Tax Haven can be a state or country or territory where taxes are levied at a very low rate or not at all. It’s described as “sunny places for shady people”.
It also refers to places where the country or state has a system of financial secrecy laws or bank secrecy laws or offer favorable tax regimes for foreign investors.
Financial secrecy or Bank Secrecy means these countries or states don’t provide or provide little information to foreign authorities.
The Bahamas, Luxembourg, Bermuda, the British Virgin Islands, Hong Kong, Mauritius, Monaco, Panama, Cayman Islands, Lichtenstein and Switzerland are all considered as tax havens.
Use of Tax havens for tax avoidance and evasion can fall into two broad categories. The first is individuals seeking to avoid taxes such as those on dividends, interest or capital gains.
The second is companies that seek to artificially inflate profits in low tax countries at the expense of those in higher tax countries. For example Luxembourg has a corporate tax rate of 12%, significantly lower than the rate of USA and India which is 35% and 30% as of 2015 respectively. This attracts large corporate from around the world that are seeking asylum from large corporate taxation.
Luxembourg also offers secrecy and a very low rate to send money into or out of the company. Companies like PepsiCo and Wal-Mart are known for creating subsidiaries and branches in offshore tax havens such as Luxembourg to cut taxes.
Similarly, Panama offers no taxes on offshore companies that only engage in business outside of the jurisdiction. Panama also has extensive laws to protect corporate and individual financial privacy and strict banking secrecy laws due to which banks are prohibited from sharing any information about offshore bank accounts or account holders.
The European Union published its first list of international tax havens in June 2015 as a part of a crackdown on multinational companies trying to avoid paying tax. Here is the full list: Andorra, Liechtenstein, Guernsey, Monaco, Mauritius, Liberia, Seychelles, Brunei, Hong Kong, Maldives, Cook Islands, Nauru, Niue, Marshall Islands, Vanuatu, Anguilla, Antigua and Barbuda, Bahamas, Barbados, Belize, Bermuda, British Virgin Islands, Cayman Islands, Grenada, Montserrat, Panama, St Vincent and the Grenadines, St Kitts and Nevis, Turks and Caicos, US Virgin Islands.