In the United States, the federal tax rate for corporations tops out 35 percent. If that seems high, well, it is–it’s one of the highest in the world, after Japan’s nearly 40 percent cut. Corporate tax rates go up to 28 percent in the United Kingdom, 25 percent in China, and 20 percent in Russia. In Ireland, the top rate is 12.5 percent, Cyprus and Macau max out at 12 percent, and in Bermuda there’s no corporate tax at all.
It’s hardly surprising, then, that some of the world’s most profitable companies have figured out a way to keep a bigger share of the pie to themselves by filtering their international profits through countries with low or no corporate taxes. In 2008 the U.S. Government Accountability Office reported that 83 of the 100 largest publicly traded U.S. corporations have subsidiaries in jurisdictions deemed tax havens or financial privacy jurisdictions.
Taxes too high? Just Google it.
A tax haven is a state, country, or territory with extremely low tax rates, or no taxes at all. (Delaware, with no state income tax on corporations, is an example in the U.S.) Often these areas also have vague or non-existent agreements with other governments regarding the release of tax information, a lack of transparency in banking and financial laws, and lax residency requirements. Some jurisdictions adopt tax-haven policies to purposely market their country as an offshore financial center. While the number of true tax havens is shrinking as more countries agree to reciprocal tax treaties and greater banking transparency, international corporations still have quite a few options. Small, affluent countries are more likely to be tax havens, and many of them are tropical islands–sunny destinations tempting to fantasize about when you are slaving over your taxes while the snow falls outside.
Google made news in October 2010 when Bloomberg reported that the internet company has saved over $3 billion in the past three years by shifting its foreign profits to accounts in the Netherlands, Ireland, and Bermuda. They aren’t the only big name taking advantage of these perfectly legal strategies to lower their tax bills by millions or even billions of dollars – Pfizer, Facebook, American Express, and Microsoft, just to name a few, have all taken advantages of tax havens. Countries known as prime locations for this perfectly legal, although ethically questionable, practice include:
Bermuda
The island of Bermuda, 800 miles east of the South Carolina coastline, embraces its tax haven status. It doesn’t levy taxes on income earned outside the country, and allows foreign business to incorporate under an “exempt” status. Exempt companies are limited from conducting local trade and cannot hold real estate in Bermuda, but they can establish a physical presence, such as rented office space, and employ local staff.
British Virgin Islands
A 2000 KPMG report to the United Kingdom indicated that the British Virgin Islands, a tiny island nation a hundred miles east of San Juan, Puerto Rico, was home to just over 40 percent of the world’s offshore companies. Along with its complete lack of corporate taxation, the island nation attracts corporations with its confidentiality laws, a stable government, and use of the U.S. dollar as its legal currency.
Cayman Islands
Barely 20 miles long, Grand Cayman Island, the largest of the Cayman Islands and located 300 miles south of Havana, Cuba, is the fifth-largest banking center in the world, housing branches of 40 of the world’s 50 largest banks. This isn’t surprising, considering there is no taxation in the Cayman Islands other than import and stamp duties. There are 94,000 companies and corporations registered in the Cayman Islands, along with 400 insurance companies. It also has a reputation for financial secrecy that makes it an ideal place to stash money, as well as a target for those trying to do away with tax havens.
Cyprus
Cyprus, an island nation south of Turkey, in the Mediterranean Sea, is experiencing a boom due to its unique position as an offshore tax haven located within the European Union (EU), which assures corporations reputable and well-regulated financial services. It has a 10 percent corporate tax rate and no corporate taxes on shipping companies, which makes it the EU nation with the lowest tax rates.
Macau
Macau, like Hong Kong, is a special administrative region of the People’s Republic of China. And like Hong Kong, Macau operates and oversees its own legal and monetary systems. It does not levy corporate taxes on income earned outside its borders, and with an economy based largely on gambling and tourism, it is an affluent and stable area for companies with Asian subsidiaries to filter earnings through.
Panama
Panama is close to a perfect tax haven. Income earned outside of Panama is not taxed and does not have to be reported, and the country uses U.S. currency so there are no conversion fees. Until last year, Panama had no tax treaties with other jurisdictions, so it was ideal for corporations concerned with privacy and asset protection. The U.S. is attempting to work out a tax treaty with Panama, but it has not yet gone into effect. It’s little wonder that 135 banks and nearly 400,000 corporations have established offices there.
