As far as I can tell, countries/territories (like the Cayman Islands) levy absolutely no taxes on corporations thereby gaining nothing from the corporations being registered there. Meanwhile corporations save billions not paying taxes in the countries they actually do business in. Seems like a bit of a one-way relationship. So what do the tax havens gain from allowing these companies to register there?
In: Economics
It’s work for lawyers and bankers in the country.
And it’s money in their banks.
And many “tax havens” actually charge a very small tax. 5% of billions is still a lot of money. It’s better for the country than a high percentage of a tiny amount of money. And it’s better for the company than paying a “normal” 20%+ tax.
Let’s look at an example that actually happened:
US Company A sets up corporation C in a South American country, which buys a gypsum mine. They also set up a shell company, corporation B, in a tax haven country with low or zero corporate tax rate. The small country makes money on registration fees and local banks charge some account and transaction fees, but they make it very attractive to companies.
Corp C that owns the mines sells it’s gypsum to Corp B in the tax haven country at a very small markup over cost, so Corp C pays very little taxes in the SA country. Then Corp B marks up the gypsum and sells it to US Corp A at a very high price, which lowers Corp A’s net income and it pays very little US tax. Most of the profits are attributed to Corp B in the tax haven country.
So you have
Corp C (mine) sells to >> Corp B (markup) sells to >>Corp A (US corp)
This scheme actually happened, but the IRS eventually busted the US corp. However in the last few decades the IRS has backed off and doesn’t really go after corporations who violate US tax and banking law, unless they are extremely blatant and obvious about it. Has something to do with politics and money and who’s giving the IRS it’s marching orders. You can fill in the blanks.
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