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 rates ranging from zero to the low single digits versus higher 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, Cyprus’s 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 non-citizen depositors to their countries of citizenship to facilitate taxation of income, including earnings, interest, dividends and royalties.