Throughout the world, working people are subjected to taxes by their governments. Some countries are known for taxing higher than others. Countries like the United States and Israel are known for having very friendly tax laws towards entrepreneurs. These countries may be considered tax havens. Wealthy people around the world are known for parking their money into smaller, more obscure countries and states which provide friendly tax benefits. Countries like Luxembourg and states such as Jersey and the Cayman Islands all provide such benefits. In the United States specifically, wealthy people flock to states with no income tax. Such states include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. These states can be considered tax havens within the United States.
What is a tax haven?
A tax haven is a place with very low taxation rates for foreign investors. Often, tax havens also offer a high level of financial secrecy. Typically, countries with high secrecy and high taxation are not considered universally as tax havens. Countries with lower secrecy but also lower taxation are considered tax havens by most. Therefore, a connection can be drawn that tax havens coincide with low rates of taxation.
Bilateral tax agreements:
Bilateral tax agreements are treaties established between countries to avoid double taxation on their citizens’ income. These apply primarily to individuals who work and earn income abroad; naturally, they do not want to be taxed both in their home country and abroad. Countries may enter into bilateral tax agreements to avoid taxing individuals twice. Such treaties may foster stronger political, economic, and diplomatic ties because they are working together to form a tax agreement.
The United States handles tax agreements a bit differently. Contrary to many European nations, the United States requires all citizens and green card holders to pay federal income tax, regardless of where one lives permanently. However, to prevent double taxation, the US has the FEIE (Foreign Earned Income Exclusion), which allows Americans living abroad to deduct earnings from their tax return.
Tax havens in 2021
The CTHI rankings for top tax havens:
- British Virgin Islands
- Cayman Islands
- Bermuda
- Netherlands
- Switzerland
- Luxembourg
- Hong Kong
- Jersey
- Singapore
- United Arab Emirates
These rankings are based on how strongly the country’s tax systems let multinationals shift profit out and pay less tax. It is interesting how many of these are not countries, but territories. 4 out of the top 10 on this list are British Overseas Territories. Additionally, Hong Kong and Singapore were former British colonies. From this, one can deduce that the British were historically very business friendly. The United Arab Emirates was also controlled by the British for a period. Some say this was the British Empire’s way of living on after the Empire was disbanded. When the massive European empires were collapsing, the rich and powerful colonists needed a safe place to park their money. Therefore, the tax havens were born. It is not a coincidence that a strong majority of these tax havens are in formerly British colonies. Apart from having the biggest empire in history, the British Empire was also one of the wealthiest. Their vast territories made it easy to find a place to serve as a tax haven.
Changes in 2021:
- Cayman Islands moved up from 3rd to 2nd in this year’s CTHI rankings. They did this by increasing financial activity hosted from multinational corporations by almost 15%. They also increased their global market share in enabling profit shifting.
- The United Arab Emirates entered the top 10 list for the first time following over $218 billion in foreign direct investment through the Netherlands into the economy. The country has become the unofficial financial capital of the Middle East and of the Arab world. Substantial increases in foreign investment, friendly business laws, and great national safety all encourage investment into the UAE.
