This is a guest post by Alban, a personal finance writer at Home Loan Finder. He offers tips and advice on home loans and contributed to the refinancing home loan guide
Technically there are no longer any tax havens left in the world after all the countries on the OECD blacklist of un-cooperative tax-havens agreed to make their banking systems more transparent. So why would the Organisation for Cooperation and Economic Development be so intent on securing transparency from all of the world’s most popular fiscal paradises? And what sort of options remain for you if you are looking to pay less tax on your savings and cash assets?
The OECD
The OECD has developed a definition of a tax haven as any territory where the tax on income generated by economic activity is nominal, or does not exist. These territories are also defined as not sharing the details of accounts and activities with other countries, not providing legislative transparency and not requiring any real activity from the businesses or individuals.
The OECD has cracked down on tax havens because there are basically two types of people who want to hide their money – firstly, terrorists and people who are laundering their money, and secondly those who want to avoid paying the highest tax amount. Unfortunately when a tax haven provides a haven for funds, it is almost impossible to tell the origin of those funds and the anonymity of these offshore accounts is thought to be protecting terrorists who use these accounts to channel funds around the world to pay for weapons.
Have you heard about the Caymans?
The Cayman Islands is a region which comes to mind when you mention offshore accounts however the area’s popularity as a tax haven has rapidly diminished in the wake of the worldwide cleansing of the OECD blacklist, and enhanced cooperation and reporting structures for banks around the world. While a number of tax havens have survived and continue to offer a welcoming account for your funds, the Cayman Islands have not been able to recoup their reputation because in addition to changes in tax laws, many of the Islands’ banks are now staffed with US workers who steal information and pass it onto their own authorities.
The Cayman Islands are also heavily reliant on tourism and have sold out their privacy to protect their economy. The Caymans cannot risk being labelled as a renegade country, as this could mean all returning tourists were subjected to invasive luggage and body searches when they returned home – no one would want to visit only to be branded and treated as a criminal on return.
However, if you are looking for an offshore account which will help you pay less tax, they do still exist, they are just not always where you would expect them to be, so here we point you in the direction of the top 5 fiscal paradises, in spite of OECD movements.
Switzerland
Switzerland is a tax haven which has been able to attract some big names such as Lewis Hamilton, Tina Turner and David Bowie. However, a lot of the funds stashed in Switzerland belongs to more anonymous wealthy people as evidenced by the fact that 21% of the country’s population is not Swiss.
While Switzerland does not like being known as a tax have, their tax benefits are numerous. For example, there is a lump sum concession for anyone who does not work in the country. This allows someone to pay tax based on their annual living costs, rather than their annual income, where the living costs are based on five times your predicted rental income. That figure is then taxed at 40%.
If you do not qualify for this concession you are subject to three types of tax – income, wealth and property:
Income tax is calculated on all earned income, plus a percentage of notional rental income based on the value of your property, the average rate is 60%.
Wealth tax is the oldest of Switzerland’s taxes and differs between each region of the country. the wealth tax can be up to 1% of your net assets.
Property tax in Switzerland is 0.001% of your property’s value.
UK
The UK takes the term ‘offshore tax haven’ quite literally and offers a wide variety of choice if you are looking for an offshore account.
The Channel Islands. Jersey and Guernsey Islands are both self-governing crown dependencies of Britain where their external affairs are managed by the UK government. Jersey in particular is a leading player in the offshore accounts banking sector, investment funds and trust creation. As a result the sophisticated and well regulated jurisdiction attracts significant inward investments. Both the islands allow for a range of company types to be formed to offer tax breaks, for example in Jersey, anyone who is not a Jersey-based IBC is considered a non-resident and the main tax benefit structures are in place for trusts, IBCs, exempt companies and limited companies.
The Isle of Man has its own government but is protected in matters such as foreign affairs and defence by the British crown. In matters such as taxes, the Isle of Man has free reign. There is a highly sophisticated structure in place to protect investors which results in high investor confidence, making the island one of the safest tax havens in the world. On the Isle of Man there is no capital gains tax, turnover taxes or capital transfer taxes and no stamp duty. There is Value Added Tax, and income tax which is levied at 18% but their government is reducing this rate regularly. Currently the lowest rate of tax is 10% and there are plans to reduce the tax burden on corporations to zero.
