Saturday 27 March 2010

Offshore Tax Havens: The World's 10 Best Tax Havens

A tax haven is of course a country or territory where certain corporate or individual taxes are set very low or do not exist at all, generally with the sole intention of attracting big spending individuals to help create a vibrant and prosperous local economy. Whilst their are many objectives to the principles of tax havens, with arguments that they take too much money out of other economies, there are also some generally unacknowledged advantages to global communities gained through their existence. One such benefit is to create an environment of tax competition between governments, thus helping to drive down taxes, although not particularly to the free spending governments of the USA and UK who like to spend more money on social policy than their tax revenues generate - but that's an altogether different topic which has been covered once too often! Of course, a tax haven simply supplies a service to the large numbers of people who seek to participate in tax avoidance.

My opinion on tax havens is split, on one hand the super rich are depriving their home countries of large amounts of much needed public money - thus placing more of a burden on those with moderate or low incomes. We have seen this for many years in the UK and the USA, where a small proportion of people control a large proportion of the wealth yet the burden of public spending is placed firmly on those who struggle. On the other hand, there is nothing to suggest that tax havens should only be the reserve of the super rich and to the contrary I know many people who relocate to these countries to run small businesses.

A real life example is a friend of mine who relocated to Bulgaria to take advantage of its low 10% income tax, and 10% corporate income tax. He runs a small underground record label with a turnover of around $150k, using modern technologies to run his entire business from a small home office and production suite. He estimates his annual savings, when all costs are taken into consideration (not just tax but also general operation costs), at around $38k. His own drawings in the 2009 financial year were around $30k, not a lot of money in the UK but a huge amount of money in Bulgaria. The efficiencies achieved through relocation effectively make the difference between him making a living overseas, or having to run a loss making business in the UK. I can see nothing wrong with this, whats the alternative for him? To move back to the UK and claim unemployment benefits? There are numerous tax havens in the world, all of which have benefits for different needs.

 

10. Andorra

In Andorra there is no income tax, gift tax, inheritance tax, or capital transfer tax. Since 2007 there has been a capital gains tax, introduced on a sliding scale to counter rising house prices which were problematic for the native Andorran communities, although this is the only government tax. Andorra also has single digit tax rates on imports, and has become a very popular destination for Spanish and French people seeking duty free or low duty goods. In fact, over 10 million people visit the country each year to buy cheap commodities and luxury goods - a big industry for a country with a population of just 83,000!

9. New Zealand

New Zealand is an unlikely tax haven, and an unintentional one too. New Zealand made the list partly on the basis of how attractive the country is to live in, with it being cited recently as the most popular destination for people emigrating out of the UK. New Zealand did intentionally attract overseas investment when it introduced zero tax on trusts, when the beneficiary and the settler are both based overseas, and succeeded in bringing in a lot of foreign money. Now for the REAL stuff.... all new settlers in New Zealand are treated to a 4 year tax exemption on money coming from overseas. The result is many individuals moving to New Zealand from countries such as the UK and Australia, and running businesses such as websites or - like my example - small record labels! Chances are that many of these individuals will move on again after their 4 years are up, but the small number who stay and begin to pay taxes are of course the governments reasoning behind the scheme.

 

8. Switzerland

Switzerland does not like to refer to itself as a 'tax haven' but, whether it likes this label or not, it is. Some 21% of the countries population are non-Swiss and most of those people are in the country because of the clear fiscal benefits. The primary prized tax break is the 'lump sum concession' which allows any resident who works outside of the country to pay tax only on the annual cost of living, rather than their income. The annual cost of living is simply calculated by multiplying the individuals annual rental expenditure by 5, and then taxing this figure at 40%. If you earn $200k per year, and pay $10k per year to rent and live in a Swiss apartment, you will pay just 40% of $50k in tax ($20k). In this hypothetical example, lets say he is a banker, he is paying just 10% in tax. It is of course also a beautiful country!

 

7. Hong Kong

Hong Kong has relatively low tax rates of 17%, plus no capital gains tax, but its fiscal policy was not originally intended to create a tax haven. Instead, it claims that its low rates are designed to attract investment into the countries service based economy. Hong Kong is not a cheap city, so it generally only appeals to the very wealthy, particularly those who can afford to purchase a property outright or the super rich who prefer a very metropolitan lifestyle. Whilst not the best in terms of financial savings, certainly a great place for the wealthy to hang about getting a little richer!

