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Tax Havens: What Are They and Where Can You Find Them?

Tax Havens: Definition and Location

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“Tax Havens” is a term widely used for several decades. However, it became controversial again because of the “Panama Papers” case in 2018.

Dear businessmen and severely judged by different countries have awakened great struggles to stop them due to the tax evasion caused by their low or almost null tax rates to foreign capital companies and favor money laundering for lack of transparency in the information.

Therefore, the different tax legislations have incorporated in the tax system the Transfer Pricing and International Tax Transparency regulations for companies or entities resident operating in tax havens.

Chile is not an exception, also regulating within its Transfer Pricing regime the operations carried out with entities domiciled or resident in tax havens, also known as low or zero taxation countries.

This article clarifies certain doubts regarding its definition, origins, and treatment under Chilean law.

What are tax havens?

It is a very low or almost zero tax territory, country, or state.

The Organization for Economic Cooperation and Development (OECD) has pointed out certain characteristics to recognize them as follows:

  • No taxation or nominal taxation of taxes.
  • Lack of tax transparency.
  • The existence of laws or practices preventing the exchange of tax information with other countries.
  • The non-requirement of any real activity to the companies domiciled in this country or territory.

What are its origins?

The term originates in the XIX century from some states in the United States, such as Delaware, which incorporated a policy of purchasing companies in less than 24 hours, creating highly favorable conditions for them.

This model was taken to Europe due to its success at the beginning of the 20th century, Switzerland being one of the first countries to practice it and incorporate banking secrecy.

Subsequently, in 1950, the Bank of England decided not to regulate the operations of non-resident foreign clients carried out in the banks of this country. Thus, capital migrated to British territories such as the Man Islands, Guernsey, and Jersey, causing even more expansion.

What is Chile’s definition or concept regarding tax havens?

Chilean tax legislation refers to tax havens as territories with low, no taxation or preferential tax regimes.

The definition thereof is stated in Article 41-G, paragraph b), and Article 41-H, indicating that these territories or jurisdictions must comply with at least two of the following six requirements to be considered as such:

  • The effective tax rate on foreign source income must be less than 50% of the Additional Income Tax rate (35%). The effective taxation will result from dividing the net foreign tax determined by the adjusted net profit.
  • The jurisdiction or territory does not have an agreement with Chile for the exchange of tax information.
  • The territory or jurisdiction lacks legislation empowering its Tax Administration to carry out an audit of transfer pricing.
  • Do not meet the conditions to consider that the internationally accepted standards on transparency and exchange of tax information, according to OECD, have been fully or partially complied with.
  • To maintain one or more preferential tax regimes not complying with the standards dictated by the OECD.
  • Jurisdictions or territories taxing based on a territorial system.

Likewise, it states that an OECD member country will not be considered a country with low, non-taxation, or preferential regimes.

List of tax havens for Chile

According to Exempt Resolution Nª55 of 2018, such countries are the following:

United Arab Emirates

Guam Palestine
Afghanistan Guinea-Bissau

Palau

Antigua and Barbuda

Guyana Qatar
Anguilla Hong Kong

Meeting

Armenia

Heard Island and McDonald Islands Serbia
Angola Honduras

Rwanda

American Samoa

Haiti Solomon Islands
Earth Islands British Indian Ocean Territory

Seychelles

Bosnia-Herzegovina

Iraq Sudan
Bangladesh Islamic Republic of Iran

St. Helena, Ascension, and Tristan da Cunha

Bahrain

Jordan Svalbard and Jan Mayen
Burundi Kyrgyzstan

Sierra Leone

Benin

Cambodia Somalia
Saint Barthélemy Kiribati

Suriname

Bermudas

Comoros South Sudan
Brunei Darussalam Democratic People’s Republic of Korea

Sao Tome and Principe

Bonaire, Sint Eustatius and Saba

Kuwait El Salvador
Bahamas Cayman Islands

Sint Maarten (Dutch part)

Bhutan

Democratic People’s Republic of Lao  The Syrian Arab Republic
Bouvet Island Sri Lanka

Swaziland

Botswana

Liberia Turks and Caicos Islands
Belarus Libya

Chad

Belize

Republic of Moldova French Southern Territories
Cocos (Keeling) Islands Montenegro

Togo

The Democratic Republic of the Congo

Sint Maarten (French part) Thailand
The central African Republic Madagascar

Tajikistan

Congo

Marshall Islands Tokelau
Ivory Coast Mali

Timor-Leste

Costa Rica

Myanmar Turkmenistan
Cuba Mongolia

Tonga

Cape Verde

Macao Trinidad and Tobago
Curacao Northern Mariana Islands

Tuvalu

Christmas Island

Martinique Taiwan (Province of China)
Djibouti Mauritius

United Republic of Tanzania

Dominica

Maldives The United States Minor Outlying Islands (United States)
Algeria Malawi

Uzbekistan

Egypt

Malaysia Holy See
Western Sahara Mozambique

Bolivarian Republic of Venezuela

Eritrea

Namibia Virgin Islands (British)
Ethiopia New Caledonia

Virgin Islands (U.S.)

Fiji

Niger Vietnam
Falkland Islands Norfolk Island

Vanuatu

Federated States of Micronesia

Nicaragua Wallis and Futuna
Granada Nepal

Yemen

French Guiana

Oman Mayotte
The Gambia French Polynesia

Zambia

Guinea

Papua New Guinea Zimbabwe
Guadaloupe Saint Pierre and Miquelon

 

Equatorial Guinea

Pitcairn  
South Georgia and the South Sandwich Islands Puerto Rico

 

What is the treatment of tax havens in Chile?

As indicated above, Chilean tax legislation has regulated transactions carried out between a taxpayer domiciled in Chile and a taxpayer domiciled or resident in a territory with low, non-taxation, or preferential tax regime (tax haven) through Transfer Pricing rules.

These are established in article 41 E of the Income Tax Law.

Therefore, any transaction carried out with a tax haven must be under the Arm’s Length Principle if prices are at market value.

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