Tax Havens and Canadian Taxation - Research Paper Example

Tax Havens and Canadian Taxation Introduction A tax haven also known as offshore jurisdiction is a nation that gives foreign individuals and investors who have bank accounts or investments in its territory the benefit of paying little or no tax in an economically and politically stable environment for their investment (Anderson, 2014). This tax regime not only exists in this foreign country, but such investors and individuals can take advantage of this offshore system to evade paying taxes even in their own countries. Anyone can operate in an offshore jurisdiction. It does not require these individuals or investors to be residents in that country or for a business to operate outside the country to benefit from this tax policy. Countries with this kind of policies do so aiming to attract more foreign investors so as to boost their economy. Such nations are usually small nations with limited natural and industrial resources (Anderson, 2014). Without this regime that attracts foreign investors who come to boost their economy, the existence of such nations would be threatened. These offshore jurisdictions have attracted many foreign investors in recent years who most of them are usually persons fleeing their country’s taxation systems so as to establish their investments in more favorable environments. Most countries do allow their citizens to invest in tax havens. In Canada, depositing funds in a foreign tax haven is allowed by the law. A Report on any income related to such accounts is the only requirement the government asks from these investors (Hale, 2012). Where are tax havens? Tax havens are mainly found in small countries and especially islands. As stated earlier the main feature of tax havens is a favorable tax policy and investment environment for foreign investors operations. However, there are other features that could help one identify tax havens. In tax havens, an individual’s data or that of share holders of a company is not placed in public records. Bank secrecy is a serious and strict rule. Data and Information about account holders is only given to respective authorities only in cases of available evidence of major crimes like drug trafficking or terrorism Tax havens avoid signing treaties that involve exchange of tax or bank information of individuals. Social, political and economic stability of tax havens are highly maintained and promoted so as to encourage foreign investors and keep the already existing ones. They offer excellent range legal advice services on tax and accounting to potential investors and existing ones. Offshore jurisdictions often have a well developed infrastructure so as to enhance the business environment. They also have a maintained tourism sector thus easily attract tourist who get to identify the investment potential of these countries. Examples of countries with such features are: Andorra, Bahamas, Bermuda, Hong Kong, the British Virgin Islands, Monaco, the Channel Islands, Belize, the Isle of Man, Lichtenstein, the Cayman Islands Panama, the Cook Islands, Switzerland, Mauritius, and St. Kitts and Nevis (Anderson, 2014). Pressure from foreign nations that feel the need and demand to collect all tax revenue they believe is entitled to them has forced tax havens to sign treaties that allow tax data exchange. They have also had to sign agreements that allow for the providence of investors secret information to foreign governments. How tax havens work to help lower the overall taxpayer’s bill Before we get to know how tax havens work, it is important to know the various types of offshore corporations. One of them is known as International Business Company. This exists in all tax havens. It takes the form of a limited company but adding (unlimited) names such as corporation, incorporated is allowed. The other form of corporation is the limited liability company. This has both characteristics of partnership and corporations. Members of this type of offshore corporation have to declare their profits in the company during their personal tax returns for taxation purposes. Tax havens work by having no concern or follow up of the true identity or nationality of the offshore account or business owner. Independence of trustees and corporations from the owner of the benefit provides protection of the true identity of the shareholder. Setting up of an offshore corporation or account takes only a matter of hours with minimum initial capital and documentation requirement. The number of administrators or directors is not specified therefore one can have the least number of directors or even one person carrying out the administration process depending on the owner’s choice. Administration of these corporations is quite easy as no tax returns or reports are required at the end of the year. No much compulsory documentation of the business’s operations is required. Administration of an offshore corporation does not have to take place from within the country. It can take place from another country. The benefactor of these corporation or offshore account can give instructions to the shareholder or nominee director (the formal representative of the business) through e-mail as per the procedure established during the formation of the company. Banks cannot give any information about the trustees or benefit owner to a third party at all. Exemptions come in only in cases of alleged crimes like terrorism or drug trafficking. In which case there need be an official court order to release an investor’s information. Heavy penalties are imposed on banks that unlawfully release investors’ information. Trustees and corporations are strictly protected and placed in the hands of a local trustee who are independent from the beneficial owner. The transfer of assets or capital from one tax haven to another is quite possible and the process not complicated. One can also transfer capital or asset into an offshore foundation or trust without any information leaking to third parties. The true owner of an offshore account or corporation can do business all over the world in complete anonymity. The main strategies tax havens employ to lower the taxpayers bill is concealment and discretion of investors’ information from taxation agencies and the tax free or minimal taxation policy they employ on foreign investors. For Canadians, Taking the USA as Canada’s tax haven the advantage Canada gets from U.S is being able to withdraw their RRSPs, LIRAs, RRIFs, at a rate of 15 percent as