Bulletin of the Transilvania University of Braşov Series V: Economic Sciences • Vol. 7 (56) No. 2 - 2014 FEATURES AND ADVANTAGES OF USING TAX 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 haven, 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 taxes. 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 tax evasion, type of company, the international business tax avoidance 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 customs 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