May 1, 2000- Is It Illegal To Use A Tax Haven?

Dear Subscriber,

Is It Illegal To Use A Tax Haven?

Let me explain it this way. In olden times, a businessman often had to make a contribution - the bridge toll - whenever he wanted to cross certain bridges. Those who slipped past the toll collectors in the middle of the night in order to avoid paying the toll, did so illegally. But if one spurred his horse in order to reach a far off toll-free bridge he would have been acting in full accord with the law.

You are acting just like the dead-of-night-defrauder, not only if you operated through a foreign per company like Norbert Angler, but also when you:
  • Reduce the profits of your legal domestic business through questionable payments - in the guise of licensing fees, consultant's remuneration or donations to allegedly foreign associates in the Channel Islands, which are actually pet companies belonging to you.
  • Fool the revenue office into thinking that you made some very expensive imports from Monaco (where your pet company would issue you fictitious invoices) when in reality you got the pods dirt cheap from Taiwan.
  • Pretend to deliver goods at very low prices, or without much profit, to Switzerland by having your dummy company there issue a ridiculously low-value voice for the benefit of your local revue office, when in truth you collected hefty sums from your real buyer in South Africa.
  • Act as if you have moved to the Bahamas, where you rent a furnished room for appearance's sake and engage someone to forward your mail, when you actually secretly live tax-free with a mistress in your hometown and conduct your business in Nassau from a distance.
On the other hand, you would be like the man who takes the long way to the toll-free bridge if you moved your entire factory, office or practice to a country with low or zero taxes and operated from there the future. If you operate a regular business concern in the Bahamas, the Channel Islands in Liechtenstein, a leading tax haven and paper company haven, the revenue office cannot normally take you to task. While some governments of the over-taxed "democracies" limit themselves to simply fighting against the illegal use of tax- havens, the more militant of the high-tax countries attempt to plug even legal loopholes with legislation and through the courts. But since not all such anti-tax haven measures are bristling with legality, they are fortunately not always crowned with success.

The Measures Governments Take Against Tax Havens

Australia once attempted to use its restrictive foreign exchange control laws sabotage unwanted transactions of its citizens with contracting parties in certain countries. Blacklisted states - among them all tax havens from the Bahamas to Tonga - were denied the requisite approval of the Reserve Bank.

Canada hit on the grandiose idea of assuming the fictitious sale of all inland goods at market value for people giving up their Canadian residence, and collecting the corresponding value added tax.

Belgium and France try to prevent their taxpayers from engaging in business dealings in tax havens by reversing the burden of proof. It not the state which has to prove the illegality of tax-reducing expenditures in Andorra or Liechtenstein, but rather the citizen concerned who has to certify that everything is indeed above board.

Uncle Sam even seeks to prevent emigrating Americans from discharging their lifelong liability through the surrender of their US citizenship, by seeing to it that those who have long since become Swiss or Spanish citizens are taxed for ten more years in accordance with American tax provided the change of citizenship is made solely because of tax considerations.

Spain took action in 1991 against foreign firms not protected by EC membership or double-taxation treaties, with an eye on the many Gibraltar firms that are not transparent to the Spanish revenue office and which enjoyed concessions on Spanish land ownership, land transfer and inheritance taxes. Such registered Spanish properties are now subject to 5% surtax annually to compensate future land transfer and inheritance tax savings.

Naturally, the oldest and most polished anti-tax haven legislation is found the traditionally perfectionist Germany. Since the seventies, German taxpayers who emigrated to low-tax countries while keeping "substantial business interests" in their homeland, still had to pay maximum local tax rates on their businesses for ten more years. Furthermore, entrepreneurs who moved their businesses abroad were treated as if they had sold their German firms at home. A fictitious profit from the sale was assumed and was subject to tax. Finally, if domestic firms who have tax reducing contacts with companies in low-tax countries are unable to prove that the suspicion arising there from is absolutely founded, then the assumed profits of the latter are attributed to the first. You can be sure that this sort of practice will soon come the accepted thing, at least in the European Community.

Basically, there are really only two options against such measures. Either the citizen, now driven into a corner, separates himself completely from his or her high-tax "homeland", by disappearing forever taking all worldly belongings and breaking off all business relationships there. Or he or she plays the tax game through countries with which his or her government has advantageous double taxation treaties. Such special agreements between two countries supersede national anti-tax haven laws. More on this later in another issue. Americans even have to surrender their citizenship, but must do so for reasons, which will not be suspected as being tax related.

What tax systems await you in the various residential tax havens? Your choice is between:

  • Countries, which don't levy any kind of profit taxes on its residents, such as Andorra, the Bahamas, the Caymans.

  • Those countries, which only tax domestic income but exempt foreign earnings, as is the case in most Latin American countries or in the Cape Verde Islands.

  • At least one country, where there is no local income tax and only foreign profits are taxable, namely Monaco.

  • Countries, which tax their residents' worldwide income but at practically moderate rates. Among these are the bigger Channel Islands, the Isle of Man and with some reservation, Switzerland, at least if you get the right canton. States like Uruguay, for whom taxation of visible wealth makes more sense than taxation of visible wealth makes more sense than taxing income, which can manipulated. Instead of an income tax therefore, they just take a bit of the accumulated assets yearly.

  • Jurisdictions without strict laws - or at least not strictly enforced ones against the activities of its citizens abroad under the guise of paper companies. This is the case in various southern Europe countries - though nowhere near as pronounced as in Greece. Among these are Italy, Portugal or Spain. Speaking of Spain, a friend of the author did the following. First of all, he gets himself a holiday villa in sunny Marbella and registered himself as a "pension with the local authorities". Taxes in the absence of apparent income were therefore minimal or zero. Then he set up a so-called "exempted company" in Gibraltar through which he conducted all his business. All he has to pay for this is an annual flat tax of about £250 regardless bow many millions he makes. Even Spain takes over this autonomous British enclave; the game can still goes on, because the Gibraltar authorities guaranteed the exempted company's exemption from profit taxes for many years. Spanish tax authorities would have to recognize promises made to firms and private residents in Gibraltar before any takeover.

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