Tax havens are countries with zero or very low tax rates, and they are known for being used by global companies and hedge funds. There are various kinds of tax haven countries in the world, and thus we are going to discuss their differences and characteristics in this article.
The writer does not have any qualification for laws or accounting in any country, so please read and understand disclaimers to read this article.
Tax haven countries with no tax
The first category we discuss is tax haven countries with no tax such as Cayman Islands, British Virgin Islands and Bermuda. These countries are usually very small and have few significant industries or resources in themselves, and therefore they try to attract foreign money by cutting tax rates.
In a global business, these countries are used to register a company that does not need to employ a number of workers or to own infrastructures. The typical example is a fund.
When you start a hedge fund, it is usual to register two companies; one is a fund itself, and the other is a managing company of the fund. Hedge fund managers, analysts and properties such as an office are supposed to belong to the latter.
Therefore, the location of this kind of company can be anywhere as long as there is no tax, and the country has necessary and sufficient regulations and a reliable legal system. Each tax haven has different disclosure policies, different auditing and different rights of shareholders, and so countries are chosen according to the purpose of the company.
Tax haven countries with low tax rates
The next category we discuss is tax haven countries with low tax rates, good human resources and dependable infrastructures. This includes Switzerland, Ireland and Singapore.
These countries are chosen when you register a company under which you need to hire a certain number of high-skilled workers although as long as there are those people, the location does not matter. They are also chosen when dependable infrastructures are required.
For instance, Google’s European headquarter for engineering is in Zurich, Switzerland. Many European programmers and engineers are working there. On the other hand, their sales headquarter in Europe is in Dublin, Ireland. Switzerland is located next to France and Germany, for which it can easily attract educated workers. Ireland as an EU member provides Irish companies with easy access to the European market.
Google and Amazon also locate their data centres in Ireland. This would be because the infrastructure in Ireland is trusted, as it is not possible to locate a data centre in a country where a power outage often happens.
It is not only global companies that like these countries. They would also be a good choice when entrepreneurs think where to start a startup. They would seek a country that has low corporate and capital gains tax rates, has high-skilled workers and is comfortable for them to live. For this purpose, Switzerland has a huge advantage.
Switzerland has a very clean environment, punctual public transport, low crime rates, intellectual entertainments, such as concerts and operas, and societies of intelligent people to socialize with. These factors are very important to attract global companies and businesspeople.
Countries that have markets
The last category we discuss is not tax havens but countries that could be markets for global companies.
When global companies that utilize tax havens would like to join a market of a new country, what would they do? They first try to avoid registering a company in the country.
As they already have a company in a tax haven country, there would not be an incentive to locate their profit in a new company with higher tax rates. Therefore, it is better if they can be engaged in a business in the new country without registering a new company there.
However, if they need to hire people or own an office for their business in the new country, they might be legally considered as a resident there, in which case they need to pay taxes. In this case, it could be more convenient for them to register a new company in the new country.
Global businesses choose among the three categories of countries for registration of a company depending on the situation. With this viewpoint, we can more clearly understand how a corporate tax cut would function for competitiveness of global companies or how countries like Switzerland keep their competitiveness to attract foreign companies.
Whilst large countries exert a political pressure upon tax haven countries to compete, tax havens surely have a downward pressure on large countries’ tax rates. Large countries also attempt to earn more taxes from global companies such as Google and Amazon. Taxation is a chaos in the global economy.