Bulletin of the Transilvania University of Braşov Series V: Economic Sciences • Vol. 7 (56) No. 2 - 2014

FEATURES AND ADVANTAGES OF USING HAVENS

Sorina BOTIŞ1

Abstract: The appearance of tax havens is tied to illicit money laundering process, evolving later under various illegal forms and currently they operate under the protective umbrella of beneficial jurisdictions belonging to some political protected States worldwide. For them to be capable of functioning, special conditions to attract investors have been created. The purpose of this study is to highlight the main features of the tax havens, their operating mechanism and peculiarities of their tax laws, offshore entities regime. The article concludes on the reason of the occurrence, the existence and proliferation of tax havens, as well as legislative efforts that are submitted worldwide to eradicate them in the perspective of future global economic and financial developments.

Key words: , tax system, taxation, offshore companies.

1. Introduction of the United States of America(IRSI in the 1981, by the Gordon Committee which In the general context of globalization of investigated the use of tax havens by the the economy, a significant obstacle to U.S. taxpayers, a tax haven is any country Governments concerned with the increase which is regarded as such and which wants in tax revenues, is the tendency of the this”.[5] transferability of the results arising from Roger Brunet defines tax havens as the productive activity by the contributors, follows: ”It is called tax haven a territory in areas with low taxation, known as tax where individuals and companies have the havens, the phrase that tends to be replaced sensation that are less taxed than by the name of international financial somewhere else”.[2] center or a financial haven. Tax havens are those States that offer a Although associated with terms such as variety of tax privileges to offshore “immoral”and “ïllegal”, the existence of companies registered in their territory. Any international tax havens, had in recent offshore company can operate in favourable decades, the effect of a progressive growth tax conditions, provided registration in a tax of the economic activity, more than two- haven, the company must conduct business thirds of the international broad money outside of the record. being performed in their shadow. Tax havens are those Sates that offer a There are many definitions for the tax variety of tax privileges offshore haven term: according to the report to the companies registered in their territory. Any International Service for Gordon Revenue offshore company can work in favourable

