Concept of Tax Haven

TanviTanvi    02 March 2022
Concept of Tax Haven

The word ‘tax haven’ has been acknowledged by people since 1950s. However, there is still no clear definition to it. It is generally used for an independent jurisdiction or country having low or nil tax rate. Such places offer its citizens and businesses to avail tax advantages due to effectively low tax rates being levied on them. There are few standards specified by Organisation for Economic Co-operation and Development (OECD) if they are met, then we say that country as tax haven jurisdiction. Such specified standards are:

  • The country is levying no or nominal tax rate on the income
  • There is financial secrecy
  • Lack of exchange of financial information with tax authorities.

In earlier times, liability to pay tax discriminated between residents and non-residents. Sometimes, resident citizens and businesses had to pay more tax than the non-residents. Later, such practice was called off and countries began to treat all in same way for the purpose of levying tax.

Modern tax haven has been arranged in three groups i.e.UK based tax havens, European tax havens and third is the transitional economies group.Due to financial crisis, tax haven system in western part has been undermined and some of Gulf states has been emerging as substantial tax haven jurisdictions.

The varying national tax policies can also be used to avoid paying taxes.There are many countries in the world which levy no or nil tax rate like Switzerland, it has been one of the tax avoidance shelters and many businesses have been benefitted by it. Bankers are prohibited to share the financial information of their clients.Due to such financial secrecy, people avoid their tax liabilities and exploit loopholes of the law. Similar countries like Panama, Cay Island, Luxembourg, Netherlands etc. are renowned places for seeking off-shore tax shelters.

The tax haven nations enjoys when their financial institutions bring in a vast amount of money in the countryand is then invested to earn profit.

Tax shelters are sought by manipulating profits and investments in business. Few wealthy people, corporations find the ways to reduce their tax liabilities and hide income proceeds. They get indulged into illegal practices of tax avoidance, tax evasions and money laundering which widens gap of inequality in economies. It defeats the intention of law to have equality and tax justice in a country. Due to opacity of financial information and lack of transparency of ownership, it is be difficult to trace ultimate owners who are illegally evading taxes.

Tax planning is ethical if it is practiced as per laws and until it doesn’t defeat intentions of law. Availing advantages only to avoid tax is illegal and hinders the growth of economy.

 

Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. The view/interpretation of the publisher is based on the available Law, guidelines and information. Each reader should take due professional care before you act after reading the contents of that article/post. No warranty whatsoever is made that any of the articles are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.

You can access Law including Guidelines, Cabinet & FTA Decisions, Public Clarifications, Forms, Business Bulletins for all taxes (Vat, Excise, Customs, Corporate Tax, Transfer Pricing) for all GCC Countries in the Law Section of GCC FinTax

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