 

5. Guernsey & 6. Jersey

Guernsey and Jersey are both part of the Channel Islands, an Archipelago in the English Channel which separates England and France. The Islands are considered British Crown Dependencies but are entirely independent from both the UK and the EU, each has their own government. The small state of Jersey (population 91K) is famous for its diary products, but is even more famous for its financial services, and is one of the worlds richest countries on a per capita basis at $57000. The most famous tax benefit of Jersey is the non-existence of value added tax (VAT) for items under £18GBP, VAT is set at 17.5% in the UK. The result is hundreds of retailers, including Amazon UK, setting up distribution channels in Jersey and selling low value goods such as CDs, DVDs and lingerie to the UK consumer with a significant competitive advantage. Most major online retailers of low value goods in the UK now operate from Jersey, or the neighbouring Guernsey (population 65k) where the system is exactly the same. There are also no capital gains tax or capital transfer tax to be paid in Jersey, and many corporations are exempt entirely from taxation too. This is also the same in Guernsey. A one bedroom property in Jersey would cost you a minimum of £150k, whilst a small office building for commercial operations would cost you a minimum of £500k.

 

4. Panama

Panama has long been a tax haven for the wealthy foreigner, and is one of the principle channels of global funds into and out of latin America. The tax benefits really are simple, probably the most simple, basically an individual or corporation will only pay tax on income which is judged to have arisen from Panama. All outside income is entirely tax free, making it one of the most attractive tax havens in the world. Panama is however, unfortunately, a haven for illegal activities. A lack of transparency means that it is almost impossible for outside tax investigators to determine the value of assets or capital held by a Panama resident, this has left the system open for abuse. A luxury apartment can be purchased in Panama City for as little as £25k/$40k and the city is a very attractive place for those from the English speaking world, with English being widely spoken and the US dollar being universally accepted.

 

3. The Isle of Man

The Isle of Man is a small island just off the coast of England, and a favourite of UK multi-millionaires. There is no general capital gains tax, no tax on business turnover, no stamp duties, and no tax on capital transfer. The only significant tax is income tax which is set at a maximum of 18%, significantly lower than the 50% paid by the rich in the UK! Those based on the Isle of Man can get to anywhere in England within 30 minutes from catching a flight, meaning that many CEOs of UK based businesses choose the Isle of Man as their primary residence. The lower tax rate, for those on the island who earn a moderate or low income, is just 10%. In addition, the island charges zero income tax for certain areas of the islands economy; these include manufacturing, film, e-gaming, tourist accommodation, fishing, agriculture, insurance, fund management, and shipping. Their is a 10% tax on corporations with banking licenses or those who take income from the rental of land or property on the Isle of Man. I should also point out that the Isle of Man is a beautiful island, if you dont mind weather which closely resembles that of Britain, in other words..... invest in a brolly!

 

2. The Bahamas

The Bahamas, like Panama, does not tax money judged to have been earned overseas. Anybody can get a permanent residence in The Bahamas with an investment of $150k or over, although real estate and the cost of living is very expensive. The Bahamas isn't really a tax haven suitable for the lower middle classes (I hate that word, in other words the non-rich), probably best suited to those with a few million to their name. I'm sure that I don't need to mention how nice The Bahamas is! It is generally recommended that those who choose to avoid income tax in The Bahamas do not put their money in the national banks, and instead choose to bank overseas.

 

1. Monaco

Legal residents of the tiny state of Monaco do not pay any personal income tax whatsoever, although you do actually have to be in Monaco for a minimum period per year to be considered a resident. Monaco is home to the super rich, with the British billionaires Sir Philip Green and Stelios Haji-loannou being prime examples. The British newspaper contacted 650 British company directors who gave their residence as Monaco, and established that the 10 richest Brits in Monaco account for $13.5bn alone. Quite astonishing for a country with a population of just 35000. A Monaco 'resident' can actually spend 90 days per year outside of the country, plus one day travel out and one day travel back, whilst it actually only takes about an hour and a half to fly from the UK to Monaco - less than the time it takes to travel from Birmingham to London on the train. This means that these businessmen and company directors can spend 4 days a week for most weeks of the year in the UK and still be considered a resident of Monaco. If you flew to the UK one day, and flew back the next, you will not have used any of your 90 days. A 30 metre squared studio flat will cost you at least $1m.

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