Tax havens are territories or countries that offer tax and financial benefits to foreign individuals and companies, such as low taxes or a lack of strict financial regulations. These territories often have lax or non-existent regulation in terms of transparency and international cooperation on tax matters, which can facilitate tax evasion and tax avoidance, although this need not necessarily be the case.
How are tax havens regulated?
The regulation of tax havens varies depending on the country or territory in question. In Spain, the regulation of tax havens is mainly governed by the Spanish Corporate Tax Law, which includes a list of territories deemed to be tax havens. Spanish companies are subject to specific restrictions and regulations when carrying out transactions with these territories, such as the obligation to report transactions carried out with residents of tax havens.
At the European level, the European Union (EU) has implemented measures to combat tax evasion and avoidance, including the creation of a list of non-cooperative tax jurisdictions, which includes several tax havens. However, these measures are not binding and their effectiveness has been the subject of debate.
Am I relocating my residence to a tax haven?
Relocating residence to a tax haven inevitably has tax implications, both positive and negative. On the one hand, there may be benefits in terms of a reduced tax burden, such as lower tax rates or tax exemptions. However, there may also be negative consequences, such as the loss of tax benefits in the home country and the risk of being deemed a tax evader.
Some countries that are not deemed to be tax havens may have uncooperative regulations in terms of international tax cooperation. This may involve a lack of transparency in financial reporting or a lack of exchange of information with other countries under international agreements to prevent tax evasion.
Relocating residence to a tax haven can have benefits for companies and individuals in terms of reduced tax burdens, greater financial confidentiality, flexibility in business structuring and greater privacy in asset management.
Sin embargo, es importante tener en cuenta que la evasión fiscal y la elusión fiscal son prácticas ilegales en muchos países y pueden tener consecuencias legales y financieras graves. Además, las regulaciones fiscales y financieras están en constante evolución y es fundamental cumplir con las leyes y regulaciones aplicables en cada jurisdicción.
However, it is important to note that tax evasion and tax avoidance are illegal practices in many countries and can have serious legal and financial consequences. In addition, tax and financial regulations are constantly evolving and it is essential to fulfil the applicable laws and regulations in each jurisdiction.
Likewise, the tax authorities may presume that a company established in a country or territory with zero taxation, or considered as a tax haven, is resident in Spanish territory when its main assets, directly or indirectly, consist of assets located or rights that are fulfilled or exercised in Spanish territory, or when its main activity is carried out in Spanish territory, or when its main activity is carried out in Spanish territory, unless the entity proves that its direction and effective management take place in that country or territory, as well as that its incorporation and operations respond to valid economic motives and substantive business reasons other than the simple management of securities or assets.
How is tax residence accredited?
Tax residence is evidenced by a certificate issued by the competent tax authority of the country concerned.
However, bear in mind that an individual can have a residence permit or administrative residence in a State and not be deem resident for tax purposes in that State.
In my own experience, although in Andorra, the immigration service occasionally carried out random inspections without prior notice on residents who were self-employed and in their first two years of activity, in order to verify the taxpayer’s actual residence and to be able to renew or revoke the residence permit, the Andorran Tax Administration issued tax residence certificates to any individual who had a valid residence permit or who had an Andorran passport, regardless of their actual residence in the Principality of Andorra.
OECD criteria for qualifying a territory as a tax haven
According to the OECD, four factors are used to determine whether a regulation is deemed to be a tax haven.
The first factor is whether the regulation imposes no taxes or very low taxes. The OECD recognises that each country has the right to decide whether to impose direct taxes, but if there are no direct taxes, the other three factors are used to determine whether a regulation is considered a tax haven.
The second factor is the lack of transparency in the regulation. If laws or management practices do not permit the exchange of information for tax purposes with other countries in relation to taxpayers benefiting from low taxes, a lack of transparency is deemed to exist.
The third factor is whether non-residents are allowed to take advantage of tax reductions, even if they do not engage in economic or investment activities in the country.
Finally, a distinctive feature of a tax haven is the presence of two different and legally separate tax regimes in the same territory. Residents and local companies are taxed as in any other country, but non-residents can take advantage of tax benefits and are generally prohibited from carrying out any economic or investment activity within the territory of the tax haven.
How effective are the global controls and measures taken by organisations and countries to prevent tax evasion?
The Independent Commission on International Corporate Tax Reform became evident in 2020 in the wake of the Mauritius Leaks case that the OECD had failed in the fight against tax evasion and ruled that Mauritius, like many other OECD jurisdictions, claimed to fulfil international rules and standards in order to avoid being accused of non-cooperation. In practice, however, this compliance was in practice simulated, i.e. it existed only in appearance, and in reality, the rules were not being effectively applied.
The Commission became evident that some OECD countries, such as Ireland, Luxembourg, Switzerland and even the United Kingdom, designed the game and its rules, and are not being denounced by the OECD or the European Union. In other words, these countries are taking advantage of the same tax advantages as Mauritius, but are not being singled out for it.
Automatic exchange of information and banking secrecy
The OECD’s Common Reporting Standard (CRS) is an important mechanism for combating tax evasion and money laundering at the international level. However, the CRS has certain drawbacks that need to be addressed to ensure its effectiveness.
One of the main problems of the CRS is that there is no homogeneous system for assigning legal identification codes, which makes it difficult to unequivocally identify the owners of the information exchanged.
Another problem that needs to be addressed is the lack of reciprocity in the exchange of information. The US FATCA system, which collects information on its taxpayers abroad, presents a geographical loophole that allows non-US residents to hold assets in the US protected by secrecy, turning the US into a large tax haven.
In this regard, to ensure the effectiveness of the information exchange system, it is necessary to address these problems and improve both the CRS and the US FATCA system. This is the only way to ensure transparency and effectiveness in the fight against tax evasion and money laundering at the international level.
On the other hand, regardless of which countries are considered tax havens and which are not, a list that differs considerably depending on who issues the list, there are many countries that do not qualify as tax havens but do not cooperate or are less cooperative with foreign administrations or whose banks may and prefer to pay fines on behalf of the client in order not to exchange banking information on certain clients with foreign administrations.
Article by:
José Pérez-Fuster
Senior tax manager
jose.perezfuster@metricson.com
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