Why do people hide assets in offshore havens?
The use of offshore havens to limit the amount of tax due is an ethical and moral minefield, but in the eyes of the law, it is not necessarily wrong.
Tax havens are big business; they are also big news. The release of the ‘Panama Papers’ earlier this year, which saw the leak of 11.5m files from the database of the fourth biggest offshore law firm, was headline news. A number of big name examples from world leaders and politicians, through to household name celebrities, were named and shamed regarding their involvement in utilising offshore tax havens to squirrel away their money.
So what exactly is a tax haven? While there is no agreed definition, it can be said to be anywhere where a tax structure is established deliberately to take advantage of the huge appetite for tax avoidance. Taxes in these so-called ‘havens’ are typically low, and sometimes even non-existent. Panama, for example, doesn’t require offshore companies to pay income tax on international transactions; it has instead been suggested that they are asked to pay a nominal franchise tax of $300 annually to the government.
A crucial component of an offshore haven is that individuals are neither required to reside in, or to operate business out of, these tax havens in order to reap the rewards of local tax policies; they merely have to register a business there. Due to the often relaxed rules regarding setting up a company in these jurisdictions, this can be a surprisingly simple and quick process. Agents will be hired to manage business matters for the company on the owner's behalf. It is the agents' names which appear on company documentation, meaning many offshore companies can trade anonymously.
The use of offshore havens to limit the amount of tax due is an ethical and moral minefield, but in the eyes of the law, it is not necessarily wrong. Tax avoidance (or tax planning) is, on the whole, a legal way of taking advantage of existing loopholes in the tax system. This is different to tax evasion which is illegal.
While the monetary savings which can be made are often the driving factor for the majority of businesses and individuals seeking an offshore haven, for some the benefits go far beyond tax reasons. As well as offering preferential tax rates, some offshore havens also offer protection against scrutiny from foreign tax authorities. This is where the utilisation of offshore havens can stray from the legal practise of tax avoidance, into the murky world of illegal activities. The looser regulations coupled with a culture of secrecy can make offshore havens prime locations for hiding the proceeds of money laundering and other criminal activities.
Regardless of the legalities of such schemes, the use of offshore havens cost governments around the world substantial amounts of money in lost tax revenue. The practice has been said to cost the UK Treasury alone £5bn in lost taxes annually, while worldwide, governments are missing out on a staggering £120bn each year. But with Theresa May pledging a crackdown on offshore tax havens to help stem this loss, whether they will continue to offer businesses the same financial shelter in the future is uncertain.
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