Tax havens

 

The tax havens controversy

Tax havens have been the subject of controversy and political confrontation between nations practically since political borders have existed.

Obviously, no country is interested in the fact that the taxes it may collect in its territory can be transferred to a different one.

At this time when the measures to save the economic recession caused by COVID are going through an increase in the fiscal pressure in some countries, this issue is coming up again with force and controversy.

What is a tax haven

But what is a tax haven? Are we really clear what this term means? Is any operation or activity illegal in tax havens?

In the first place, we must be clear that a tax haven is not only a country with low or no tax burden. Or rather, not all countries with a low tax burden are necessarily tax havens.

We are in a global world like the current one, in which practically anyone can have economic or financial interests in any country in the world.

That is why the different nations try to reach agreements among themselves to determine to which tax agency in which country the taxes generated by the income that a citizen of one nation may have in another should be paid. They are what is called double tax treaties.

Double taxation agreements and information exchange treaties

These double taxation treaties, in addition to determining which country the taxes belong to in these circumstances, establish mechanisms for the exchange of relevant information for tax purposes.

Well, this is the really determining factor to qualify a country as a tax haven or not.

The general trend is that, from the moment that two countries have a double taxation treaty or simply a tax information exchange agreement, neither will be a tax haven for another, regardless of the differences in tax pressure between them.

To put it in some way, it is recognized that the other country has a legal tax regime and the tax rate is not assessed.

At the European level, for example, countries that were traditionally tax havens such as Andorra, Liechtenstein, Luxembourg, etc., are no longer so for the main economies of the old continent, usually due to agreements with the European Union, although their tax burden continues being much lower than in neighboring countries.

No one is aware that many times the decision to remove a specific country from the list of tax havens has more political than tax component, such as the cases of Luxembourg and its membership of the EU in addition to its ties with Belgium and the Netherlands, the German influence in Liechtenstein, the case of Hong Kong and its membership in China, etc.

And is it illegal to reside or operate in these countries?

Actually, the fact that a country or territory is considered a tax haven does not necessarily mean that any economic operation or any attempt to establish itself in them is illegal.

So to speak, it means that they are “suspicious” operations and normally the countries that may be considered harmed by these operations increase their controls or establish tougher legal requirements to validate the legality of the operation than if it were carried out with countries with which they were have tax collaboration agreements.

Normally the authorities of each country are especially rigorous when their citizens with great fortunes establish their residence in tax havens, since these changes of residence are often not real and only seek better (or no) tax treatment.