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The ACFE tells us that countries in virtually all parts of the world, but especially those located in the Caribbean and South Pacific, are commonly regarded as tax havens. A tax haven is a country whose laws, regulations, traditions, and treaty arrangements make it possible for a person to reduce his or her overall tax burden. Secrecy is basically supplied by such countries in two ways.
1) Domestic bank secrecy laws: Laws which bar insight by outsiders;2) Blocking statutes: Statutes which effectively prevent the disclosure, copying, inspection, or removal of documents located in the host country in compliance with orders issued by foreign authorities.
Moreover, in many countries, legal depositions may not be taken on national territory in connection with judicial proceedings being undertaken abroad. Many countries, such as the United Kingdom, France, South Africa, Germany, Australia, Norway, and Canada have comprehensive statutes to guard their sovereignty from the extraterritorial reach of foreign authorities. Although these countries are not generally thought of as tax havens they have laws which can be used by the asset hider. In addition to asset hiding, some foreign countries have a legal, banking, or economic climate that provides an excellent site for laundering money. Historically, places such as Panama, the Cayman Islands, the Bahamas, Switzerland, and the Netherlands Antilles have been associated with hidden bank accounts, fictitious corporations, and money laundering.
The most popular off-shore jurisdictions in the news recently are:
Countries like Panama with relatively small, open economies have often embraced the financial secrecy business as a way of promoting economic development. With some notable exceptions, these countries are geographically isolated with a narrow production concentrated on a few major commodities, usually for export. This tends to make them vulnerable to adverse climatic conditions and international market development. It also limits their ability to produce an adequate domestic market, invest in an infrastructure, attract foreign direct investment, and gain access to a diversified mix of importers and exporters.
It’s important for CFE’s to understand the general concept of a financial center with regard to financial havens. Financial centers are of two types:
–A functional center is defined as country where transactions are actually undertaken and the value added is created in the design and delivery of financial services. Examples of functional centers include New York, London, Singapore, Bahrain, and Hong Kong.
–A booking center is defined as a country where transactions are recorded but the value added involved is actually created elsewhere. Examples in this category include Panama, the Bahamas, Cayman Islands, Seychelles, and Vanuatu.
Accordingly, the ACFE classifies the tax havens of the world into four broad categories:
No Tax Havens – these countries have no income, capital gains or wealth taxes. It’s legal to incorporate and/or form a trust. The governments of these countries do earn revenue from corporate registration fees, annual fees and a charge on the value of corporate shares. Examples of “no tax” havens are the Bahamas, Bermuda, the Cayman Islands, Nauru, the Turks, Caicos and Vanuatu.
No Tax on Foreign Income Havens – These countries impose income taxes, but only on locally derived income. Any income earned from foreign sources that involves no local business activity (apart from simple housekeeping and bookkeeping matters) is exempt from taxation. There are two types of “no tax on foreign income” havens. Those that:
–allow corporations to conduct both internal and external business, taxing only the income from internal sources;
–require a decision at the time of incorporation as to whether the company will conduct local business or will act only as a foreign corporation. If the company elects the latter option, it will be exempt from taxation. If it chooses to conduct local business, it incurs the appropriate tax liabilities. Examples are Panama, Liberia, Jersey, Guernsey, the Isle of Man, Gibraltar, Costa Rica and Hong Kong.
Low Tax Havens – These are countries that impose some income tax on company income, wherever it is earned. However, most have double taxation agreements with “high tax” countries. This agreement can reduce the withholding tax on the income derived from a high tax country by local corporations. Examples of “low tax” havens are Cypress, the British Virgin Islands and the Netherlands Antilles.
Special Tax Havens – Special tax havens are countries that impose all or most of the usual taxes, but either allow concessions to certain types of companies, or allow specialized types of corporate organizations such as the flexible corporate arrangements offered by Liechtenstein. Tax havens offering special privileges for holding companies are Liechtenstein, Luxembourg, the Netherlands and Austria.
Understanding the role of tax havens, involves distinguishing between two basic sources of income:
–Return on labor
–Return on capital
The return on labor refers to earnings from salary, wages, and professional services – your work. Return on capital describes the return from investments such as dividends from shares of stocks; interest on bank deposits, loans or bonds; rental income; and royalties on patents. Placing “return on capital” income in certain tax havens can benefit the secrecy seeker. By forming a corporation or trust in a tax haven this income may become tax-free or be taxed at such a low rate that the taxation is hardly noticeable.
In the case of Panama, for example, off-shore banking and incorporation are a major source of revenue. It’s also a good country for laundering drug money through its banks. It was reported by the financial trade press some years ago that at one time $200-$300 million a month was laundered through Panamanian banks. Panama is one of the most effective off-shore havens for money-launderers, offering tremendous secrecy. As the Panama papers seem to bear out, its banking haven business has always been regarded as supplemental to its status as a tax haven.
Before asset hiders and money launderers can utilize off-shore secrecy havens, they must first establish secret off-shore bank accounts. The off-shore account provides asset protection because the existence of such an account will not readily be known by someone seeking to collect against assets. Foreign banks, regulated by their own authorities, are under no obligation to inform the fraudster’s home country bank examiners of the ownership of the accounts they hold. Even if the existence of an off-shore account does come to light, judgments from home country courts are generally invalid in foreign countries, so creditors normally have to get a judgment in the country where the account is located. This allows time for the individual to fight the action or, unless the court immediately issues an order prohibiting the transfer of assets, simply move the assets out of the account.
So why do fraudsters and others secretly move money off-shore? Not just tax avoidance. There are many additional benefits of doing so, extending well beyond simple tax avoidance:
–Off-shore bank accounts allow an individual to invest in foreign stocks and mutual funds that are not registered with home country government agencies;
–In some instances, off-shore bank accounts offer more flexible customer options than home country accounts;
–The account can be used to profit from currency fluctuations, buy stocks from mutual funds, purchase foreign real estate, and earn the high interest rates available in many foreign countries;
–Foreign accounts are used to trade precious metals and other assets through the banking system;
–For U.S. citizens, off-shore banking income is not presently considered “subpart F income” on U.S. tax returns. The profits accumulate in the off-shore bank and are compounded free of U.S. taxes;
–Most off-shore banks allow transactions to be conducted by mail, fax, or telex.
Keeping money in off-shore bank accounts is generally considered to be a safe move. On the rare occasion when a bank fails, in most developed countries the major banks in the country will take over its business to ensure that depositors do not lose any money. Some countries even have stronger capital requirements for banks than the United States.
The off-shore financial safe haven sector constantly evolves and adds more attractive customer services over time, just like every other dynamic market place that wants to retain and grow its customer base. To effectively investigate the role off-shoring plays in many high profile frauds, CFE’s need to realize that tax avoidance is often just the tip of the concealment iceberg.