Specific locations worldwide attract business owners looking to cut their tax bills. Many countries offer banking services and special tax cuts for international businesses, but in many cases, businesses that take advantage of these services are evading the payment of taxes in their home country.
What is tax evasion?
Tax evasion is a crime: failing to pay or underpaying taxes. Companies and individuals who do this usually do it to retain more profit and keep more money by paying fewer taxes. Sometimes, these businesses or individuals funnel money to a legal entity created in a foreign country without disclosing it to the Internal Revenue Service.
Once the money arrives on foreign soil, it becomes subject to that country’s laws. Certain countries do not tax foreign income or have meager tax rates, which is a massive incentive for a company or person who wants to avoid paying taxes. It also benefits the foreign country because it brings in money which can boost that country’s economy and create employment.
What is a tax haven?
A tax haven is a place (country or state) that offers tax breaks or tax incentives to companies that incorporate or open their business in that location. Many countries offer this, including the United States. Delaware, for example, is known to offer tax incentives for businesses that incorporate within the state.
Likewise, some foreign countries (Cayman Islands, British Virgin Islands, Bermuda) offer incentives for companies to open businesses there, and they provide low taxation or no taxation at all. However, if the business does not report that money to its country of origin, it becomes tax evasion.
When does it become a problem?
Tax havens remain popular even though the Internal Revenue Service (IRS) has extensive resources to crack down on tax evasion and follow the flow of money that leaves U.S. soil. The crime of tax evasion is a serious crime. In the United States, if an individual is found guilty of tax evasion, they could face felony charges, a conviction, fines and prison time.
Suppose you are planning to start a business and are considering utilizing some of these incentives but have questions about the differences between tax havens and tax evasion. In that case, information is available via the government. You can also seek step-by-step guidance on how to lawfully do this with the assistance of an experienced legal professional.