Why doesn’t every company and individual use tax-havens to pay less taxes?
"I believe that an understanding of the taxation system can help to understand our place in it, and how that impacts each of our personal finances. I will try to remain unbiased here but this is a somewhat subjective question, so please bear with me if you disagree on any point. Some of these tax savings are well-advertised, and can be used by many people, such as tax credits for mass-transit passes which exists in some countries. But some of these tax savings are things you never heard of before, until it winds up on the news. Why do some people seem to get tax savings that you and I cannot get, and why do those people always seem to have so much more money than us? A simplistic answer can show this in three parts: (1) The source of one's income; (2) Transaction costs; and (3) ""tax loopholes"". Tax savings occur proportionately to one's income, and if the savings apply to investment income, they occur proportionately to one's wealth. If someone living paycheck to paycheck with a minimal amount in a bank account ""saves tax on investment income"", they might reduce their taxable interest from $50 to $0. That's because they simply don't have any other investment income to reduce. All of their income comes in the form of employment, which is typically very hard to save taxes on. Most governments have a very firm grasp on the taxation of employment income, because it is a huge proportion of income in the country (and therefore has the largest amount of tax associated), and because it is very straightforward (work for someone = employment income). A more cynical person than I might point out that investment income is earned by the very wealthy, who can afford to lobby for politicians to pass favourable investment income laws. Even very straightforward tax saving opportunities may cost money to enable. The simplest example would be: if a tax saving opportunity is so complicated that an average person can't understand it themselves, then an accountant, lawyer, or banker will need to be the one to explain it. And that can cost you money. If your tax isn't so much to begin with, then the transaction costs to achieve the tax savings could be higher than the tax savings themselves. For example, most countries have tax savings / deferrals if you start a corporation. These rules typically exist to promote investment in the local economy. But someone who earns $10k in a side-business might not be able to afford the $3k in incorporation costs just to save $2k in taxes. The more income and wealth you have, the more these transaction costs become worthwhile. I'm going to generally define ""tax loopholes"" for the purposes of this answer as something where a somewhat arbitrary situation allows for taxes that a layman would consider unfair or unexpected. This often occurs with good intentions but poor legislation - the government tries to provide a benefit to a deserving group or to promote an activity, but ends up allowing another group to take advantage.  For example in Canada, there existed until a few years ago tax saving rules about passing on wealth to children at lower tax rates, only when a close family member is near-death [setting up a 'testamentary trust' between a grandparent and a grandchild could in some circumstances allow that trust to be created with additional 'tax brackets', meaning more income would be taxed at a less-than top tax rate before being distributed to the grandchildren].  The rules were put in place with the idea that ""oh gee, a family member has died, and the dang ol' family is grieving so hard they can't distribute the wealth to the next generation for a few months on account of all the crying. We should make it so that the estate is taxed like a person, and if they earn only a little income, they have a low tax rate, and they only get taxed at the full rate if they have a lot of income"". Seems reasonable enough, but if a family is ready to pass on wealth at the same time as someone is nudging the bucket with their foot, a morbid discussion with your lawyer and accountant could set your children up for life with forever reduced taxes on massive inheritances.  In the case of the Panama / Paradise leaks, tax savings are due to all 3 of the above: Those who have massive wealth (and therefore earn the majority of their income from investments instead of employment) can afford the transaction costs associated with taking advantage of specific ""tax loopholes"". The simplest example of which is just that income earned in a foreign country might have a lower tax rate than income earned domestically. This is often a result of ""cracks"" in the foreign tax treaties between countries, which exist generally to promote business between countries and prevent double-taxing individuals who need activity in both countries for whatever reason. Take for example the ""Apple loophole"". Apple has operations around the world. Some activity occurs in low-tax jurisdictions. Apple reports a high percentage of the value of R&D as being