By Hervé Israël, Lovells
Tax lawyers like to think that in any law there are loopholes, and if these loopholes exist, it is because God created them.
In international taxation, tax havens are a major loophole for sheltering the assets of the wealthy. Tax havens are vilified as the scapegoat of the financial market collapse and the source of an underground economy threatening the world stability. Most jurisdictions have taken legal steps to fight tax evasion by individuals or companies.
Yet, recently, countries that appear to be tax shelters have joined the European Union. Ireland, Malta and Luxembourg are among the best locations in Europe for carrying out a business activity in a low tax environment.
Freedom of establishment is embedded in the founding principle of the European Union, making it hard to limit tax shelters. States have to allow their citizens and companies to carry out business in any other EU member state. And furthermore, most of the recent court decisions have ruled in favour of the tax payers, rather than the tax administrations.
The recent financial turmoil is changing the game. Banking secrecy has been challenged, and some states have been forced to sign exchange of information agreements or face sanctions. Most have complied. Whether blessed or excommunicated by the international community, tax shelters in places like Switzerland, the Channel Islands or Lichtenstein have been listed in different categories of white, gray, etc.
In the US, the paranoia is even more forceful, as shown by the number of laws challenging the use of tax shelters. A draft law called “Stop Tax Haven Abuse Act” was introduced before the Senate by President Obama before his election. This act calls for the establishment of a blacklist of offshore secrecy jurisdictions. An alternative proposal by Senator Baucus would establish a compulsory report of offshore accounts.
Is the use of tax shelters still recommended? Our politicians should keep in mind that there will always be people and companies who try to avoid paying high taxes. Ultimately, the simplest solution for a taxpayer may be to transfer their tax residency to a tax haven rather than transferring their wealth there. For the country of origin all tax opportunities would be lost. We are witnessing an increasing number of wealthy people considering this option.
The alternative for the governments of the civilized high tax countries would therefore be to become more tax friendly. One day they might even ask themselves, should we become a tax haven?
Hervé Israël is Partner at Lovells, in Direct Tax, Indirect Tax, Tax, Tax Disputes. Lovells is one of the largest international legal practices with offices in Europe, Asia and the United States.
