At financial events, I often define a "tax haven" as a country that welcomes foreign capital and imposes low or no taxes on the foreigners who invest there. I then ask the audience if they know where the leading tax havens are located in the world.  People usually guess Switzerland, the Channel Islands, the Isle of Man, Monaco, Andorra, Liechtenstein, Bermuda or Panama. (Switzerland is not a tax haven per se, because it levies taxes on most investors, although foreigners may obtain refunds under double taxation treaties.) For those in my audience not "in the know," they are usually surprised when I explain that the world's two largest tax havens are - (drum roll, please) - the United States and the United Kingdom.  Both of these nations have hypocritical governments which continually criticize tax havens. The U.S. and the U.K. like to vilify the many small jurisdictions that are proud to be tax havens. Ironically, the U.S. and the U.K. are tax havens only for foreigners - they offer no comparable tax relief for their own highly taxed citizens. Poor Old Uncle Sam Needs Money The U.S. gives virtually tax-free treatment to many hundreds of thousands of foreigners. Uncle Sam likes to reward these foreigners who invest billions annually in American stocks, bonds, real estate and especially U.S. Treasury bonds. Deficit-spending politicians from both parties desperately need the foreign cash float these tax-free investors so generously provide.  In 2005, foreign direct investment in the United States exceeded US$1.5 trillion on a historical cost basis. That huge amount represented 10% of the total market value of all publicly traded American firms.  That huge number has grown since. Total foreign spending to acquire or establish U.S. businesses was over US$100 billion in 2006 alone. And with the ever-declining dollar, you can expect many more "fire sale" purchases by foreigners.  We saw this happen earlier this month when Dubai bought a 20% stake in the Nasdaq, and became the single largest owner of America's technology stock exchange. How America Became the Tax Haven It Is Today The U.S. government deliberately adopted this generous American tax haven policy in the 1980's. At the time, many leading U.S. financial institutions verged on bankruptcy. The combination of uncollectible bank loans to the Third World, rampant inflation, savings and loan scandals and a 20% plus prime interest rate had put billion dollar holes in bank's and insurance companies' balance sheets. The political solution was simple and effective: Drop taxes on international capital and watch the money flow in.  Foreigners, (nonresident aliens, as the U.S. government calls them), and foreign corporations these foreigners control are exempt from most U.S. taxes. They're exempt from taxes on certain kinds of interest and on capital gains from owning most types of U.S. securities, bonds or debt obligations.

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The IRS likes to insist that offshore investing is laced with tax evasion. They estimated that US$5 trillion in assets worldwide is held "offshore" in tax havens. They also estimated the IRS annually loses a minimum of US$70 billion in tax revenue from individuals investing offshore. 

But the IRS and American tax laws welcome the trillions in foreign investment in tax haven USA. They don't seem concerned about the possible tax evasion by foreigners.

The Brits Do It Too
The United Kingdom is also a major tax haven, but with a different twist - the U.K. gives major tax breaks to wealthy foreigners who actually live there. Under British tax law, anyone living in Britain and not born there can choose what is known as "non-domiciled" tax status. 

That means scores of billionaires who live there only pay tax on the relatively small amount of money they bring into the U.K. each year. They do not pay U.K. taxes on their much larger worldwide earnings. 

This law has made London a tax haven for everyone-- from Russian oil tycoons to thousands of international investment bankers. The country now has 68 billionaires - three times as many as four years ago. Only three of its 10 richest people were born in Britain.

That special U.K. tax law is always under attack. It continually presents a political problem for the new Prime Minister Gordon Brown. The British newspaper, the Guardian, accuses Brown of having a "love affair with the super-rich." 

The British trade unions want to end the loophole. For 10 years, Brown regularly promised reform on the "non-dom" tax issue as Chancellor of the Exchequer. But in the end, he did nothing. (That's fine with us. We've never met a tax we liked.) 

This Sanctuary for the Super-Rich Will Survive
The International Herald Tribune thinks the non-dom tax exemption for the rich doesn't make sense in a highly taxed country. In the U.K., the top income tax rate is 40%. But we agree with their conclusion that "...it is too late to change it. London and, by extension, the rest of the British economy have become dependent on the mega-rich." 

There is no denying the impact the rule has had. According to British Treasury figures, about 112,000 people claimed non-domiciled status in 2005. They reported a total of £9.8 billion (US$19.9 billion), in earnings. But their wealth from overseas income would be much more and they spend a lot of cash in London.

Based on past performance and the politics involved, I predict this U.K. non-dom tax loophole will survive. If we're wrong, there will be a lot of rich people fleeing London for other, more secure tax havens.

The next time you catch some London or Washington political foghorn blasting those terrible tax havens on T.V., send them an email and tell them to look in the mirror. Or tell them to go get lost in the 25,000 pages of the U.S. and/or U.K. tax code. They might just learn something.
BOB BAUMAN, Legal Counsel
BaumanBlog.SovereignSociety.com

P.S. Unfortunately, these obscure little tax rewards hidden in the 25,000 pages of American and British tax code don't apply to U.K. or U.S. citizens. But if you're looking for legal tax avoidance, you can visit other places where you're the foreigner - and reap the foreigner's tax benefits. Click here for some ideas on where to look.

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