Tax Haven
Categories: Tax, International
Well, it’s this kindly, loving, wonderful place just past the gates of St. Peter. Eh, maybe that’s tax heaven.
If you tilt your telescope at just the right angle, you’ll see the Cayman Islands, and the Bahamas. You might see Somalia, although it always seems to be storming there. And lately, you’ll see Ireland.
How on Earth are all these countries linked?
Well, they all offer special tax incentives for corporations doing profitable business there, such that those corporations more or less pay little tax, if any.
Why is this even a thing? Well, in America at least, before Trump became President, there was a severe hit against corporations that had divisions outside of the United States, selling printers or search clicks or purple leather handbags for $999 each, such that those corporations were taxed by the country in which they did business. Think: France. And then, if those companies wanted to bring their cash back to America to be held in an American bank, those companies were taxed again, turning a dollar of profit into something like 30 cents.
Since it made no sense for companies to lose so much hard-earned profit so quickly to tax dollars, a mini-industry in tax havens grew up all around those unfair governmental dealings. Some of the schemes behind these processes included something called a Dutch Sandwich, where the product has been shipped by an Irish company, but then booked or accounted for through a shell, or quasi-fake company in the Netherlands. Sometimes remaining profits are then shipped to Caymans or Bermuda, otherwise known as the Bermuda black hole.
There are three basic types of tax havens in a Dutch Sandwich. Primary tax havens, which are the ones with the shell corps...semi-tax havens, where a country will produce goods for sale primarily outside their boundaries, and have flexible regulations to encourage job growth...and conduit tax havens, where income from sales, mainly sales made elsewhere, is collected and then distributed.
Over time, the legal structure of tax havens has shifted, but in the new, post-Obama era, which actively lowered corporate tax rates and defended American companies’ rights to bring American cash back home to America, the need for tax havens feels like it is slowly fading away.
But they’re still more popular than tax heaven.