associated with those jurisdictions. Those branches in low-tax jurisdictions charge the high-tax branches (such as the US) with fees for use of their valuable research. So much of Apple's income is reported in those foreign jurisdictions. It won't be taxed in the US until Apple ""repatriates"" the cash back to the US. Until then, the cash sits in the foreign jurisdiction, accruing less tax. This and similar rules can be used by individuals wealthy enough to hold corporations in foreign jurisdictions with low tax rates. How each particular rule / ""loophole"" works will depend on the nature of a specific case - tax law is complex, and the rules between countries are even more so. These foreign tax loopholes are closing every year. It is getting harder and harder to hide money offshore, and it is getting less and less likely that you will be able to find a country with juuuust the right loopholes for your own offshore wealth. These types of news leaks will only help to expedite those changes." "Your ""average company and taxpayer"" generally wouldn't have significant off-shore/foreign income. In the U.S., for example, even if you have your employer deposit all of your salary to an account at a foreign bank, they would still report it to the IRS as income. Removing the money from your home country isn't what gets it out of being taxed, it's that the money was never in your home country." In a nutshell, there are significant entrance hurdles, legally and especially financially. The fixed cost and effort to get it set up is high (although later, the proportional cost and efforts are negligible). Therefore, this is only of interest for taxable amounts of seven digits or more - which most people don’t reach. "Ditto @GradeEhBacon, but let me add a couple of comments: But more relevantly: GradeEhBacon mentioned transaction costs. Yes. Many tax shelters require setting up accounts, doing paperwork, etc. Often you have to get a lawyer or accountant to do this right. If the tax shelter could save you $1 million a year in taxes, it makes sense to pay a lawyer $10,000 to set it up right. If it could save you $100 a year in taxes, paying $10,000 to set it up would be foolish. In some cases the tax savings would be so small that it wouldn't be worth the investment of spending $20 on a FedEx package to ship the paperwork. Inconvenience. Arguably this is a special case of transaction costs: the cost of your time. Suppose I knew that a certain tax shelter would save me $100 a year in taxes, but it would take me 20 hours a year to do the paperwork or whatever to manage it. I probably wouldn't bother, because my free time is worth more than $5 an hour to me. If the payoff was bigger or if I was poorer, I might be willing. Complexity. Perhaps a special case of 3. If the rules to manage the tax shelter are complicated, it may not be worth the trouble. You have to spend a bunch of time, and if you do it wrong, you may get audited and slapped with fines and penalties. Even if you do it right, a shelter might increase your chance of being audited, and thus create uncertainty and anxiety. I've never intentionally cheated on my taxes, but every year when I do my taxes I worry, What if I make an honest mistake but the government decides that it's attempted fraud and nails me to the wall? Qualification. Again, as others have noted, tax shelters aren't generally, ""if you fill out this form and check box (d) you get 50% off on your taxes"". The shelters exist because the government decided that it would be unfair to impose taxes in this particular situation, or that giving a tax break encourages investment, or some other worthy goal. (Sometimes that worthy goal is ""pay off my campaign contributors"", but that's another subject.) The rules may have unintended loopholes, but any truly gaping ones tend to get plugged. So if, say, they say that you get a special tax break for investing in medical research, you can't just declare that your cigarette and whiskey purchases are medical research and claim the tax break. Or you talked about off-shore tax havens. The idea here is that the US government cannot tax income earned in another country and that has never even entered the US. If you make $10 in France and deposit it in a French bank account and spend it in France, the US can't tax that. So American companies sometimes set up bank accounts outside the US to hold income earned outside the US, so they don't have to bring it into the US and pay the high US tax rate. (US corporate taxes are now the highest of any industrialized country.) You could, I suppose, open an account in the Caymans and deposit the income you earned from your US job there. But if the money was earned in the US, working at a factory or office in the US,  by a person living in the US, the IRS is not going to accept that this is foreign income." "There are tax free bonds in the United States.  They are for things like public housing and other urban projects.  They are tax free for everyone but only rich people buy them.  Why?   The issue is that the tax free nature of the bond is included in its yield.  