In 2016, an investigative report by a network of international journalists shocked the world. The report, entitled ‘Panama Papers’, reveals the tax evasion practices of the world’s richest people. They seek to secure their property in a tax haven country.
Massive coverage at that time also became a means of education for the community. The term tax haven is widely discussed. People are getting to know countries that welcome investors who want to secure their assets.
1. What is a tax haven country?
Tax haven is a nickname for a country that provides asylum or protection for taxpayers. Why do they name it asylum? By placing their assets in this tax haven country, taxpayers can avoid the obligation to pay taxes or if there is a levy, they will usually be subject to super minimum rates.
With such facilities, countries with minimum tax rates or even zero percent seem to be heaven for tax evaders.
The Organization for Economic Cooperation and Development (OECD) through its 1998 report entitled ‘Harmful Tax Competition: An Emerging Global Issue’ does not provide a specific definition of the term tax haven.
However, the OECD provides 4 criteria for a country to be categorized as a tax haven:
- Setting a minimum tax rate of up to zero percent
- No exchange of information
- No transportation in tax collection
- No substantial activity requirements for companies
- Law number 36 of 2008 concerning Income Tax (PPh) also alludes to the tax haven country as a tax protection tool.
2. Example of tax protection in a tax haven country
. For example, a company called QWERTY becomes a taxpayer in their country. In that country, QWERTY needs to pay a tax (eg corporate income tax) of 15%.
Well, in a tax haven country, the tax rate is super minimum, which is only 1%. In order to avoid taxes in their own country, the QWERTY company then set up a shell company in a tax haven country. Then, the QWERTY company flows its liquidity there.
With this practice, the potential tax revenue in the country’s QWERTY corporate tax base will be eroded. On the other hand, tax havens where shell companies are located are getting more prosperous due to capital inflows and rising consumption.
3. Examples of tax haven countries
There are no standard provisions regarding which countries are called tax havens. However, referring to a number of criteria proposed by the OECD above, we can conclude for ourselves which countries are asylums for tax evaders. The following are some of the favorite tax havens for shell companies.
- Cayman Island
This country in the Caribbean Sea is a favorite of tax evaders to set up shell companies. There are more than 600 banks on the Cayman Island.
- British Virgin Island
Data from the International Consortium of Investigative Journalists (ICIJ) reveals there are more than 150,000 companies based in this country. BVI has been a tax haven country since 1976.
The status of this country as a tax haven was further confirmed through the Panama Papers investigative report. The country is the tax base for 48,000 shell companies.
For entrepreneurs from Indonesia, Singapore is a favorite country for tax avoidance. Ministry of Finance conveyed this information in 2016. The reason is of course light tax regulations.
- Hong Kong
Similar to Singapore, Hong Kong is also Asia’s tax haven.
Read now: Second Job That Will Affect Your Taxes