The words "tax haven" or "offshore haven" bring to mind far off corners of the planet with millionaire populations. This population, of course, spends most of its day drinking daiquiris on the beach, its funds secure in various numbered Swiss bank accounts. Not so. Tax havens need not be the exclusive recluse of the ultra-rich. People of average means need no longer be captive slaves to the politicians in today's modern jet-set era.
As modern governments continue to expand and swallow human rights, deficits and taxes grow. All free-minded individuals must seek a means to protect their assets from this monster out of control. It is legally possible to pay absolutely no taxes. Your government may want you to think otherwise. The media may love to tattle about the misery of a particular celebrity "tax- evader," but a very important point remains unnoticed. While "tax evasion" is illegal, "tax avoidance" is not. This distinction is crucial.
A recently published report covers tax havens from start to finish, without hopping on the bandwagons for the latest "fad" tax havens. (It is not commonly known, but tax havens are just as interested in finding you as you are in finding them.) It explains everything from the basic criteria you should use when assessing a tax haven to how you can put them to work to save you that big chunk of your income whisked off each year by the politicians. For information on The Tax Haven Report, by Adam Starchild, ask for a free catalog from Scope International Ltd., Forestside House, Forestside, Rowlands Castle, Hants., PO9 6EE, Great Britain.
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 was described earlier.
Tax havens are one of the most important subjects for an international 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 planning, and almost any international investor has an opportunity to use tax havens. It is the purely domestic investor, confined to one country, that cannot benefit from the international fiscal loopholes.
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.
About the Author Adam Starchild has been writing about international tax planning and tax havens for over 20 years. Sample chapters from some of his books on these subjects are available at The Offshore Entrepreneur.Copyright © 1993, 1997 by Adam Starchild
The Tax Library has reprinted this copyrighted article with the permission of the author.
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