Tax havens
Can we really talk about fair play in the global financial system when certain countries offer much more favorable tax conditions, thus attracting capital that could be taxed in the country of origin?
This question brings us closer to understanding what so-called tax havens are and how they work. These jurisdictions, often referred to as tax havens, have become a vital part of the global economy, influencing the tax decisions of businesses and individual investors around the world.
What are tax havens?
Tax havens offer foreigners and foreign companies attractive tax conditions that include low or zero tax rates, as well as a high degree of financial confidentiality. Countries such as Antigua and Barbuda, Belize, Grenada, Jersey, the Cayman Islands, the Principality of Andorra, the British Virgin Islands and the Kingdom of Bahrain use liberal laws to attract foreign capital that would otherwise be taxed in the investor's home country.
However, not all countries offering low taxation can be classified as tax havens. Germany and the United States, for example, despite strict financial secrecy, have relatively high tax rates, effectively eliminating them from this category according to the most widely accepted definition.
Tax havens, while bringing economic benefits to investors and entrepreneurs, simultaneously generate serious challenges for the global financial system. It is estimated that through the use of tax havens, global capital of between $9 trillion and more than $32 trillion is hidden from the tax authorities, resulting in huge losses for national budgets, which cannot tax these funds. Poland, for example, loses about 3 to 4 billion zlotys a year from moving profits abroad.
In response to these challenges, many countries, including Poland, have introduced legislation to limit the misuse of tax havens. In 2019, the Ministry of Finance presented a list of 26 countries and territories that were deemed to use harmful tax competition. These countries, such as Andorra, Bahrain and Panama, are on the so-called Black List, meaning that income earned in these jurisdictions does not enjoy foreign tax credits in Poland, which is expected to discourage Polish taxpayers from transferring profits to these places.
The European Union has also taken steps to regulate tax practices, based on the principle of transparency and international cooperation. Thanks to these initiatives, many countries have amended their tax laws to bring them in line with the standards adopted by the EU.
At the corporate level, tax havens are mainly used to create complex corporate structures that allow profits to be shifted to low-tax jurisdictions. For example, a company can sell its products to a subsidiary company registered in a tax haven at production prices so that it officially does not make profits that would be taxed in its home country. The subsidiary then sells these products on the international market at higher prices, generating profits that are not taxed in the home country.
Another popular way to minimize the tax burden is to sell licenses or copyrights to subsidiary companies in tax havens for amounts far exceeding their actual value, thereby significantly reducing the tax base.
In the context of individual taxpayers, tax havens also offer opportunities for those working abroad who want to minimize their tax obligations. However, taking advantage of these opportunities requires careful tax planning and an understanding of the regulations in both the country of origin and the country where the income is generated. In Poland, for example, the foreign relief (abolition relief) avoids double taxation, but does not cover income earned in blacklisted countries.