Foreign Tax Havens

A few hundred years ago, Ben Franklin began the search for the true tax haven. Said Franklin: "Where there is liberty, there is my country." Today, there are so many evolving and devolving tax havens, that Franklin might be moved to say, "If I can find some consistent liberty, that's where I'll put my money."

Perhaps when Americans finally do not have Richard Nixon to kick them around any longer, it will be easier to gain a valid perspective of just how much personal and financial liberty we have left. But for now, the emotional and financial search for "havens" of all kinds is intensifying.

Because of the U.S.-sponsored world-wide inflation, every haven is having problems with its currency and must make constant adjustments to the rules. This causes much difficulty as today's haven might become tomorrow's problem. But on the positive side, all this action is tending to create new avenues of financial expression faster than before. This means that selecting a tax haven is as specialized a process as selecting a home, car or anything else fitted to your taste and financial situation. Variety has advantages, but it takes longer to find the facts and decide.

First, all havens must be considered in light of the type of income you have, and expect to have. Second, all havens must be considered in light of the taxation laws of your own country. Third, consider the political and social aspects along with the financial when locating your haven. All too often one locates the "ideal" tax haven, only to discover language and/or cultural problems. Much upset and frustration can be experienced when life-styles bother you and local mores offend you.

Following that warning, we can proceed to your basic consideration: is the haven for investment or company business? Most legal systems allow the investor the greatest latitude in financial dealings. This is usually in the form of trusts. Companies formed abroad often find it to their advantage to engage in business with a foreign company on a 50-50 basis. In this way, income can be taxed only when repatriated.

In any event, here is a check-list of items to use for basic analysis:

• Political and economic stability
• Attitude of the country toward tax haven business
• Other possible taxes and fees (death duties, inheritance tax, etc.)
• Tax treaties (existing, possible, etc.)
• Exchange controls on currency; good havens have none
• Ability to conduct your business within the country
• Ease of forming a company (attorneys, costs)
• Systems of law (civil, common, ?)
• Transportation (accessible as you might require ?)
• Banking and communications facilities
• Political situation now, long term trends—will they change the rules?

When analyzing from tax considerations alone, there are four general classifications:

1. Traditional tax havens with no taxes at all, or so minimal as to be of no consequence such as: Bahamas, Bermuda, Cayman Islands, Liechtenstein.
2. Havens which impose taxes but at low rates, such as the British Virgin Islands and the Channel Island of Jersey.
3. Tax havens which tax domestic income but exempt all foreign sources, such as Hong Kong, Liberia and Panama.
4. Countries which allow special privileges but are not true tax havens, such as Luxembourg and The Netherlands. They are useful for holding companies only.

In actual practice, most any country can be a haven of some kind. Miami, Florida banks have created secret accounts for Cubans—for obvious reasons. The U.S.A. is also a tax haven for many foreigners in high-tax countries who can utilize our capital gains taxation.

A U.S. citizen may set up a company in England and have it classified as "nonresident" for tax benefits. For years, Puerto Rico has had fine incentives for businesses locating there. Ireland continues to grant tax holidays until 1999 for new companies bringing jobs, etc. This privilege, incidentally, has recently been reaffirmed after the mining industry was threatened with loss of this status.

Creation of a tax haven is not always the direct decision of a single government. In 1972 for instance, economic conditions forced the British to float the exchange rate of the pound and thereby to dismantle the currency controls of what was known as the "Sterling Area." The "Area" still exists, consisting of Ireland, Jersey, Guernsey, Isle of Man, and Sark. But the action freed many members of the Commonwealth from the currency controls and thus allowed them to develop more toward tax-haven status.