1 Dept. of Finance, Accounting and Economic Theory, Transilvania University of Braşov. 182 Bulletin of the Transilvania University of Braşov • Series V • Vol. 7 (56) No. 2 - 2014 tax conditions, provided registration in a Worldwide there are currently about 68 tax haven and the company must conduct financial havens. Some have dissapeared, business outside of the registration such as Lebanon, but some of them have territory. subsequently reborn, others like The operation of these companies in the Switzerland, are disappearing or even traditional tax havens, is aided by the failed as it happened to Cyprus. At the legislative mechanism, which means in same time, in certain areas there may that States the law provides tax appear new havens. These tax havens are advantageous conditions for offshore some excellent hot topics, because they are companies. You have highlighted the fact known and used by tourists and some that, through the non-payment of tax, the businessmen. For example, famous for company does not violate the law, but banking secrecy are Austria, Andorra, under the legislation is partially or fully Monaco, Gibraltar. They also are havens exempted from payment of . vacation: for example the Caribbean area The lightness of the legislation of those holds a multitude of Islands with States or territories, encouraged foreign independent status, which have a taxation investors to set up companies in their system more permissive than allowed territories. In these areas, operation of elsewhere. companies, the security of foreign According to statistics of the investment and of information are Organization of Economic Cooperation guaranteed by the law. and Development (OECD), through The first law relating to the international financial havens were conducted the companies, was adopted in 1982 by the businesses of huge size. Approximately Legislative Assembly of the British Virgin 65% of the total international monetary Islands, to make a competitive legislation expansion was run under the umbrella of relating to offshore companies registered such unimaginable havens. Thus, the large in this area.[6] The law was implemented corporations in the U.S. have moved in the in 1984 and allowed the establishment of 1980s to tax havens, under various forms offshore companies exempt from taxes, of major foreign investment, about 22 demanding minimal requirements for billion U.S. dollars, while other Western conformity, providing full confidentiality European corporations held financial of the details.[1] The British Virgin Islands resources of about 160 billion U.S. dollars. have the most successful legislative system All banking transactions conducted that supports the offshore companies. Also through tax havens have been evaluated at here, in 2005, came into force the New Act the beginning of the 21st century at about concerning the establishment of offshore 1,600 billion U.S. dollars. According to companies, representing a continuing studies conducted by economists in the development of the existing legislation U.S., 25 years ago it ran through tax concerning the operation of these havens 5% of the world economy, companies. This Act removes any compared to 50% today.[4] distinction between a local company and Thus, tax havens represent a highly used an offshore entity, thus promoting a single way to making international , type of company, the international business schemes with privileged tax company from the British Virgin Island regime offered by the developed countries. being exempted from the taxes payment At the origin of privileged tax regimes are and still enjoying the benefits of previous contradictory economic interests. Those legislation. countries that encourage them, obtain S. BOTIŞ: Features and Advantages of using Tax Havens 183 collateral economic benefits, even though Caribbean are small, economically weak tax revenues are reduced, and those who countries, with generally poor inhabitants. reject and limit them, are trying in fact, to That country, can get a considerable protect their tax revenues. income, with a lower cost, through the collection of duties, taxes for 2. Characteristics and classification of permits and fees. tax havens All tax haven countries provide some protection to bank or commercial Starting from Roger Brunet definition of information. In the case of a legal inquiry tax havens, there can be highlighted a from a foreign Government, most countries number of features, such as: will not protect this information when the - reduced taxation investigation is made under treaties. - protection of information Otherwise, tax havens refuse to disclose - encouraging the development of the offered banking secrecy, although, it is banking sector a violation of the laws of another country. - modern media holding The distinction is made by exaggerated - the absence of currency control restriction rules on classified bank - the promotional advertising information, that may encourage tax - favorable tax treaties offences have been carried out, as well as Some of the countries considered tax legislation that pertains to the protections havens, have charges only for certain on of personal privacy, but that in some cases income or only specific taxes, much allow legitimate research. reduced compared to those applied in the The security level and the size of the countries of origin of those companies that measures that limit access, varies from one use financial havens. Thus, they make country to another. Thus, some countries available to customers all the tax benefits make a distinction between tax evasion and which they cannot obtain in their residence other criminal activities, cooperating when countries. By acquiring the country’s criminal cases are being investigated, other residence considered as a tax haven, or by than fees, but instead they not cooperate installing the registered office of the when there is question of tax evasion. company or other legal entity, they enjoy So, the fact of having a secret safe, that country’s own taxation, such revenues protected by law, with regard to financial and profits will be taxed far less than in and commercial operations in these their countries of origin. In conclusion, the countries by persons or corporations tax haven countries, through this reduced participating in economic operations, also taxation, ensure their capital resources contributes to ensuring sources of capital. used in economic expansion. The banking business has tended to play For example, the Government of the a more important role in the economy of Cayman Islands, Bermuda, Bahamas and fiscal paradise, compared with the other not tax income or personal wealth- in economy of country which is not a these cases, the absence of the income financial haven. taxes, is part of the nearby policy of the Most countries financial havens are pursuing banks and the economic-financial policies to support the Bank’s activities outside corporation from abroad, and there are the State’s borders. This achieved through the cases in which that country has considered implementation of a distinction between the that there is no need to apply a revenue tax. banking business of the inhabitants of the The majority of financial havens in the country and that of foreigners. 184 Bulletin of the Transilvania University of Braşov • Series V • Vol. 7 (56) No. 2 - 2014

