In the realm of financial planning, one of the more prominent areas that really grabs people’s interest – as well as raises many eyebrows – is the aspect of taxes. The controversy arises from the fact that tax planning necessarily involves finding ways to reduce a taxpayer’s tax liabilities.

There are various strategies used in tax planning to achieve a significant tax reduction for an individual or business. Some of these tax reduction methods are considered more acceptable than others. However, enumerating such strategies will be reserved for another discussion.

About Tax Havens

Among the tax reduction methodologies that carry a certain degree of notoriety is the availing of financial services at various offshore jurisdictions. These financial centres are more commonly known as offshore tax havens.

Whether or not the term “tax haven” is appropriate is subject to debate. Nevertheless, there are those who are not quite keen on tax reduction measures by means of offshore facilities, as these actions are often regarded as tax avoidance.

However, the impulse to move away from restrictive taxation by governments has its roots in the very history of taxation itself. While taxes always seem to strike a sensitive chord amongst populations, they are neverthess necessary for the proper functioning of governments. The undeniable reality is that people are not really enthusiastic about parting ways with the fruits of their hard labour.

The evolution of tax havens as we know them today has come about due to the growth of global trading and the fact that different countries promulgate different tax laws. It so happens that people find tax laws in certain jurisdictions less restrictive, and, thus, more attractive than taxation in their own countries. In other words, the existence of tax havens promotes an atmosphere of tax competitiveness within the scope of economic globalisation.

Using Tax Havens

For those who do choose to avail themselves of tax mitigation strategies of financial centres at offshore tax havens, there are several pathways that can be taken.

First, individuals can become residents of the tax haven. In most cases, countries count residency as the foremost criterion for taxation. While non-residents may enjoy little or no taxes, residents, on the other hand, are afforded certain protections compared to non-residents. A person may thereby benefit from relatively lower income tax and little to no capital gains tax compared to the person’s high-tax country of origin and still gain other benefits of being a resident of the offshore jurisdiction.

Another common method is to place assets in an offshore trust or company. In effect, ownership of the asset is held in trust by the offshore company with the real owner as the beneficial shareholder. Company shareholders in offshore tax havens are, in practice, kept in the strictest confidence and effectively remain anonymous because reporting requirements regarding these matters within these jurisdictions are usually non-existent.

As an alternative, entire businesses may be setup offshore simply to achieve lower rate of taxation. While this strategy is the least “tax-free” option, the minimised exposure to taxes is enough to allow businesses to operate with more funds at their disposal compared to operating their business in a high-tax regime.

Regarding Onshore Tax Havens

There are other ways of leveraging the benefits of tax havens. Those mentioned here are just the more popular forms of tax mitigation using offshore tax havens. Note, however, that there are certain locales within one's own country that may be considered tax havens as well. Any time that a particular region or province provides a competitive taxation scheme to attract individuals or businesses to reside, invest or trade, that location would essentially be a tax haven.

Selecting Tax Havens

There are quite a number of places that may be considered as tax havens, whether onshore or offshore. There were only a handful of countries considered offshore tax havens during the middle part of the 1990’s, which were usually located in the Caribbean and thereabouts. However the number of jurisdictions has multiplied dramatically in the past two decades.

According to the Organisation for Economic Co-operation and Development (OECD) more than 40 countries were identified as tax havens by the turn of the millennium. Now the OECD has refined its list to two general categories – cooperative and uncooperative tax havens. The latter refers to tax havens that have not committed or have yet to fully implement the international tax standards being pushed by the OECD.

With OECD reporting that all countries included in their survey of well known offshore tax havens have agreed to enact compliance with the tax standards, OECD status should be the least appealing criteria for choosing a tax haven.

The main determinant for most people, which truly defines what a tax haven is all about in the first place, is the enforced tax rate in the jurisdiction. The applicability of a particular tax haven will depend primarily on the situation of the person or business – particularly which forms of taxes may require mitigation.

Some countries do not impose personal income tax on foreigners, while others impose minimal or no capital gains and inheritance taxes. There are also jurisdictions that impose zero to very minimal personal or corporate taxes.

Apart from the different tax rates, other factors used to select a viable tax haven for minimising exposure include the country’s political and economic stability, availability of local professional services (i.e. accounting and legal firms), telecommunication infrastructures, and existing international taxation treaties.

At any rate when choosing a tax beneficial jurisdiction, the help of a tax planning professional is essential to making a proper selection. Not only are there financial considerations involved, but there are also numerous legal aspects that need careful attention before one can undertake offshore tax reduction strategies.