When you hear the phrase “tax haven,” you might think about a couple of different things. If you, like Jason Hartman, have done business internationally, you’ve probably at least heard the phrase. Perhaps it brings to mind a somewhat shady place where a wealthy person might stash some cash, perhaps it confuses you, and perhaps the phrase even piques your interest.

A tax haven is a place where money can be stored with little or no tax consequences because they don’t enforce the labor laws or inheritance rules of other nations, which gives them an element of mystery. They also offer a kind of escape from financial regulations and laws that can be bothersome. Tax havens are, by nature, located somewhere else, which is where the term “offshore banking” comes from.

For wealthy individuals and corporations, tax havens provide the opportunity to pay lower or no taxes associated with the cost of running a business in the United States. The Tax Justice Network estimated that global tax revenue in 2012 lost due to tax havens was between $190 billion and $255 billion per year, with approximately $32 trillion hidden in tax havens across the world.

The location of the first tax haven is debatable, as many countries claim to have first acted in that capacity. According to many economic commentators, the title belongs to Switzerland. Now, tax havens exist in many places. Some have worse reputations than other (the British Virgin Islands, for example, are particularly bad).

Tax havens are ever-changing—from the 1920s until the 1950s, tax havens existed to avoid personal taxation. After 1950, tax havens became a place for corporate groups to avoid taxation, which depended upon a double taxation treaty between a large jurisdiction with a high tax burden and a small jurisdiction with a low tax burden. Corporations took advantage of the treaty by structuring group ownership through the small jurisdiction—paying taxes at a lower rate. By the 1970s, many countries repealed double taxation treaties to prevent such action.

By the middle of the 1980s, tax havens changed legislation to make corporations exempt from local taxation, called exempt companies (sometimes referred to as international business corporations). By the 90s, actions were being taken to prevent tax haven abuse.

Now, tax havens exist in a variety of forms and are legal, though many argue they aren’t ethical, given the series of loopholes required to form a tax haven strategy. We’ll let you be the judge! (photo credit: Kıvanç Niş via photopin cc)

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