So rather than yielding say a 5% return, they figure that the owner is getting 20% off due to not paying taxes.  As a result, they only give a 4% return but are as risky as a 5% return investment.  Net result, only rich people invest in tax free bonds.  ""Rich"" is defined here to mean people paying a 20% tax on long term investment returns.   Or take the State and Local Tax (SALT) deduction, which has been in the news recently.  Again, it is technically open to everyone.  But there is also a standard deduction that is open to everyone.  For the typical family, state and local taxes might be 5% of income.  So for a family making $100k a year, that's $5k.  The same family can take a $13k or so standard deduction instead of itemizing.  So why would they take the smaller deduction?   As a practical matter, two groups take the SALT deduction.  People rich enough to pay more than $13k in state and local taxes and people who also take the mortgage interest deduction.  So it helps a lot of people who are rich quite a bit.  And it helps a few middle class people some.   But if you are lower middle class with a $30k mortgage on a tiny house and paying 4% interest, then that's only $1200 a year.  Add in property taxes of $3000 and SALT of $2.8k and that's only $7k.  Even if the person gives $3k to charity, the $13k deduction is a lot better and requires less paperwork.   Contrast that with someone who has $500k mortgage at 3.6% interest.  That's $18k in interest alone.  Add in a SALT of $7k and property taxes of $50k, and there's $75k of itemized deductions, much better than $13k.  Now a $7k donation to charity is entirely deductible.  And even after the mortgage interest deduction goes away, the other $64k remains." "And yet, the same law that these individuals and companies use to   lower their taxes applies for every citizen and company of the   country. Thus, in principle, every individual and company could make   use of these methods. Clearly, they do not. Why? Misconception number 1. How did you conclude they do not? Because NY Times didn't spend time doing an expose' on your plumber? The Panama Papers and the Paradise Papers contain the files from merely three companies that help in this large industry. This is a story about poor IT policies of three companies. A potential reason could be the price charged to set up and maintain these services. This is a significant deterrent.  The costs of forming offshore entities are perpetuated by the expensive lawyers, registered agents and incompetent government representatives in these tiny jurisdictions. (For what its worth, even most United States are pretty incompetent at these administrative processes. Really only a few financial centers and a few exceptions have it all streamlined.) These are scale problems primarily. The incompetence of different nation/state's public sectors will make you realize everything you take for granted. The main message emerging from Panama Papers, Paradise Papers, and the like, is that it is the rich, powerful and famous who make use of and benefit from tax havens. But not exclusively for tax purposes. Newspapers, and even the organization leaking this information, is driving clicks to a gullible and impressionable public. I've talked with ICIJ (who release and push the discussion on the Panama/Paradise Papers), they really do believe in their ""tax expose'"" angle, but lack any consideration of how business work. 'Tax Haven'. These are sovereign nations with due process with democratically elected legislatures who looked at their budget and realized they don't need to fund their government via passive taxes. Their governments offer a good and service that people want, and it provides enough revenues to their governments. Many of these jurisdictions have well evolved corporate laws for fast evolving business models.  For example, The Segregated Portfolio Company in the British Virgin Islands is more well defined and supported by clearer case law and is more useful entity than a Series LLC in the few United States that support it. There are at least a dozen reasons why someone would use a ""tax haven"", where only one of them is ""tax""." Many of the Financial intermediaries in the business, have extraordinary high requirements for opening an account. For example to open an account in Credit Suisse  one will need 1 million US dollars. However, if you are employed by a company that exists in a tax haven and your services are provided to an employer by that tax haven company, it is the tax haven company that gets paid, not you. Under various schemes that company need not pay you at all. For example it may make you a loan which is not taxed (ie you don't pay tax on a loan, just as you don't pay tax on the money lent you by a mortgage company). You are bound by the terms of the loan agreement to repay that loan at a rate that the company finds acceptable. Indeed the company may find eventually that it is simply convenient to write off the loan as unrecoverable. if the owners/officers of he company write off your loans, how much tax will you have paid on the money you have had as   loans? The taxman can of course state that this was simply set up to avoid tax (which is illegal) so you should have a balancing scheme to show that that the loans were taken to supplement income,just as one might take a bank loan / mortgage, not replace it entirely as a tax scam. Hiring tax counsel to provide this adequate proof to HMRC has a price.  