not a
legitimate use for tax havens. Others think they are
only for banking money after you have made it. Not
true either.
Money grows much faster if a tax haven is part of
your business planning, and almost any international
business has an opportunity to use tax havens. It is
the purely domestic business, confined to one country,
that cannot benefit from the international fiscal
loopholes. Switzerland is a major financial center,
but not generally a tax haven.
Called a paradis fiscal by the French, a rifugio
fiscal by the Italians, and a Steureroase by the
Germans, it obviously means a place where the fiscal
grass is greener than in your own particular backyard.
But an effective tax haven is not determined simply by
geography; it all depends on what particular asset or
transaction you are trying to defend from the tax
collector.
Simply stated, a tax haven is any country whose
laws, regulations, traditions, and, in some cases,
treaty arrangements make it possible for one to reduce
his overall tax burden. This general definition,
however, covers many types of tax havens, and it is
important that you understand their differences.
No-Tax Havens. These are countries that have no
income, capital gains, or wealth (capital) taxes, and
in which you can incorporate and/or form a trust. The
governments of these countries do earn some revenue
from corporations; "no-tax" means that what you pay is
independent of income derived through a company. These
states may impose small fees on documents of
incorporation, a small charge on the value of corporate
shares, annual registration fees, etc. Primary
examples are Bermuda, Bahamas, and the Cayman Islands.
No-Tax-on-Foreign-Income Havens. These countries
do impose income taxes, both on individuals and
corporations, but only on locally derived income. They
exempt from tax any income earned from foreign sources
that involve no local business activities apart from
simple "housekeeping" matters. For example, in such a
haven there is often no tax on income derived from
export of local manufactured goods.
The no-tax-on-foreign-income havens break down
into two groups. There are those that allow a
corporation to do business both internally and
externally, taxing only the income coming from internal
sources, and those that require a company to decide at
the time of incorporation whether it will be one
allowed to do local business, with the consequent tax
liabilities, or one permitted to do only foreign
business and thus be exempt from taxation. Primary
examples in these two sub-categories are Panama,
Liberia, Jersey, Guernsey, Isle of Man and Gibraltar.
Low-Tax Havens. These are countries that impose
some taxes on all corporate income, wherever earned.
However, most have double-taxation agreements many the
high-tax countries that may reduce the withholding tax
imposed on income derived from the high-tax countries
by local corporations. Cyprus is a primary example.
The British Virgin Islands is another, but no longer
has a tax treaty with the U.S.
Special Tax Havens. These are countries that
impose all or most of the usual taxes, but either allow
special concessions to special types of companies (such
as a total exemption from tax on shipping companies,
or movie production companies) or allow very special
types of corporate organization, such as the very
flexible corporate arrangements offered by
Liechtenstein. The Netherlands and Austria are
particularly good examples of this.
To understand the precise role of tax havens, it
is important for you to distinguish two basic sorts of
income: (1) return on labor and (2) return on capital.
The first kind of return is what you get from your
work: salary, wages, fees for professional services,
and the like. The second kind of return relates,
basically, to the return from your investments:
dividends on shares of stock; interest on bank
deposits, loans and bonds; rental income; royalties on
patents. It is the second kind of income, income from
an investment portfolio, that tax havens are useful
for. Forming a corporation or trust in a tax haven can
make the second form of income totally tax free, or
taxed so low that you will hardly notice. Certain types
of businesses can be effectively based in a tax haven.
If you publish a newsletter, for example, you might be
able to set up the entire operation in a totally tax
free country such as the Bahamas or the Cayman Islands.
If your income comes from copyright royalties, perhaps
on the computer program you invented, the Netherlands
is famed as a base for sheltering royalty income.
Tax havens are a very complex subject, but the
hours you spend studying their use will probably pay
you more per hour than the hours you spend directly
earning an income -- an unfortunate commentary on the
confiscatory taxation policies of most governments.
If you want to gain a good understanding of how
the government views tax havens, University Microfilms
International, through its Books On Demand program, is
now making available Tax Havens and Their Uses by
United States Taxpayers by Richard Gordon. Frequently
referred to as "The Gordon Report," this was a 1981
U.S. Treasury Department study prepared at the request
of Congress. It gives considerable detail and examples
of the uses of tax havens.
Just stop and think for a moment how much faster
your money can grow if you are not paying out an
average of 40% to a taxing government somewhere, which
will give you more money for your tax-free Swiss
investments.
