Tax havens: What are they, and how do they work?

Concealment |  Resident or non-resident |  The risks

Tax havens are countries that the Tax Office sees as having less-than-transparent tax or financial systems, and that by dint of such systems may encourage tax evasion or out-and-out fraud.  Tax havens also have minimal or no taxes for non-residents.

Australia and the Organisation for Economic Co-operation and Development (OECD) use two yardsticks to assess whether a country is a tax haven – a lack of transparency, and a lack of effective information exchange.

The Tax Office's main worry is that the financial systems in place in tax havens make concealment of assets too easy, in particular the schemes and arrangements that make good use of a tax haven's secrecy laws to hide assets and income that would otherwise be subject to Australian tax.

The Tax Office's Project Wickenby, for example, while targeting a range of tax avoidance schemes, has a central interest in offshore tax havens, and has clawed back hundreds of millions of dollars from its acticities (you can check the Tax Office's website for updates).

Concealment
A straightforward example of concealing assets and income would be an Australian taxpayer who sets up a bank account in a tax haven country. As that country does not have an agreement to exchange information with Australia, or has a strict banking secrecy policy, the Australian Tax Office has no way to get any information about this offshore bank account.

The most common form of the more complex tax haven structure used to conceal ownership is the 'international business company'. In these cases, an 'international promoter' may use trusts or companies as the shareholders, using their own companies as trustees or nominees.

The directors of the offshore company could also be companies associated with the international promoter. Arrangements are also put in place to ensure that the 'owner' is still able to influence or control the offshore trust or company.

These complex arrangements aim to conceal the true ownership of assets and so avoid declaring any offshore income or gains for Australian tax.

Under Australian law, broadly speaking, a resident is subject to tax on income from all sources, within or outside of Australia. A non-resident is subject to tax generally on income that is only derived from Australian sources (see information on residency and non-residency here).

Resident or non-resident
Residency for tax purposes is a central concept in our tax laws, and is important on the wider worldwide stage. A company, for example, that is not incorporated here can still be deemed as 'resident' and have to pay its fair share of Australian taxes if it carries on business in Australia and has management and control here.

And people across all taxpaying groups have increasingly become involved in global investment and business dealings. The number of tax havens is gradually shrinking, but the following are commonly considered to fall within the definition of a 'tax haven':

• Andorra
• Anguilla
• Antiqua and Barbuda
• Aruba
• Bahamas
• Bahrain
• Belize
• Bermuda (United Kingdom)
• British Virgin Islands (United Kingdom)
• Cayman Islands (United Kingdom)
• Cook Islands
• Curacao
• Cyprus
• Dominica
• Gibraltar
• Grenada
• Guernsey
• The Isle of Man (United Kingdom)
• Jersey
• Liberia
• Liechtenstein
• Marshall Islands
• Mauritius
• Monaco
• Montserrat
• Nauru
• Niue
• Panama
• Saint Kitts and Nevis
• Saint Lucia
• Saint Martin (Dutch Part)
• Saint Vincent & the Grenadines
• Samoa
• San Marino
• Seychelles
• Turks and Caicos Islands (United Kingdom)
• US Virgin Islands
• Vanuatu

Note however that Australia is updating the list of countries that have a tax information exchange agreement (TIEA) in place, or have agreed to one. Check this Tax Office page for what a TIEA is, and for the latest developments. The above list will be updated as advice is received on the status of TIEAs and countries that are no longer considered to be tax havens.

It is not illegal to have dealings with a tax haven, and in fact there can be very legitimate reasons to conduct business there. An Australian for example may work overseas as a non-resident and build up savings in a tax haven's bank.

Some tax havens, including those that have large value dealings with Australian taxpayers, have developed particular niche markets. Others are regarded as offshore financial centres, and can be attractive to international businesses involved in portfolio management, such as insurance companies, self-insurers, hedge and mutual funds and offshore investment funds.

The risks
But it's a fact that some people try to exploit the confidential nature of tax havens to conceal assets and income to avoid paying their fair share of tax. The Tax Office says there can be risks in dealing with tax havens, and points out that the 'confidentiality' that may have been so appealing in one circumstance could work against you in another circumstance. The Tax Office contends that if a scheme's promoter is willing to dodge Australia's tax laws, why wouldn't they also dodge responsibilities to you?

A giveaway can be secrecy and concealment. Any arrangement that involves disguised ownership or hidden accounts should trigger your alert button – don't wait for something as obvious as an email from a Nigerian 'friend'.

You need to know what to look out for, and a touch of healthy cynicism won't go astray. For example, say you're told that an arrangement is confidential and for only select clients. There's that secrecy and concealment alert button.

And if they say the scheme already has a ruling from the Tax Office, what would it hurt to check yourself that this is the case?

What should also get your Spidey senses tingling are claims that the Tax Office won't be able to trace money back to you. Obviously if that's the case, someone else will have been given not only access to, but actual control over, your money. Don't let that happen!

And don't think that because 'So-and-so Bank' or Trust or Group is involved it must be legitimate. In many tax havens, banking licences are cheap and easy to get.

Last reviewed 9/08/2012

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