Roughly $8.7 trillion is held in offshore accounts and tax havens.
Let me repeat it for you – $8,700,000,000,000. If divided between everyone on Earth, each person will receive $1115. That is a lot of money. And that money is hidden. ( This figure does not account for non-financial wealth like yachts, artwork, gold )
What are tax havens?
A tax haven is generally an offshore country that offers foreign individuals and businesses little or no tax liability in a politically and economically static environment. Tax havens also share limited or no financial information with foreign tax authorities. Tax havens do not typically require residency or business presence for individuals and businesses to benefit from their tax policies. – Investopedia
Tax havens are not just small countries in the Caribbean Islands, there are mainstream countries which act as tax haven too.
Few of the most popular tax havens –
- British Virgin Islands – No corporate tax. No income tax. No capital gains tax. No gift tax. No inheritance tax.
- Bermuda – No corporate tax. No income tax. No capital gains tax.
- Cayman Islands – No corporate tax. No income tax. No capital gains tax.
- Ireland – Effective corporate tax between 0 – 2.5%.
- Monaco – No corporate tax. No income tax. No capital gains tax. ( For residents )
How to use a tax haven?
For that, you need a shell company. A shell company is one that usually exists only on paper, it may have a bank account and assets registered under their name. The “tax avoider” pays their shell company for fictional services. Companies move their patents, code, algorithm and formulas under the shell company. This allows their valuable, money generating asset to legally reside in a tax haven. The shell company charges the “tax avoider” exorbitant prices to use their assets thereby draining profits from the home country to the tax haven. So the shell company makes millions of dollars in profits with little or no tax to be owed. Trusts are set up to use the money as per the beneficiary’s wishes.
Is using tax havens legal?
Technically, yes. Ethically, no. Tax havens are controversial but completely legal. However, in recent times there have been policies designed to block the usage of tax havens. USA passed a Corporate Transparency Act to stop corporations from abusing the loopholes.
Corporation you know who use Tax Havens
- Apple – It has booked assets worth $214.9 billion in Ireland. This helped them avoid taxes worth $65.4 billion to the US government.
- Amazon – In 2018 Amazon paid $0 in taxes on profits worth $11 billion. In fact, it took $129 million in tax rebate from the government.
- Google – It transferred $23 billion to Ireland to avoid taxes.
Honourable Mentions – Starbucks UK, Nike, Microsoft, Netflix, Goldman Sachs, Pfizer.
People you know who use Tax Havens
- Amitabh Bachan – was a director in at least 4 off-shore companies since 1993.
- Vladimir Putin – amounts worth $2 billion held in off-shore accounts.
- Jackie Chan – He had at least 6 companies managed through Mossack Fonseca.
Honourable Mentions – Messi, Tiger Woods, Anurag Kejriwal, Iqbal Mirchi ( right hand of Dawood Ibrahim )
Is using tax havens ethical?
There are powerful people who run the financial world. There have been several documents which have leaked over the years which help identify the account holders in tax havens. The journalist who leaked the Panama Papers was murdered in a car bomb near her home. We should be aware of how tax is “legally” avoided all over the world.
Most of us would say they are not, it just helps the rich and so on. But imagine having to pay the government > 40% of your income. People will look for alternatives to avoid paying that much of their income. The alternative argument is the government loses significant tax revenues which could have been put to good use to help the economically challenged parts of the society. It will use the tax to bridge the gap between the rich and the poor.
To know more about Tax Havens
- IMF’s article on the true cost of Tax Havens ( Reputable Source )