In general, the activity of foreign who carries out the majority of activities companies is not subject to reserve funds beyond paradise, is generally regarded as a requirements, it is taxed differently (if will person with a foreign regime in terms of be taxable) and will not be exposed to exchange controls. Thus, in the tax haven, scrutiny regarding currency conversions or a foreign can register a company in order other economic activities. In addition, this to carry out activities in other jurisdictions. activity enjoys the guarantees relative to As long as a company’s activity is carried the maintenance of banking secrecy. out in the currency of other countries and Tax havens, are thriving largely thanks to do not execute financial transactions in the presence of foreign banks. One of the financial paradise, the company is not important requirements of an effective controlled about the exchange transactions banking activity is an optimal relationship made in the tax haven. between the volume of foreign goods, in the One of the advantages of tax havens is form of bank deposits and the total foreign the absence of the verification for trade volume of the country in question. both nonresidents and transactions in Capital deposits in foreign banks in foreign currencies as well. financial havens are much higher These countries see in financial activity a compared to foreign bank accounts located relatively stable source of income and seek in the countries that are not financial to promote it. A promotional campaign for havens. the paradise country is achieved through Ensuring the necessary capital resources the linear aggression which means the for economic growth and maintaining the adaptation of the legal framework in order social local balance is achieved by the to attract financial resources. existance of a developed banking system Financial havens are classified according that allows quick and easy operations to their importance, in main financial outside the borders without restrictions. havens and secondary financial havens.[1] As a general rule, the citizens are not As we can see in Table 1, the main seven subject to the controls on the currency, but financial havens and their characteristics this rule is not available for the inhabitants are: of that country. A company established in a tax haven and whose owner is a foreigner

The countries considered main tax havens and their characteristics Table 1 Crt. Features State nr. 1. The income and capital gains are not taxed. The islands of Bermude, They are known as ”zero havens” or ”pure Bahamas, Bahrain, Nauru, havens’. Cayman, Turks, Caicos, Saint- Vincent, The Republic of Vanuatu and Monaco; 2. The tax rates have a low value as they are The British Virgin Islands, approved by the state or as a result of the Liechtenstein, Switzerland, application of the quota reductions, due to the Neterlands Antilles, Man implementation of tax agreements between Islands, Guernesey and Jersey different states concerning ; Islands, The Republic of Ireland; S. BOTIŞ: Features and Advantages of using Tax Havens 185

Crt. Features State nr. 3. The taxation of income or benefits is determined Liberia, Costa Rica, The locally base. The taxpayers from these states are Philippines, Venezuela, exempt from taxation of profits made by trading Malaysia, Panama; across borders; 4. Countries with preferential treatment for Hungary, Austria, Netherlands, offshore and holding companies; Luxemburg, Thailand, Singapore; 5. Offers tax exemptions for industries that have Ireland for the companies been made for the development of ; created before 1 January 1981, Madeira; 6. Provides financial benefits for international The Islands of Bahamas, business companies, that are focused on Antigua, Bermude, The British investment or not, but instead are classified as Virgin Islands, Montserrat and offshore finance companies with certain Nevis Islands in the privileges; Caraibbean; 7. Provides specific tax advantages to other Antigua, Island-British banking companies or other financial territory in the Caraibbean, institutions with offshore activities; Anguilla, Grenada, Barbados Islands and Jamaica; Source: the table is created by the author using dates from Finante.ideaplussolutions.net/.../51725386828_BUZINESCU_RO... [accessed September 12, 2014]