Frequently this kind of loophole exists because the number of people using it were sufficiently low not to warrant policing ( if the policing costs more than the tax recovered, then it is more efficient to ignore it) or because at some stage the scheme has been perfectly legal (as in the old offshore'education' trust recommended by the government a few decades ago). When Gordon Brown set out a 75% tax rate (for his possibly ideological reasons rather than financially based ones)for those who had these accounts , he encountered opposition from MPs who were going to be caught up paying high tax bills for what was effctively retrospective taxation, so there was a built in 'loophole' to allow the funds to be returned without undue penalty.  If you think that is morally wrong, consider what the response would be if a future Chancellor was to declare all IAs the work of the devil and claim that retrospective tax would need to be paid on all ISA transactions over the last few decades.eg: tot up all the dividends and capital gains made on an ISA in any year and pay 40% tax on all of them, even if that took the ISA into negative territory because the value today was low/ underperfoming. Yet this has been sggested as a way of filling in the hole in the budget on the grounds that anyone with an ISA can be represented as 'rich' to a selected party of voters.
&gt;Hate to break it to you but it's the republican policies of deregulation and tax cuts we can't afford that got us this shit sandwich.   Not even close. 1.1Trillion/year deficit is NOT related to taxes, it's related to increased spending while yes, tax revenues fall a bit. But you don't take actions that will make tax revenues fall more. Putting additional burdens on companies doesnt yield more tax revenue. If it did, why not tax them at 90%? But then guess what happens along that chart curve? There are no companies left.  How much in additional taxes could we take in? 100 billion conservatively? Ok genius, what about the other $1 Trillion/year? WE SPEND TOO MUCH!  &gt;Really? Seems to me like a person living paycheck to paycheck would actually have a very good idea of what it's like to live on the edge of bankruptcy  Except for most people close to bankruptcy they never had any capital to begin with. They lived pay check to pay check, using credit cards, buying houses, buying cars.   Businesses must keep a MUCH larger cushion of liquid capital and assets and must plan YEARS in advance. ---very few individuals do this or ever will.   The only correlation is that more and more liabilities are not meeting income. Except when an individual goes bankrupt it's mostly on them. If a company goes bankrupt it can effect hundreds or thousands of employees AND the company. An indivdual going bankrupt won't then bankrupt their creditors or vendors but a company going bankrupt very well could.   I don't know if you knew this, but the United States itself is bankrupt.... We can't meet liabilities with the current income. That doesn't mean increased taxes to increase income. It means reducing liabilities and creating an envionment where those who bring in the revenue can expand.   What we're talking about here is companies receiving additional burdens, not less, thus there is an incentive to decrease liabilities where possible, sell or close if necessary. That's a weak excuse.  What other companies in other countries pay in tax is irrelevant after profit.  Competition already took place to garner that cash.  US companies should want to pay taxes in their country and the government should invest it in this country.  Hell of a dream huh?  Cash is useless sitting in tax havens. "Just came across [this Economist](http://www.economist.com/news/leaders/21608751-restricting-companies-moving-abroad-no-substitute-corporate-tax-reform-how-stop) article, they make it sound quite straight forward and I don't think they can be called totalitarian leftists by any stretch.  Here is the money quote.  &gt; America’s corporate tax has two horrible flaws. The first is the tax rate, which at 35% is the highest among the 34 mostly rich-country members of the OECD. Yet it raises less revenue than the OECD average thanks to myriad loopholes and tax breaks aimed at everything from machinery investment to NASCAR race tracks. Last year these breaks cost $150 billion in forgone revenue, more than half of what America collected in total corporate taxes. &gt;  &gt; The second flaw is that America levies tax on a company’s income no matter where in the world it is earned. In contrast, every other large rich country taxes only income earned within its borders. Here, too, America’s system is absurdly ineffective at collecting money. Firms do not have to pay tax on foreign profits until they bring them back home. Not surprisingly, many do not: American multinationals have some $2 trillion sitting on their foreign units’ balance-sheets, and growing.   