Point of View

Recent disclosures by investigative journalists of just two tax havens point to more than $1 trillion stored offshore; globally, some have estimated the total amounts are in the area of $21 trillion to $32 trillion. But are offshore accounts a deliberate evil or a necessary one?

Tax Havens Equal Tax Evasion

Companies use many dodges to avoid their fair share of taxes. Thus Starbucks found itself under fire in the U.K., along with Google and Amazon, for moving profits offshore to avoid higher corporate taxes.

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All three are international companies, but the tactic has been used elsewhere in the U.S. where companies have deliberately chosen to offshore their domicile to Bermuda. Toolmaker Stanley Works tried to do so. Others have succeeded.

On the other hand, many wealthy Americans were caught up in an IRS probe, thanks to data leaked by a disgruntled former Swiss bank employee. Not only were the Americans called to account, but the Swiss banks gave up some of their secrecy and a couple of them have since been wound up.

The continuing scandal in Greece is that 4,000 prominent personalities also have a close acquaintance with Swiss banking arrangements—not surprising in a country where few report they have a swimming pool (a taxable asset) and doctors are brazen enough to declare annual incomes below the taxable threshold of $13,300.

The fact that, as CBC reported, 450 Canadians have accounts in just two tax havens, the British Virgin Islands and the Cook Islands—neither of which is booming with entrepreneurship except amongst the accountants and lawyers—would seem to indicate nefarious intents at work.

And if that weren’t so, why would Finance Minister Jim Flaherty declare a crackdown on tax cheats in his most recent budget? Let the evaders pay up.

Tax Havens Equal Tax Planning

It’s not surprising that corporations book their profits in low-tax jurisdictions. In Europe, these include Luxembourg, the British dependencies of the Isle of Man and the Channel Islands, and the City of London itself. Tax planning would appear to have official sanction.

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There are good reasons for countries to offer lower corporate income taxes. Hence Ireland’s status as a (former) industrial tiger, with software companies relocating European units to Dublin and its environs, not just employing highly skilled local workers, but also attracting emigres back home.

As long as countries compete for business, there will be tax differentials.

Now about those 450 Canadians the CBC found with bank accounts in the BVI and the Cook Islands. There could be perfectly good reasons for this: doing business abroad and having the cash flow to a stable jurisdiction; non-resident trusts whose beneficiaries are not Canadian; access to global investment funds, such as hedge funds and alternative investments.

It could be sensible tax planning. In any case, Canadians with overseas investments are required to report them annually on their T-1135s.

Whether they have evaded taxes is between them and the CRA.

What is known is that, after a data leak from Lichtenstein, more than 11,000 account holders have voluntarily come forward to the CRA, reporting average assets offshore of $330,000, according to the Canadian Press. Unreported income: about $350 million a year.

So, yes, there is tax cheating. But that doesn’t automatically mean that all offshore accounts are evasion schemes.



Scot Blythe is a Toronto-based financial writer.

Originally published on Advisor.ca

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