Tax havens are very much in the news, and stories about small- and medium-sized companies mushrooming overnight and multi-national giants amassing fabulous fortunes via tax haven operations are growing. They may sound like Alice in Wonderland fairy tales to most people, but to the sophisticated entrepreneur, use of foreign tax havens for such advantages is an everyday business opportunity.The use of a foreign corporation domiciled in any one of the famous company tax havens such as Switzerland, Panama, the Bahamas, or Bermuda (among others, can enhance the profitability of any international business, and especially a travel or tourism enterprise.
Many European and American companies are expanding and diversifying overseas as a means of growth and as a hedge against economic ups and downs in their country of origin. By incorporating a tax haven operation to accumulate tax-free income, accomplishment of multi-national objectives is accelerated. A travel or freight operation can be established in a tax haven to be used as a conduit for international sales activity and financing. Such operations can accumulate trade discounts, commissions, advertising allowances, etc., completely tax-free while the parent or associated company can assume tax deductions by absorbing administrative and selling costs.
Before getting into the ways in which tax haven operations are used by various types of businesses, it is of eminent importance that the distinct difference is understood between two seemingly similar terms: "tax avoidance" and "tax evasion." Tax evasion has dubious and illegal overtones: for example, a company might falsify its financial statements so as to conceal its full liability to the tax authorities -- that would be tax evasion -- an infraction of the law and a very serious one.
Tax avoidance, on the other hand, is a legitimate method of minimizing or negating the tax factor. In simple terms, it is utilizing "loopholes" in tax laws and exploiting them within legal perimeters. This is the cornerstone of the tax haven concept.
Certain offshore companies can defer any tax until the profits are repatriated to the investor's home country. These are generally companies actively engaged in the conduct of a local business. In the travel business, such a definition is especially easy to meet. A retailer, or group of retailers, could set up their own travel wholesale operation in a convenient tax haven, such as Bermuda, and put all of their European business through it. The profits of the Bermuda firm would accumulate tax-free, and could be invested in other foreign operations.
In addition, a great many countries offer tax holidays of 5 to 20 years for new hotel construction, often including smaller hotels down to as few as ten rooms. A travel company or group of companies could easily invest some of their foreign profits in such a venture, continuing to build for tax-free profits. Among countries offering such incentives for hotel construction are Morocco, Jamaica, Tunisia, the Dominican Republic, Panama, most of the British-associated islands of the Caribbean, the French West Indies, and many, many more. Such concessions usually include an exemption from customs duties on building materials and fixtures.
Most developed countries do tax the current income of certain types of corporations controlled by their residents, such as leasing companies, and other financial enterprises dealing the parent company. But this concept of a controlled foreign corporation applies usually to passive or tax-haven type corporations, not to active businesses. But even for a passive business, a joint venture with foreign partners on a 50-50 basis will allow the income to accumulate tax-free since the company is not controlled by national of either country. If you are leasing aircraft, coaches, or whatever, consider a joint venture with your foreign partner whereby you set up a jointly owned company to receive some of the income. You will both profit by it, and have a tax-free pool of funds to invest together in other ventures. Such profits will not be taxed in the country of either partner until they are repatriated, since they are not controlled by either country's citizen.
Countries which have no income tax include Bermuda, the Bahamas, the Cayman Islands, Nevis, and the Turks & Caicos Islands. A number of countries do not tax foreign source income, including Panama and Hong Kong. Shannon International Airport in Ireland also has special concessions for service companies (such as travel operators) setting up in the airport area, but so far no travel company has taken advantage of these, although other service companies have.
The cruise ship operators have long been able to use Panama and Liberia, but they are about the only segment of the travel industry which has shown any understanding of the advantages of tax havens.
Many businessmen looking for tax haven opportunities would envy the daily opportunities open to the travel industry, and yet the travel industry rarely uses these opportunities -- or even understands them. 100% tax-free dollars will grow a whole lot faster than 50% after-tax dollars.
About the Author Adam Starchild is the author of over a dozen books, and hundreds of magazine articles, primarily on international business and finance. His articles have a appeared in a wide range of publications around the world -- including Business Credit, Euromoney, Finance, The Financial Planner, International Living, Offshore Financial Review, Reason, The Rotarian, Tax Planning International, Trusts & Estates, World Trade, and many more.
Article copyright © 1980, 1997 by Adam Starchild
The Travel Careers Information Center has reprinted this article with the permission of the author.
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