U.S. Does not have Tax Haven Blacklist: Opportunities and Risks
Last week, EU finance ministers met to discuss a Danish proposal that would expand the blacklist of tax haven countries. Additionally, the proposal questioned if the current safeguards against tax avoidance and evasion are sufficient. In the EU, this blacklist of deemed tax havens normally leads to difficulty in tax planning when doing business in these countries.
Contrastingly, the US does not have any such list. Clients frequently find it surprising that in general there is no penalty or problem with doing business in a tax haven as long as you have proper reporting, but it is not quite that simple. The tax laws of the US are setup irrespective of the foreign country involved. However, it does not mean US international tax planning can easily use tax havens. The laws are designed to stop tax evasion and avoidance when using low tax jurisdictions based on rules that are not country specific. Instead of imposing the tax or penalty based on the country, the rules are based on certain criteria which is often failed when dealing with business through these types of countries. In most cases, this may have a similar end result, but there are some varying effects. First, if these rules are met it may be possible to use a low tax jurisdiction for tax deferral or avoidance, whereas, with a country based system it would not be possible. On the other hand, it is not uncommon for some of these rules to have unintended consequences of taxing or penalizing activities done through a country that is not a tax haven and is being used for legitimate business purposes. Overall, the US offers the risk and reward of a system that may let you use a tax haven but may also penalize you for business in a non-tax haven. Either way, the US system certainly requires much more analysis and reporting to make these determinations. Therefore, it is very important to always go through the rules and never assume business in a certain country will be or won’t be taxable.
Interestingly, Hong Kong and Singapore are not on the current EU blacklist of tax havens but are listed as tax havens by the International Monetary Fund. While these places are considered favorable financial and business centers, they generally aren’t the first places that come to mind as tax havens. For example, also on the IMF list and not on the current EU list are the Cayman Islands, British Virgin Islands, Bermuda and Mauritius, which are more traditionally known as tax havens. Both Singapore and Hong Kong have heavy business and financial ties to the EU, which could mean that an expansion of this list could be a major problem, and possibly drive business to a place without these restrictions, such as the US.