Tax haven: definition and meaning

A tax haven is either a nation, a dependency of a larger nation, or a designated zone within a country that has no taxes or extremely low taxes. Its banks are very secretive.

Tax havens are popular places where tax avoiders or tax evaders place their money legally or illegally (respectively).

Tax evasion refers to illegal methods used to not pay taxes, while tax avoidance involves using lawful methods – tax evasion is illegal while tax avoidance is legal.

A tax haven may tax non-residents who place their money there at a zero rate, while taxing its own residents fully.

Tax havens are designed for people and companies that do not want to pay the high tax rates that exist in their own countries. If you made money illegally and want to hide it somewhere, you may consider placing it in a tax haven, where no questions are asked and secrecy is guaranteed. They are ideal places for tax avoidance (legal) and tax evasion (illegal).

The Tax Justice Network has the following comment in its FAQ webpage regarding what a tax haven is:

“There is no generally agreed definition of what a tax haven is. The term is a bit of a misnomer, because these places offer facilities that go far beyond tax. Loosely speaking, a tax haven provides facilities that enable people or entities escape (and frequently undermine) the laws, rules and regulations of other jurisdictions elsewhere, using secrecy as a prime tool.”

“Those rules include tax – but also criminal laws, disclosure rules (transparency), financial regulation, inheritance rules, and more.”

A tax haven is attractive to some people or firms

A tax haven, also known as a secrecy jurisdiction, provides one or some of the following:

  • Secrecy regarding all banking and other financial activities.
  • Freedom from financial regulations.
  • An escape from your home country’s tax regulations.
  • Avoidance of criminal laws.
  • An escape of inheritance, corporate governance, and other regulations.

Walmart uses tax havens all over the worldWhy would the world’s largest supermarket chain have so many subsidiaries across the world, and tens of billions of dollars in those places – every single one used as a tax haven – and not one store? The reason is simple. The company has clever accountants and lawyers who have found ways to significantly reduce its tax bill. (Data Source: dabrownstein.com)

Well known tax havens include:

  • Bahamas
  • Bermuda
  • British Virgin Islands
  • Cayman Islands
  • Gibraltar
  • Isle of Man
  • Luxembourg
  • Mauritius
  • Panama
  • Puerto Rico
  • Switzerland
  • The U.S. states of Delaware and Nevada

Some countries that have relatively low income or corporate taxes are often considered semi-tax havens, such as the United Kingdom, Ireland and the Netherlands.

There are many different types of tax havens, from small tropical islands with beautiful sandy beaches, to old European principalities.

Whether a country or region is a tax haven depends on how it compares to another country – there is no generally accepted definition of ‘tax haven’. For example, corporate tax is 35% in the United States, but only 21% in the United Kingdom. For US-based companies, the UK is a tax haven.

George Osborne ' Tax haven quoteGeorge Osborne is a British Conservative Party politician. He was Chancellor of the Exchequer under Prime Minister David Cameron from 2010 to 2016. He has recently been appointed editor of the London Evening Standard, and will take up the post in May 2017. (Image: adapted from twitter.com/George_Osborne)

Since the turn of the century, having a tax haven – or many of them – has become a must for many multinational banks, giant corporations, ultra-wealthy individuals and their army of accountants and lawyers.

According to a recent study carried out by the Tax Justice Network, between $21 trillion and $32 trillion is currently invested in tax havens across the globe. That is equivalent to the combined annual GDPs (gross domestic products) of Japan and the United States combined.

Nicolas Sarkozy - tax haven quoteNicolas Sarkozy is a French politician who was President of France from 2007 to 2012. Before becoming president, he had been the leader of UMP (Union pour un Mouvement Populaire – Union for a Popular Movement) center-right party. (Image: adapted from twitter.com/nicolassarkozy)

Mini tax haven league table

In an article published in Forbes magazine in 2010, titled – World’s Best Tax Havens – Richard Murphy wrote that the world’s top ten tax havens are:

  • – The U.K. (City of London)
  • – the U.S. (Delaware)
  • – Luxembourg
  • – Switzerland
  • – Cayman Islands
  • – Ireland
  • – Hong Kong
  • – Singapore
  • – Belgium
  • – Bermuda