What is an Offshore Tax Haven?

Published on 21 November 2006
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When asked to define or explain ‘what is an offshore tax haven’ people often describe some form of island nation, probably in the Caribbean or some similar far flung and exotic place that is keen to launder the multimillions of wealthy business moguls as a means to support the local economy…but this is far from an accurate description!

In order to accurately define an offshore tax haven and present its function it is important to examine the defining factors that all tax havens or offshore financial centres have in common…

An offshore tax haven is a nation or jurisdiction competing in an open market place for the business of ‘mobile capital’ by using attractive taxation regimes as a method to draw in business.  You can have tax havens that charge virtually no tax at all or which just charge annual administrative sums of money for companies using its shores as a base for their operations, and you can have nations that simply charge a lower rate of taxation than competitor havens…i.e., they ‘under cut’ similarly attractive countries.

Another term used to describe an ‘offshore tax haven’ is an ‘offshore financial centre’ – and the term ‘offshore’ in this context means moving funds or capital outside the jurisdiction of the taxpayer’s residence for international taxation planning purposes…but are tax havens and offshore financial centres one and the same?

There is a fairly indistinct dissimilarity between the two, but maybe if we focus on London in the UK or the state of Delaware in America you can recognise two examples of offshore financial centre - but one would hardly describe London or Delaware as tax havens - so, maybe you do need the Caribbean Sea and sunshine for people to think of your nation as a tax haven?! 

More likely, as in the case of London in the UK which is an incredibly important and active offshore financial centre, you will be defined as an offshore financial centre rather than a tax haven if you have different taxation rules for domestic and offshore transactions and you are a responsible jurisdiction with at least one of the following attractions: -

An attractive taxation regime
An attractive and secure legal environment
An attractive and non-restrictive regulatory environment

Tax havens on the other hand tend to offer mobile capital transactions low or no taxation burden together with higher levels of transaction privacy and secrecy of operation as well as the provision for offshore banking services.

Although these definitions and descriptions are not all encompassing, they should give the basis upon which an individual can make initial decisions about the best taxation friendly jurisdictions in which they or their company should operate and those who are interested in learning more about the principles of international taxation should consider the title of the same name that has recently been published by Tottel and which we have reviewed here: - http://www.shelteroffshore.com/index.php/investment/more/principals_of_international_taxation/

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