The term “tax haven” is a bit of a misnomer, for the places that are considered tax havens don’t just offer an escape from taxes. They also offer secrecy and a place for U.S. citizens and corporations to keep their money far from the government’s grasp. What is a tax haven, and how does the IRS think of them?
The IRS actively fights against tax havens via their The Abusive Tax Scheme Program, which actively attempts to prevent abusive behavior by would-be taxpayers. Avoiding paying taxes via hiding money in tax havens is a white-collar crime.
What Is A Tax Haven?
A tax haven is any country, state, or territory that offers foreign individuals and businesses with little or no tax liability. It usually refers only to countries that are politically and economically stable. Tax havens fall into one of three categories:
The current tax rules underpinning practically every tax code around the globe are derived from a “bricks and mortar” or manufacturing based economy. What this means is the underlying concepts were developed when all world economies were based on building physical products that were bought and sold (think industrial revolution). For example, the tax treaty phrase “permanent establishment” was actually developed by League of Nation’s negotiators during their preliminary discussions to develop a working tax treaty framework. Compare this to today’s digital economy where “products” are actually multiple lines of computer code that exist in cyber-space (or a trademark or patented item) or where a “store front” (the old “permanent establishment”) is in fact a web site located halfway around the globe on a server in a tax haven. This mismatch between the underlying concepts of the old Read More
On July 13, the OECD issued a new paper titled, Action Plan on Base Erosion and Profit Shifting. The purpose of this paper was to outline the OECD’s new round of concerns regarding tax havens and their use in international tax planning. It is important to understand first what is behind the issuing of this new report:
Over time, the current rules have also revealed weaknesses that create opportunities for BEPS. BEPS relates chiefly to instances where the interaction of different tax rules leads to double non-taxation or less than single taxation.
One of the central purposes of the OECD’s original tax treaty was to divide taxing rights and Read More
As discussed in Part I, “What Is A Tax Haven“, the OECD originally went after tax havens in a 1998 document titled, Harmful Tax Competition, An Emerging Global Issue. They defined a tax haven as a low or no tax jurisdiction that employs secrecy and does not exchange information with other taxing officials. To counter-act the effect of havens, the OECD proposed a number of options. There are several that stand out.
Recommendation concerning Controlled Foreign Corporations (CFC) or equivalent rules: that countries that do not have such rules consider adopting them and that countries that have such rules ensure that they apply in a fashion consistent with the desirability of curbing harmful tax practices. Read More