The What, Where and Why of Corporate Tax Havens

The only two certainties in life are death and taxes — except that some people don’t have to worry about taxes. Around the world, there are a few places that don’t impose corporate taxes on certain companies, saving major corporations billions of dollars every year while starving the world population of much-needed financial support for critical physical and social infrastructure, like roads and schools.

Operating out of a corporate tax haven seems like a brilliant business strategy — but is it one you can use to benefit your business? Read on to learn more about the laws and morals surrounding corporate tax havens.

What Is a Corporate Tax Haven?

A tax haven is any jurisdiction where there is minimal or no tax liability, and corporate tax havens provide the same benefits to businesses in addition to individuals. Contrary to popular belief, you do not need base your operations there to enjoy the advantageous taxation rate; you merely need to register your business with the country whose tax rates you want to benefit from.

Tax havens tend to be small island nations with little or no industry and thus little or no opportunity to collect sufficient taxes from its local population to account for basic government spending. Strategically, these tiny nations decide to offer rock-bottom tax rates as a means of attracting exceedingly wealthy individuals and corporations. In this way, they gain some tax revenues, whereas if they charged a typical corporate tax rate, they would earn nothing. What’s more, tax havens often charge businesses a substantial fee for registration and licensing, and these fees are often repaid on an annual basis. Thus, these small nations have a means of providing their populations social support.

In addition to lower tax rates, tax havens also tend to maintain a lack of transparency and rarely exchange information with other nations. This serves to protect the financial interests of individuals and businesses taking advantage of their helpful tax system.

Where Are Corporate Tax Havens?

There are too many tax havens to list all of them here, but the tax havens most commonly used by corporations include:

Cayman Islands. The Cayman Islands levy no personal income taxes, no corporate taxes, no capital gains taxes, no payroll taxes — and considering that the Cayman Islands effectively hides financial activity from other countries, it is no wonder why this nation tends to be the first-choice destination for the largest and wealthiest corporations in the world.

Bermuda. Another zero-income-tax, zero-corporate-tax nation, Bermuda is a second-choice destination for business leaders looking to hide their financial activity. However, because Bermuda is slightly better connected to other nations, through tourism, business activity on Bermuda is slightly easier to discern.

Netherlands. The Netherlands does have a standing corporate tax rate of about 41 percent, but few major corporations are expected to pay that much. Tax incentives lower that tax rate to close to nothing, encouraging businesses to expand in the Netherlands and stimulate the economy with jobs and services.

Singapore. Though Singapore is often listed among the most expensive places to live, it is one of the cheapest for business operations. The corporate tax rate here is around 21 percent, and there are other useful financial policies, like a lack of withholding taxes and substantial profit shifting.

Ireland. Though Irish officials loudly assert that the nation is not a tax haven, organizations like Oxfam and the International Monetary Fund (IMF) have found that Ireland provides significant tax incentives to major corporations, like Apple.

Why Businesses Shouldn’t Use Tax Havens

A tax haven is an enticing prospect to business leaders tired of trying to budget corporate taxes into their already tight margins. However, there are notable downsides to taking advantage of a tax haven. First, you still need to navigate global tax compliance, as it is unlikely that you will be totally free of all tax liability. What’s more, the money you keep in an offshore account often is not factored into your business’s cash flow, which can interfere with your ability to provide accurate financial models.

Secondly, and more importantly, utilizing a tax haven could be extremely bad for your corporate brand. Tax havens cost governments between $500 billion and $600 billion in tax revenues every year, which means businesses that use tax havens are depriving consumers of social services they desperately need. Companies that are exposed to use offshore accounts tend to experience backlash from consumers, who recognize that their governments are being deprived of their due. Unless you want to take responsibility for providing your consumers with safe roads, affordable housing, education, foster care and more, you should commit to paying corporate taxes.