Secondary financial havens include the or providing exemptions from taxes for small countries and the industrialized the activities carried out by certain countries, where certain is companies or set very low odds; high, but where at the same time there are - powerful industrialized states which legislative provisions which have have the possibility of becoming attraction particular character, being used by for certain economic sectors. These are: investors in certain tax planning Italy, Austria, Belgium, France. These operations. powerful industrialised countries tend to From the small territorial class, as well grant reliefs appealing, offering tax as tax havens, the following are relevant exemptions or tax reductions, in order to examples: expand exports and attract foreign capital. - small states such as the Vatican, French Polynesia, the Republic of Malta, 3. Elements of taxation in Cyprus Maurice Islands, Tonga Inlands, Haiti, Taiwan, Jamaica, the British Virgin Cyprus became a tax haven in 1975 by Islands. They have a reduced area and Act No.37 that regulated the offshore have a numerically small population, entities regime, allowing the country to without having to carry out all the become an attractive tax haven. According features of the main tax havens. to its, offshore entities are joint stock Therefore, they often do not practice companies or individuals, belonging any taxation or not tax all income entirely to foreigners holding Cypriot obtained by individuals or companies, resource revenue. In relation to this 186 Bulletin of the Transilvania University of Braşov • Series V • Vol. 7 (56) No. 2 - 2014 definition, it differentiates the following foreign trade companies (Foreign Sales circumstances:[3] Corporation), Cyprus was on the list of - If the unit is directed and controlled countries where F.S.C. can be created from outside Cyprus, it is not subject to through application of the US laws in force income taxation in Cyprus; since 1985. Cyprus offered to FSC a - If the entity is ruled and controlled in reduction of 90% of the , an Cyprus, it is subject to a tax with a lower exemption from 90% on the income fee of 10% of the common law that is foreigners from these companies. in most cases a fee of 4.25%; Stimulating investment in Cyprus is The same law regulates the status of the made by into force of various decisions, offshore companies and foreign branches. whose objective is to stimulate the growth According to it, a branch is considered an and expansion of its economy, to facilitate offshore company if it belongs entirely to the exports. For example, a temporary tax foreigners and in terms of fiscal if the exemption for 10 years is granted to company that made the branch registration foreign investors in the free zone. is controlled from abroad it is not subject The fall of the Cypriot banking system is to taxation and if the company is managed due to the wrong election of Laiki Bank and controlled in Cyprus, it is subject to and Bank of Cyprus made by the managers the tax on benefits with a rate of 4.25%; and by the European System of Societies people offshore(offshore Supervision and Regulation. According to partnership) are not taxed either on behalf official documents, have the following or in the name of members of society. The result:[6] conditions to benefit from this exemption - In July 2010, Laiki Bank and Bank of are as follows: all associates must be Cyprus pass the stress test carried out by foreigners and whether they are offshore the EU, with 582 million euros capital partnerships, business object must be surplus, to the satisfaction of the Cyprus exercised outside of Cyprus. Central Bank; In terms of the tax regime of offshore - At the end of 2010, they were about 6 banking units(OBU), they are exempt from billion euros invested in bonds issued by all taxes in Cyprus, if they are not Greek banks, accounting for one third of controlled from Cyprus, as well as all GDP achieved; offshore branches of foreign companies. If - Also at the end of 2010, Laiki Bank they are headed and controlled from pays dividends for 67 million euros and the Cyprus, are subject to an income tax Bank of Cyprus pays dividends for 27 benefit of 4.25 percent in the country and million euros plus another 47 million in must pay an annual fee of $15,000. 2011. Through these payments has been Foreign employees of an offshore transferred an important part of the capital; company have discounts or tax exemptions - In 2011 were made other stress tests to even the companies operating in the free those banks which have been passed , zone of Larnaca, they are subject to and a week after that, European leaders personal income tax at the rate of 50% of have agreed a new deal to rescue Greece, the resulting from the common law. which consisted in debts restructuring; Foreign employees who work outside of - In August 2011 Laiki Bank expands its Cyprus and receive wages in Cyprus, are business in Greece with mortgages, hoping taxed at a rate equal to one tenth of the to achieve a positive asset portofolio, but common tax. after three month, the Bank’s management Concerning the tax facilities of the begin to reduce the Greek sovereign bonds; S. BOTIŞ: Features and Advantages of using Tax Havens 187

