Tax haven is a place which affords shelter from taxes. Tax havens can be broadly classified into:
- Countries that do not impose any taxes whatsoever ie Bahamas, Bermuda and New Hebrides. Such countries are also referred to as tax paradises.
- Those countries which tax income on a territorial basis or tax income at a very low rate (Hong Kong). Such countries do not generally tax foreign source income except under certain exceptional circumstances. These countries may be referred to as tax shelters.
- Countries that provide special tax privileges for certain types of income and to certain classes of taxpayers, for example, The Netherlands and Switzerland. These countries are referred to as tax resorts.
Besides getting the right finance and accounting for startups, SMEs and MNCs, the choice of tax havens for an international business becomes an important aspect of international tax planning because the avoidance and postponement of taxes, present and future, must be completely effective for an operation to succeed.
Some of the more important factors a business has to consider in the choice of a tax haven are:
- Procedures, legal and customary, for the formation, administration and liquidation of companies, trusts and other business entities;
- Exchange control regulations and the convertibility of currencies;
- Secrecy of information;
- Political and economic stability and the attitude of government to tax haven operations.
- The conduct of domestic businesses in the haven.
- The existence or absence of tax treaties.
- Banking, professional and communication facilities/
- Laws for protection of assets.
It is considered that flexibility is of great importance in the choices of a tax haven and further it is not necessary that the haven should be a completely tax free area. The ultimate choice of a tax haven must involve professional consultation, advice and tax planning.