Gibraltar. Even though it is geographically located in Spain, Gibraltar is a dependent territory of Great Britain, and is one of the oldest of its dependent territories to be granted offshore status. Gibraltar has no capital gains tax, wealth tax, sales tax or VAT. However, there are income taxes, withholding tax, stamp duty, property tax, estate tax and import duty; these taxes are likely to be quite high for residents unless they have a High Net Worth Individual status or Expat Executive status.
Ireland is a country separate from the UK but does have strong links. The government in Ireland have used their status as a tax haven to strengthen and diversify their economy by using structures such as the Shannon Free Zone and the International Financial Services Centre in Dublin to implement a maximum corporate tax rate of 12.5% to attract cash investors.
Liechtenstein
In February 2008 Liechtenstein was the setting for the discovery of the largest case of tax evasion in Germany’s history. With just 35,000 inhabitants, 70,000 foundations, but 110,000 million Euros deposited in anonymous bank accounts, a list of European tycoons was discovered to be using coded accounts to hide money which was not declared to the treasury. Secret accounts were also discovered which were linked to the Spanish terrorist group, ETA.
Since then, Peer Steinbruck, head of the German Economics and Treasury portfolio, has been urging the European Commission ‘to harden sanctions against tax evasion and economic paradises’ yet the citizens of Liechtenstein are resigned to the fact that their home is a tax haven, and as a result is also home to a third of the world’s offshore wealth.
Luxemburg
Luxemburg is the richest member state of the European Union and is Europe’s number on investment fund centre, as well as being the world’s leading hub for global fund distribution. Luxemburg is also not worried about what happened to their neighbour Liechtenstein, because in Luxemburg the laws prohibit them from revealing bank information to the outside world, unless it is a criminal matter.
Hong Kong
Hong Kong has one feature no other fiscal paradise can compete with and that is the fact that it is not a member of the OECD, and at the same time does have an attractively low tax rate. As one of the leading trading centre in the world, Hong Kong is expected to have large numbers of international companies with a business and banking presence. As a result, Hong Kong does not derive its primary income from providing a tax effective shelter to help external companies avoid tax, so is not technically defined as a tax haven – but it can still be a fiscal paradise.
Hong Kong is a low tax country where it is possible to establish a Hong Kong company or register an existing foreign company which derives no income from within Hong Kong, and all business conducted through that company can be 100% tax free. In this way a Hong Kong company is similar to any other IBC or offshore company, except that because Hong Kong is not part of the OECD, is not on an OECD watch list and is not bound by information exchange procedures required by the OECD or the EU there is an impenetrable veil of privacy for your business dealings.
Hong Kong is also an attractive fiscal destination thanks to:
A local tax rate of 17.5% which is significantly lower than the international average.
No exchange controls.
Independent strength as the major business centre of the Far East, without the need to be aligned with bodies such as the OECD.
Hong Kong is not considered a tax avoidance destination.
Corporate and nominee shareholders are permitted.
No estate tax.
It’s not all black and white
So if there are no countries on the OECD black list anymore and if all countries which were previously tax havens have now agreed to share information about account holders is Hong Kong the only option for an escape to fiscal paradise? Well it’s not all as black and white as that.
In May 2009 the Committee of Fiscal Affairs removed the last blacklisted jurisdictions after commitments to implement OECD standards of transparency and an effective exchange of information. These previously blacklisted countries are now greylisted as they have expressed a willingness to reform their reporting systems; as compared to whitelisted countries which are already compliant.
While these countries which were previously blacklisted and have now been moved to the greylist have been moved on the understanding that they will implement OECD tax information exchange standards in the future, they are unhappy that they have not achieved a whitelist classification. Switzerland for example announced sanctions against the OECD, including blocking 136,000 Euros they were due to pay the OECD. Switzerland also threatened to withhold their 6.5 million Euro annual fee to the OECD and block further progress on cooperation with China, India and other emerging economies.
Jurisdictions such as the Isle of Man, Jersey and Guernsey have been upgraded to the whitelist after agreeing on bilateral information exchange treaties. While such an agreement may have been enough to get these UK tax havens off of the blacklist and onto the white, that isn’t enough to prove they are no longer effective tax havens.
However the fight against money laundering really comes down to a matter of perspective on where the funds are coming from – is it from smuggling, drug trafficking or terrorist activities? If so then when a bank or other professional has even the slimmest suspicious they are obligated to report the transaction to the authorities. If the funds are coming from those looking to avoid tax, every country has their own views on this, for example in Luxembourg it is not considered a criminal act in the same way it is in other countries.
Information contained in this article is not guaranteed to be accurate. Do your own research.
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