Contractors' Questions: What is a tax haven?

Contractor’s Question: I’m having a friendly dispute with my PSC’s accountant over what constitutes a ‘tax haven;’ can you please settle it by providing us with a definition?

Expert’s Answer: The term ‘tax haven’ refers to a country where business and personal taxes tend to be very low or non-existent. Such a country attracts individuals and companies wanting to pay less tax than they have been in their home countries. A business may move its central base to a tax haven or an individual may elect to live there for part or all of the year in order to qualify for the lower tax regime.

As a contractor you should understand that these jurisdictions can be ‘safe havens’ for disreputable firms, notably underhand umbrella companies that dispense overseas services deemed high-risk from a compliance standpoint.

It might also inform your dispute to realise that there is competition between some countries, whereby the driving down of tax rates is done solely to encourage businesses to set up inside their borders. More than that, some countries create tax legislation explicitly intending to become a ‘haven’ for individuals and businesses wanting to avoid tax in their home countries or in their countries of work. You don’t provide details of why you’re having this “friendly dispute”, but you -- or your accountant -- might need to appreciate Chain Law, under which all parties in the contractual chain would become open to investigations triggered by tax offices in the countries of work.

The expert was Mike Philips, a director of its international, a compliance advisory for UK contractors who freelance overseas.