Businesses that operate across international borders sometimes take advantage of differences in tax laws between countries to minimize their tax liabilities. Certain jurisdictions have gained a reputation for favorable tax laws. These jurisdictions are often known as “tax havens.” Provisions of the Tax Cuts and Jobs Act (TCJA) of 2017 encourage U.S. businesses to repatriate money currently held in tax havens by setting much lower tax rates for repatriated profits. A bill current pending in the U.S. Congress, the Disclosure of Tax Havens and Offshoring Act (DTHOA), would require certain businesses to disclose overseas profits, assets, and other information on a country-by-country basis. This would effectively require them to identify jurisdictions they are using as tax havens.
What Is a Tax Haven?
No single definition exists to identify a “tax haven.” The term commonly refers to countries or territories with low tax rates for foreign investors, which may provide incentives for foreign businesses. Some definitions of the term involve both low tax rates and strong financial secrecy laws, while other definitions focus on low rates. Jurisdictions with reputations as tax havens include Bermuda, the Cayman Islands, Hong Kong, and Luxembourg.
What Is the Impact of the Use of Tax Havens?
Businesses can use a variety of rather complicated methods to take advantage of lower tax rates in certain locations. One method is known as base erosion and profit shifting (BEPS). The Organization for Economic Cooperation and Development (OECD) describes BEPS as “tax planning strategies…that exploit gaps and mismatches in tax rules to avoid paying tax.” It involves transferring funds to subsidiary businesses organized in a tax haven jurisdiction.