- In November 2011, some Bank Laiki In March 2013, Cyprus received a $13 customers begin to withdraw their deposits billion financial rescue, from the UE, as a due to the Greek crisis; support for its banking sector’s massive - In 2011 the banks experienced a loss restructuring. In this way, its role as an because of Greek debts. Bank of Cyprus international is ending. has reduced the lending portofolio for Greece. As a result of economic analyses 4. Conclusions have been classified as non-performing 10% of total loans; The appearance of tax havens is tied to - The stress tests carried out in illicit money laundering process, evolving December 2011, revealed a capital deficit later under various illegal forms, and of 2 billion euros for the Laiki Bank and currently, they operate under the protective 1.6 billion euros for the Bank of Cyprus; umbrella of beneficial jurisdictions - The Cypriot Government has called for belonging to some political protected States international aid because it cannot cover worldwide. For them to be capable of such losses; functioning have been created special In conclusion, because of Greece’s debt conditions to attract investors. rescheduling, the Cyprus banks have Due to the large number of tax obligations realized the historical loss of 4.3 billion imposed on taxpayers, they’re trying to find euros. ways to avoid or reduce tax liabilities. The The European Union and the main concern of businesses is to mitigate the International Monetary Fund pledged an impact of high taxes and controls, and this aid of 10 billion euro capital infusion for justifies the use of tax havens as a refuge the strengthening and restructuring of the from the increasingly high taxes. The banking system, highlighting that the objective of use of tax havens is obvious, the Cyprus problem solving will be achieved maximum gain with the minimum state through long-term banking reforms. Thus, payments. Any individual will seek Cyprus requires the acceptance of the loss countries, where the tax is minimal. of 80% for deposits holders of over The development of offshore companies is 100,000 euros al Laiki Bank and growing ever larger and this is due to the approximately 60% for Bank of Cyprus. At development of tax havens. The offshore the same time, the Cypriot State had phenomenon gets widespread at the accepted the liquidation of Laiki Bank, international level, and the access to them is which in Romania was represented by more easily achieved. The establishment of Marfin Bank. offshore companies is in a continuous The European Commission has proposed development. The significant of the offshore that the depositors of the bankrupt banks world is highlighted by the fact that most which are not insured, be obliged to major international banks and bank branches bearing the losses, but just after 2018. For were created and are present in offshore this proposal to be applied, must be obtain financial centers, the largest investment the approval from the European foundations in the world and trust companies Parliament. also operate through the offshore According to the assessments made by subsidiaries. At the international level there the Moody’s rating agency, whether is a struggle against tax havens development, Cyprus would no longer be able to pay its promoted in particular by the developed debts, this cause looses to Russian banks countries. Tax evasion was, is and will be a and companies of over $50 billion. phenomenon present everywhere in social 188 Bulletin of the Transilvania University of Braşov • Series V • Vol. 7 (56) No. 2 - 2014 and economic area as well. Its development less willing to implement and enforce this is alarming because of the absence of the recommendation. control measures, that can affect the stability In fact, the policy makers at European of the world economy, already globalized. level and worldwide, “search” legal The fight against evasion is especially modalities for the abolition of tax havens and necessary, firstly must be adopted an tax evasion while owners of big companies affective system and after that, a rigorous that benefit from the advantages of these fiscal control and a tax education of the havens are part of the same political class, citizens in the same time. who lived together during the years and have Although official statement and positions sought not to disturb each other. taken by the political leaders, financial and tax havens continues to be the most References hospitable territories for money laundering and practicing the most sophisticated 1. Beauchamp, A.: Guide mondial des combinations for hiding large scale fraud. Paradis Fiscaux. Paris. Bernard The credibility and strength of the Grasset, 1995. attraction of these territories is given by the 2. Brunet, R.: Zones franches aux Paradis fact that in those areas there are branches of Fiscaux. Paris. Fayard-Reclus ed., 1986. the great majority of major European and 3. Clifford, Z.: The Evolution of the American banks, the biggest law firms are up Shadow Economy in Transition to date with every dollar or euro going Countries: Consequences for Economic through their clients’ accounts, and large Growth and Donor Assistance. In CAER companies and audit firms control the II Discussion Paper (September 2000) conduct of such operations, which they No.83, p. 6. consider be perfectly legal but refuse to 4. Marshall, J. L.: Practical International comment on the questionable business of the Tax Planning. New York. Practicing major global corporations. Law Institute, 1986. Regarding the attitude of international 5. *** The Gordon Report, 1981. organizations and the developed economies Available at: against the proposal recommended by the http://www.inspiredlifecenter.org. Transparency International Organization and Accessed: 01-10-2014. approved by the Organization of Economic 6. *** http://worldwideoffshore.com/taxe Cooperation and Development (O.C.D.E), to /british-virgin-islands-7. Accessed: 28- suspend all financial dealings with the 09-2014. uncooperative off-shore centres, both the European Union and the United States are