This, along with improved communications, gave the Cayman Islands a great boost as a haven. Also about this time they secured more independent political status from Britain. The Caymans, of course, are the "in" haven these days because they:

• Have no tax treaties
• Are English speaking
• Have stable government
• Permit companies to be easily formed, inexpensively (trusts also)
• Have good air transportation (until energy crises became more frequent)
• Have offices of most major banking institutions
• Have a system of company law that is sound and carefully developed

But just to show that all is not perfect, problems may develop in the Caymans in these ways:

• Imported foreign labor is tending to upset social stability
• Resources are limited, as is land; all prices are rising
• Most "tourism" is, in effect, controlled by the U.S. and before long treaties on taxation will be offered in a way that will be difficult to refuse
• U.S. tax law is being tightened to make problems for you in terms of what you do there

Of course, when treaties and new IRS rulings close liberty's doors, enterprising countries will come up with new free market conditions to offset the problems. This is a never ending game of "Follow the Legislation," but the advantages are usually worth it. Taking a look at some "old" and "new" tax havens will help explain this process. First a few of the "has-beens."

URUGUAY: long before all this became fashionable and really necessary, Uruguay was the Switzerland of South America. In the 1950's political stability was lost and the money moved out. Much of it went to—

MONACO: this principality still has some advantages, but in 1963 the French barred their citizens from individual and corporate business there. The resultant controls sent most other nationalities elsewhere, such as:

THE BAHAMAS: fine tax haven status was enjoyed until a recent change in government. Then restrictive residency requirements and increased taxes in certain areas sent thousands of companies and individuals to the Caymans. In the Bahamas' defense however, it should be noted that the residency restrictions have been eased a bit and the government has maintained most of the favorable tax advantages. Also, because of the exodus of capital, prices for businesses and real estate are bargains. Government policies bear watching, but the speculative situation is excellent.

All tax havens are in a state of flux, but a few bear mention as their recent progress has been very positive.

BAHRAIN: this island state in the Persian Gulf is increasing its banking and communications facilities rapidly. It is a major connection point for Middle East air transport.

BERMUDA: the closest and best for many categories, particularly trusts and holding companies. It is more difficult to get established here, but this, and the deliberate lack of publicity, are long-run advantages.

HONG KONG: has a wild stock market for the activists, bank secrecy, no currency controls, some local political problems, but still the best Asia has at present.

LIECHTENSTEIN: fine legal system, banking is Swiss in design and practice, currency is Swiss. In many ways this little country is the best of all. But you must really know what you want or you will be politely discouraged.

NEW HEBRIDES: these South Sea islands are increasing their services and facilities rapidly; distance and energy problems will slow progress.

SINGAPORE: this city state has been independent for a little over a year and has made the most of it, rapidly becoming the largest capital market in Asia. The Prime Minister is determined to make it the "Switzerland of the East."

But what of the real Switzerland? It is not a tax haven. It is a money haven, and still the best in the world. When a country has (as the Swiss just did) a national referendum and votes to continue strong-anti-inflation policies, that country is to be respected—its laws and its currency.

If you make money in or, in most ways, through Switzerland, you can expect taxes to average 30 percent. However, for nonresident banking functions and some trust situations, taxes may be deferred until profits are claimed in your own country. The Swiss have tax treaties with the U.S. which can help you to avoid double taxation. The new, more famous, treaty is really so much propaganda by the U.S. Article 17 of that treaty insures the Swiss of their rights to interpret their own tax and bank law as they see fit. The treaty merely establishes some guidelines for communication and procedure.

An interesting working situation for favorable tax status combines the company law of Liechtenstein with the banking facilities of Switzerland—the better parts of two fine worlds of commerce.

Also in that part of the world is the developing importance of Austria. With a history of banking excellence that goes farther back than the Swiss, the new East-West ties are making this country an increasingly active center of finance. At present it is a good place to bank in any currency you prefer, and a nice place to vacation. Tax haven status is a way off as yet, but it bears watching.

Whatever your financial needs regarding tax havens, there are certainly one or two places that will interest you. If not, wait awhile and something is bound to turn up (if you don't create it yourself). As far as countries and legal/political systems are concerned, we live in an increasingly creative age. As always, political oppression is the mother of libertarian invention.

Wainright Dawson, Jr., formerly chairman of United Republicans of America, is a consultant in Washington D.C. who specializes in "tactical finance."