Have you ever thought why many companies have their subsidiaries or branches in countries like Bermuda and Cayman Islands, despite of the fact that these countries are not so developed and the market their is also very minimal? The answer lies in the concept of Tax Havens.
To start with, we have Bermuda, Cayman Islands, British Virgin Islands, Isle of Man, Panama, Singapore, Luxembourg, Switzerland, and many others. What are these? These are Tax Havens.
What are Tax Havens
Tax Havens are the infamous global offshore financial centers that attract millions of foreign investments every year, not particularly for higher returns but for hedging them. In simpler words, to evade taxes (all thanks to Panama papers).
They’re generally stamped with the status of no income tax, no VAT, no wealth tax, no service tax, no manufacturing tax, no excise, no customs, no royalty tax, no property tax, no capital gains tax, no foreign exchange tax, etc. Yet they have a surplus budget every year.
Now comes the bottom line: How do these function then? How is the government able to perform its basic functions of maintaining law and order when it does not collect taxes for rendering services? How is the economy able to sustain its rudimentary functions when no money is being squashed into the normal operations of working? How is infrastructure established and maintained? How is employment ensured?
See, the answer lies in systematic economies of scale and not in volumes. The revenue is raised by the government in primarily four forms. Let’s check it out.
First, through minimalist tax rates. Well, to be honest, not every tax haven promises 0% tax on earnings. Though the prominent ones do, many don’t. For instance, the Isle of Man charges 20% highest income tax. So those of you who still believe tax havens are “tax heavens”, they’re not. These are areas where tax rates are really low. That’s it!
Second, through annual work permit fees, they’re able to charge thousands of dollars in every single grant. For instance, the Cayman Islands have fees ranging from $375 to $24000 exclusive of any additional provisions.
Third, higher costs of living in these areas facilitate decent collections from residents. Specifically, Rent in the Cayman Islands is, on average, 68.27% higher than in the United States.
Last but cardinal, the collection of annual license/renewal fees for preserving the anonymity of shell businesses and other connected services assists the government to generate revenue for survival and development, although in tiny quantities but on a regular basis. Even if the government does not engage in such nefarious activities, the fact that money is being invested in the country aids in the acceleration of the economy and employment. This is why, in places like Cayman, the number of businesses outnumbers the number of people.