Tax Competition is the competition between two offshore financial centres in order to entice foreign (or in some cases ‘home’) individuals or companies to relocate and invest their assets in their offshore tax haven. This can take one of several forms:
- The company or individual can change their official domiciled location to the offshore jurisdiction in order to benefit from the lower rate of taxation. In the case of an offshore company, however, it often can not do business within the domiciled location.
- The offshore jurisdiction can offer a zero rate of tax to the company or individual.
- A ‘tax holiday’ is offered to companies. For a period of time after they relocate to the offshore jurisdiction, the company is given a more favourable rate of tax to ease them into the new offshore location.
The benefits of tax competition
Tax competition benefits in a number of ways:
Tax competition forces governments to keep their rate of tax down. If they see that a number of their citizens or companies are going offshore for better rates then they will address the matter or pre-empt the matter by keeping their taxation rate as low as their economy allows. This will ensure that companies think twice before relocating to an offshore corporate tax haven and the prospect becomes less attractive. It is also interesting to note that certain governments can also offer a tax holiday as an incentive to encourage the company to stay.
Tax competition allows companies to prosper and grow. Although the OECD may not agree, there is a point of view that suggests that corporations may prosper from offshore tax haven benefits. Because the companies are paying less tax it means that there are much more likely to be viable businesses. A borderline business in a home jurisdiction may or may not be able to survive long term. In an offshore tax haven, where the financial burden is substantially less, the business will be profitable and, consequently, much more viable and sustainable. It will keep employing people and become increasingly profitable.
Tax competition between home and offshore jurisdictions allows individuals the chance to protect their assets from the overburdening of home taxation and capital gains tax. An individual or family can transfer assets and money to be held offshore in order to reduce the amount of tax they are paying on their savings and to protect their assets in the case of civil action or capital gains, for example.
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