provided in the Canada/US Tax Treaty, instead of the normal Canadian rate of close to 50 per cent (Keats, 2012). Through using the United States as a good strategy of immigration and a tax haven, Canadians have the freedom to travel in any direction anytime as long as they want without harassment from tax or immigration authorities all their lives under the cover of both the Canadian and U.S. systems. Advantages of tax havens to: Individuals and Corporations Tax havens offer a wide range of taxation options to choose from. It is advisable though to seek advice from an offshore tax consultant on which range suits you or your business most. This helps in reducing the risk of exposure to tax competition. The offshore financial institutions have advanced legal measures that increase privacy and protection of an individual or investors assets. The fact that no information about these assets is shared or given to anyone gives investors and individuals the confidence to invest in tax havens. Individuals and investors who invest in tax havens have the benefit of avoiding high taxation or even paying no tax even in their home land. Tax havens create tax competition for other countries (Hampton & Abbot, 2009). Thus, nations cannot afford to impose unfavorable tax policies for investors as offshore jurisdictions offer a better opportunity for them to invest. Tax havens offer refuge for investors from governments that are corrupt, oppressive and incompetent. It is usually very easy to set up a company in an offshore jurisdiction, usually a time span of around 48 hours. Companies in offshore jurisdiction require a minimum number of directors and trustee too. Documentation needed to start off a company is minimal usually a copy of the passport, address and a cost of between $1000 and $2000 are the basic requirements. (Barber, 2007) There is no citizenship limit of the trustees or administrators. Tax havens offer freedom of investment as there are no strict financial regulations for investors. Also, lack of thin capitalization rules allows creation of a company without subscription of capital expenditure (Hampton & Abbot, 2009). Investors too have the freedom of transferring their business to another offshore jurisdiction without necessarily changing the structure of the business or its activities stopping. A Nation The fact that political and economical stability of tax havens is a matter of great importance gives investors confidence in investing in these nations as it ensures security and a good business environment for them. Stability in a country also ensures peace for the whole nation at large. Tax havens encourage foreign investors who in turn bring about development and growth to these countries. The establishment of good infrastructure, political, social and economic stability of tax havens creates a good environment for both local and foreign investors. (Barber, 2007) This translates into booming businesses which means more capital yield in terms of profits. Disadvantages of tax havens to an individual and corporation: the fact that one has invested their money in a far away tax haven is enough to worry about the inaccessibility of the location of this money. Getting tenders from tax haven governments is also a disadvantage as many governments and governmental agencies such as education, the defense agency, health, civil engineering, and other civil contractors do not take tenders from offshore investors (Barber, 2007). This is an important factor to take into consideration before investing in tax havens. Tax offices have the worry that the financial systems in offshore jurisdictions make concealment of property easily. This is particularly, the systems that take advantage of offshore secrecy to hide property and investments that would be subject to Canadian tax. In countries with high taxes especially in Europe, tax paid by investors or individuals adds up to 50 percent of their profit. With the advantage of tax evasion, this 50% or so financial flight is not favorable according to tax officials as it derives a country an important part of their tax revenue (Barber, 2007). This has led to nations putting into action measures that hinder transfer of an individuals or corporate to an offshore jurisdiction. Some people take advantage of the confidential and protective nature of tax havens to evade paying taxes. Tax havens too are a great disadvantage to developing countries. This is because they deprive these countries tax revenue due to the fact that they pay little or no tax. This Revenue would have been used to boost the development of these countries as we well know that most developing countries get most of their finance for development from tax revenue. Conclusion Tax havens are commonly found in young developing countries. The main purpose for a nation to adopt this taxation system usually is to attract foreign investors that help in the development of these nations. The main strategies tax havens employ are concealment and discretion of investors’ information from taxation agencies and the tax free or minimal taxation policy they employ on foreign investors. Tax havens offer a wide range of taxation options that can be an advantage or a disadvantage to an individual, investment and a nation at large. Therefore as an individual or a nation, before one thinks of investing their finance in these nations, it is important to get advice from an offshore consultant so as to get to know what range best suits you as a person or an investment. As a nation, it is important to identify genuine investors and individuals from those that are just up to evading taxation before enrolling them to the tax havens institutions. References Anderson, Lawrence. (2014). The Tax Haven. Iuniverse Inc. Barber, H. L. (2007). Tax havens today: The benefits and pitfalls of banking and investing offshore. Hoboken, N.J: Wiley. Clemens, J., & Fraser Institute (Vancouver, B.C.). (2008). The impact and cost of taxation in Canada: The case for flat tax reform. Vancouver: Fraser Institute. Hale, G. E. (2012). The politics of taxation in Canada. Peterborough, Ont: Broadview Press. Keats, R. (2012). A Canadians best tax haven: The US. North Vancouver, B.C: Self-Counsel Press. Hampton, M., & Abbott, J. (2009). Offshore finance centers and tax havens: The rise of global capital. West Lafayette, Ind: Ichor Business Books. Schmitt, J. A. (2008). Legal off shore tax havens: How to take legal advantage of the IRS code and pay less in taxes. Ocala, Fla: Atlantic Pub. Co. Read More