What is a 'Tax Haven'

A tax haven is a 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 require residency or business presence for individuals and businesses to benefit from their tax policies. Due to the globalization of business operations, an increasing number of U.S. corporations, including Microsoft, Apple and Alphabet, are keeping cash in offshore tax havens to minimize corporate taxes.

BREAKING DOWN 'Tax Haven'

Tax haven status benefits the host country as well as the companies and individuals maintaining accounts in them. Tax haven countries benefit by drawing capital to their banks and financial institutions, which can form the foundation of a thriving financial sector. Individuals and corporations benefit through tax savings resulting from tax rates ranging from zero to the low single digits versus relatively high taxes in their countries of citizenship or domicile.

The list of tax haven countries includes Andorra, the Bahamas, Belize, Bermuda, the British Virgin Islands, the Cayman Islands, the Channel Islands, the Cook Islands, Hong Kong, The Isle of Man, Mauritius, Lichtenstein, Monaco, Panama, and St. Kitts, and Nevis.

U.S. Corporations and Tax Havens

The Tax Cuts and Jobs Act, which passed in December 2017 set the effective corporate rate of U.S. taxes at 21%. Rather than repatriating revenues and earnings from offshore operations, companies including Apple, Microsoft, Alphabet, Cisco, and Oracle maintain billions of dollars in foreign tax haven accounts with tax rates in the low single digits. 

The circumstances of this paradigm make it less expensive for U.S.-based companies to borrow funds for share buy-backs, special dividends, and acquisitions than to repatriate and utilize the cash on their balance sheets. For example, rather than use its $100 billion in cash holdings and pay $9 billion in corporate taxes for repatriation, Microsoft opted for debt financing to fund its all-cash acquisition of LinkedIn for $26.2 billion in June 2016.

Pressuring Tax Havens

To maximize their tax receipts, foreign governments maintain relatively constant pressure on tax havens to release information regarding their citizens’ offshore accounts. For the efforts to succeed, however, countries trying to get tax havens to change their ways usually need financial leverage in some form as the advantages of capital inflows seeking tax relief typically outweigh the benefits that might be received due to tax compliance.

For example, the Cyprus’ financial sector built on the country’s tax haven status collapsed in 2013. The European Commission, European Central Bank, and International Monetary Fund predicted the $11.8 billion bailout on the country’s agreement for compliance with tax reporting. In addition to increasing its corporate tax rate, Cyprus agreed to join the Automatic Exchange of Financial Information in Tax Matters program by 2017. Participating countries automatically transmit tax-related banking information of noncitizen depositors to their countries of citizenship to facilitate taxation of income, including earnings, interest, dividends and royalties.

RELATED TERMS
  1. Effective Tax Rate

    The effective tax rate is the average rate at which an individual ...
  2. Tax Rate

    A tax rate is the percentage at which an individual or corporation ...
  3. Tax Base

    A tax base is the amount of assets or income that can be taxed.
  4. IRS Publication 514

    A document published by the Internal Revenue Service that provides ...
  5. Federal Income Tax

    A federal income tax is levied by the United States Internal ...
  6. Direct Tax

    A direct tax is a tax paid directly by an individual or organization. ...
Related Articles
  1. Taxes

    3 Ways Tax Haven Governments Make Money

    If the governments of tax haven countries impose little, or no, income taxes, how exactly do these nations generate revenue?
  2. Taxes

    The Top 10 European Tax Havens

    While the popular stereotype of a tax haven is a Caribbean island, these countries in Europe serve as attractive places for foreign individuals and companies to store funds.
  3. Taxes

    Switzerland's Declining Tax Haven Appeal

    Switzerland's tax haven allure is being threatened by efforts by the US and other governments to make Swiss banks give up their much-vaunted secrecy.
  4. Taxes

    Taxes: Who Pays And How Much?

    When it comes to taxes, the debate is endless on who pays what, especially in Congress. With no new initiatives in sight, let's take a look at who is paying now.
  5. Taxes

    Why America's Taxes Are Too Low

    The solution to America's economic woes may not be in lowering taxes further, but may, in fact, lie in increasing them.
  6. Insights

    A Concise History Of Changes In U.S. Tax Law

    We look at how U.S. taxes have changed since their inception.
  7. Taxes

    Do U.S. High Corporate Tax Rates Hurt Americans?

    The United States has the highest corporate tax rate of the 34 developed, free-market nations that make up the Organization for Economic Cooperation and Development (OECD).
  8. Insights

    How Fortune 500 Companies Avoid Paying Income Tax

    President Donald Trump is not alone in not paying taxes.
  9. Taxes

    Which Countries Have the Highest Taxes on High Incomes?

    These countries charge the highest taxes on high incomes.
  10. Taxes

    5 Countries With Low Taxes

    These countries manage to keep their overall tax levels in check, and some of them have done well because of it.
RELATED FAQS
  1. Is Cyprus considered a tax haven?

    Explore the factors that resulted in Cyprus abandoning its status as a tax haven, including the terms for the bailout of ... Read Answer >>
  2. Why are the Cayman Islands considered a tax haven?

    Find out why the Cayman Islands is considered a tax haven and why this location is so popular among those looking to reduce ... Read Answer >>
  3. Why is Andorra considered a tax haven?

    Find out why Andorra is considered a tax haven and how developments have lessened its appeal due to increased taxation and ... Read Answer >>
  4. Why is Luxembourg considered a tax haven?

    Learn about Luxembourg's role as a tax haven for large corporations around the world. Discover how the country's tax laws ... Read Answer >>
Hot Definitions
  1. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  2. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  3. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  4. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  5. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  6. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
Trading Center