There has been a lot of Sturm und Drang lately about tax havens, offshore accounts and the like. Some of what I've seen appears to be at least mildly uninformed, so I decided to write a primer on the most elementary basics. So, let's jump over the orange offshore island and begin.
I'm gonna summarise before I start explaining: There is nothing illegal or immoral about having offshore accounts and investments, even if they are in Tax Haven countries.
What is a haven
I'll just use a piece of der Wiki, it is plenty good enough for our purposes.
Source: Tax Haven
A tax haven is a state or a country or territory where certain taxes are levied at a low rate or not at all while offering due process, good governance and a low corruption rate.[1]
Individuals and/or corporate entities can find it attractive to move themselves to areas with reduced or nil taxation levels. This creates a situation of tax competition among governments. Different jurisdictions tend to be havens for different types of taxes, and for different categories of people and/or companies. ...
There are several definitions of tax havens. The Economist has tentatively adopted the description by Geoffrey Colin Powell (former economic adviser to Jersey): "What ... identifies an area as a tax haven is the existence of a composite tax structure established deliberately to take advantage of, and exploit, a worldwide demand for opportunities to engage in tax avoidance."
Please read every word and read the whole thing more than once. Think about what it says. If every one of the fifty states were a country, a lot of them would be tax havens with respect to the rest. If you have portable income and aren't massively into consuming stuff, you can get pretty low taxes by moving to Nevada.
Not everybody does so, because there are other things to life than simply lowering your taxes. (That is another topic however.) A lot of states/counties/towns have lured companies or operations to their area by offering tax holidays of various types, no property taxes for 10 years, a cap on marginal tax rates for 15 years, and stuff like that. That is haven behavior, but between the states. Countries do it too, Ireland comes to mind.
Some Examples:
Well, the U.S. is a tax haven with respect to a lot of other countries, low income taxes on the rich, no wealth taxes, low total corporate rates and the like. A real world case - before the US passed FIRPTA, persons from the UK and Italy who had windfalls not taxable in their home country from sources outside of their home country would buy California and other US real estate. The investment was seen to have stable value and good likelihood of appreciation. It's ownership was not reported to the home country. This led to two scenarios:
1) Joe Italiano invests such a windfall in California's Dry Creek Valley, and reports the ownership to the Italian taxing authorities and pays the proper Italian wealth taxes. Joe has done no wrong to anybody, but has, from the Italian perspective, invested in a Tax Haven country, and if he has a bank account at B of A to pay the property taxes and such, he also has not merely an Offshore Account, but an Offshore Account in a Tax Haven (from the Italian perspective). All the same, nothing illegal or immoral has occurred, (they grow Sangiovese, the principle grape used in Chianti in Dry Creek, BTW.)
2) Joe doesn't report to the Italian government, thus evading the Italian wealth tax. That is tax Fraud, and is very, very bad, but it is because of failure to report and failure to pay taxes, not because Joe invested in a Tax haven and had an Offshore Account.
The point is that you can commit crimes using offshore accounts and tax havens, but simply having them is not criminal.
Getting Picky
The definition presented by the Wiki mentions a worldwide demand for tax avoidance. Tbus they are evil, no? No. Per the wiki,
Tax avoidance is the legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law.
Tax
avoidance is tax minimization using methods that are
legal. O.K. - take notes, here comes a fundamental keystone of U.S. Taxation:
Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands.
---Judge Learned Hand (1872-1961), Judge, U. S. Court of Appeals
Helvering v. Gregory, 69F.2d 809 --
That case and specific language has been cited by the Supremes so many damn times that it would make your head swim - that is the effing law of the land. Havens, defined as providing means for avoidance are perfectly cool.
Avoidance v Evasion
As an aside; people often talk about evasion when describing avoidance. This is an extremely serious error. Evasion is illegal, it is a crime, it is fraud, and hence accusing somebody of evasion is accusing them of willful criminal behavior. Don't use that word.
So What About The Caymans?
Precisely! So What? (About the Caymans). Absent evidence of fraudulent underreporting of income there is nothing bad about the Caymans. I've been there, they have some nice beaches and Duty Free Shops (ooooh, Duty Free - government approved avoidance again.)
Basically, when one government calls another a Tax haven, it is whining. Country x has attracted funds and businesses by having lower taxes on those funds or activities than we do. Not everybody goes there all the same for the same reason that we don't all live in Winnemucca, there is more at stake than just taxes.
The Reality Zone
International finance and taxation is complicated and the rules change daily. The U.S. insists that some businesses have offshore accounts, and sometimes in Haven countries in order to fall within certain provisions of US laws.
A lot of countries have "blocked income/restricted currency" regimes. A guy in country x wants to use your patent down there, so you want royalties. The government won't allow that guy to cut you a check, but requires that you open an account there where the royalties may be deposited. Sometimes you can then pay yourself specified amounts from that account, and sometimes you must spend it there.
Countries sometimes require that you do business in their country via an agent and this usually requires a bank account as well. Regardless of any laws, it is often more convenient to do business abroad via an in country agent and to have a local account for local expenses. This is also often a source of local good will, increasing sales.
The Take Away
The guy next door importing small amounts of handicrafts from the Caribbean, the lady volunteer at the library collecting Peruvian royalties on her travel guide, the guy exporting byproduct K to Botswana, where it is scarce, every single Cruise Line, Shipping Company and U.S. exporter of goods has at least one offshore account, every oil company and major airline, and huge numbers of them are in "Haven Countries". Brokers, banks, mutual funds, you name it. That is hum-drum everyday business as usual.
If you think you have evidence that somebody is using such accounts to commit tax fraud, call the IRS, but otherwise there are probably things you could more productively worry and think about.