It seems clear that the 35% rate is not the driving reason for these huge companies doing inversions. That 35% rate should almost certainly be cut down, but the loopholes and tax breaks need to stop as a condition of a rate cut.   Clearly this is not a dead simple issue, but I just don't want to hear the silly argument of ""oh our poor mega corporations are having to pay the highest taxes in the world!"" when the tax environment in the US is clearly rigged in their favor. Small and mid sized companies that can't afford their own Congressman sure are getting fucked though, and that makes me sad." "In the U.S., virtually all salaries are expressed as ""gross salaries"", which are before the taxes that the individual must pay on their income. The numbers shown in the links are almost certainly gross salary figures. However, the ""gross salary"" is not the entire ""total compensation"" number, which is the total value of all compensation and benefits that the employee receives for his work. Total compensation includes not only salary and bonuses, but the cost or value of any employer-paid healthcare, retirement, company car, expense account, stock options, and other valuable goods or services. That's still not the total amount of money the company has to pay to have you; there are employer-paid payroll taxes totaling 6.2% of your gross salary, plus practical costs like the cost of your computer, cubicle or office furniture, and the portion of utility costs that keep you well-lit, clean and comfortable. This complete number is called ""total employee cost"", and the general rule of thumb is that it's double your gross cash compensation (salary + bonuses). Lastly, $100k in California isn't worth as much, in real terms, as $100k in other parts of the U.S. The cost of living in California, especially in Silicon Valley where the majority of the people who make six figures by being C++ programmers are located, is ridiculously expensive. There are other tech hubs in the U.S., like DFW, Austin TX, Atlanta GA, St Louis MO, Raleigh NC, etc where people earn less, but also spend less to live and so can use more of their salary in a ""discretionary"" manner." That isn't how it works, and that's definitely not the way it should work for either business or personal taxes. A business is free from taxes only if they have made a net loss over the year. This is **very** different from simply having less cash at the end of the year than at the beginning. A business could have less cash if they bought assets, paid off debt or any number of reasons and still pay taxes. On the other hand, they could end up with *more* cash at the end of the year than they began it with and still be free from taxes, as long as they made a net loss for the year. The cash balance has nothing to do with whether they pay taxes or not. Creating a corporation is not necessarily less taxes. In fact, you'll face the problem of double taxation, and since you must pay yourself a reasonable salary, if your corporation doesn't earn much to give you as dividend after the salary, and/or your tax bracket is low, you'll in fact may end up paying more taxes. Also there's a lot of bureaucracy involved in managing a corporation. Liability on the other hand is important, and what's more important - is asset separation and limiting the liability to the corporation assets, keeping your personal assets safe. To achieve that, you don't have to create a corporation, but you can create a Limited Liability Company (LLC). LLC are disregarded entities for tax purposes (i.e.: you won't have to pay taxes twice, only once as a sole proprietor/partner), but provide the liability limitation and asset separation. LLC's are much less formal, and require much less paperwork reducing the risk of corporate veil piercing because of non-compliance. I myself decided to manage my investments through LLC's for that very reason (asset separation). A lot wrong with this statement. Services which is 90% of their income is not exclusive to tourism. If you read the entire thing properly you'd know 80% of their income from services is not from the US 80% of its tourism is from the US. You're also changing the argument now you're attacking the economic policies of these countries and claiming it is reflective of their tax policy when in reality that's not true. Do you know what the Bahamian fiscal policies are?   EDIT: 50% of Bahamas income is tourism Taxing citizens on global income caused by tax inversion, not the cause of tax inversion.  If yourwebsite.com makes $1mil, and you pay yourwebsite.ca $1m for rights to the name, that's inversion.  Your company, and you, as the owner, have $1m income in Canada.  All of which came from US revenue.  I'm not saying the tax system is great or anything.  There just seems to be a miss understanding.