Popular Myths About Tax Havens
by: Vesna Ivkovic in: Thoughts
is amazing how popular tax haven topic is, and how people are inclined to
speculate about that topic. There are numerous popular myths about tax havens.
Opinions are mostly influenced by media, or after the news spread on some
corrupted politician being arrested for having an "offshore
account" in a foreign country. Only then are the "biased
opinions" created on what exactly tax havens are. Sensational news on
tax havens and offshore accounts perceived through the ordinary people's perception
start to look like John Grisham's crime novels. Some of those people will
find it difficult to change the stereotype image they have on tax havens.
Hereafter I will list some of the most common myths:
Tax havens are small tropical islands
Not entirely. Tax havens are not only tropical islands, but also certain developed
countries, or parts of certain countries or territories. Not all destinations
are exotic, for example there are Delaware in the United States of America,
Dubai, The Netherlands, Hong Kong, etc.
2. Illegal business is run there
We can't say that company business in tax havens is illegal. In general, there
is a myth that companies in tax havens are mostly used for money laundering
and/or covering up the real (illegal) sources of income. Money laundering
is a concept that stands for infiltration illegally acquired money (incomes
from illegal activities such as trade in narcotics, people, smuggled diamonds
etc.). Some would go so far even to think that the IMF and the World Bank
run offshore businesses, and that some "super rich" elite is in
charge there. I am not saying that such a super-rich elite is not present
there; there are both honest people and corrupted politicians there. The reason
why this myth is popular is that the data about company owners and their incomes
on bank accounts are held in secret (i.e. they are legally protected). Some
even think that everything should be taken away from them. Others want to
know not only who the company owners are, but also who the owners of the tax
havens or islands themselves are.
Business activities on and via tax havens are legal. Offshore accounts and
offshore business activities are legal. The problem appears when illegal money
flows get into legal financial (clean or white) flows, so that due to data
secrecy, the mystery about those accounts is created (because the data on
owners and their incomes are protected).
3. Tax havens are places where
money laundering is done
Transactions of the "dirty money" (illegally obtained money that
was realised from illegal incomes: trade in narcotics, people, smuggled diamonds,
financing of terrorism etc.) may enter clean or white financial flows, but
that does not necessarily mean that such money flows go through all of the
4. Tax havens have zero percent
Some countries have zero percent tax rate, whereas some have low or exempted
tax rate which companies pay once they fulfil certain required conditions.
5. Benefits that tax havens
offer are the reasons for business activities in those tax havens
It can't be said that this is the case entirely because of the benefits
that tax havens have to offer. Quite often, the reasons are disadvantages
that exist in countries that are the sources of incomes (hidden taxes,
restrictive regulations, strict bureaucratic formalism etc.)
6. It is important to introduce
monopoly for companies in tax havens because it will enable economic equality
This is with no doubt the biggest myth of all. Some consider that everything
those companies own should be confiscated and given to the poor. It is believed
that then all the wars, terrorism financing, poverty etc. will stop. That
is absolutely incorrect because the money transfer can be done outside the
financial accounts as well. Tax competition existed back in XII century (the
attracting the wool weavers to the northern parts of Italy, Piedmont); it
is just that nowadays it became more dynamic and technologically more sophisticated,
hence the competition will inevitably exist. Tax havens abolishment would
mean monopoly and introduction of some sort of communism. Investors always
search for favourable business climate.
It would be completely insane if the successful companies became a common
enemy to the people. It would be also wrong to assume that those companies
are the source of all injustice in the world.
7. Companies use tax havens in order to pay less taxes
This is not necessarily true. Namely, the companies very often register enterprises
for legal reasons, in order to protect assets or privacy. For example, if
the offshore company's stocks are owned by trusts, court procedure on filing
charges would be several times longer, which would cause the prosecutor to
drop that intention. Very often, those are the reasons that prevail.
8. Tropical tax havens are
It is often the case that those are the countries that necessarily require
development and have to offer benefits in order to attract the investors.
Some of the countries exist entirely on banana export, whereas others develop
in two sectors: tourism and offering offshore services, for example Antigua
in the Caribbean.
9. Tax evasion and tax avoidance
are the same thing
Not true. There is a difference between tax evasion and tax avoidance.
Tax evasion stands for not paying taxes and directly breaking tax regulations
which are clearly and legally defined and determined, while legal tax avoidance
means using every possibility for reduction of tax liability enabled by the
law. That is accomplished through so-called tax planning.
10. Offshore services are used
only by criminals
Not true. Illegal transaction flows can enter legal flows due to existence
of certain level of intransparency and data protection both on the owner and
on incomes and financial transactions which could be infiltrated as ' marketing
services' or other financial speculations.
All in all, people's perception about tax havens is hardly going to change,
and the debates on this topic are not showing any signs of stopping any time