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The
Benefits of Lower Taxation
This might
seem an oxymoron, but the point is to examine the advantages
for an investment manager and for investments themselves
of being based in a low-tax area.
All jurisdictions,
whether they tax low or high, give some tax advantages
to certain preferred types of investment, usually starting
with government's own bonds, which are often tax-exempt
(why else would anyone buy them?). In high-tax countries,
most of these exemptions apply only for small investments,
and seldom to high-return investments. Pension investment
might seem to be an exception for the investor, but
it isn't really because the tax is only being deferred,
not escaped. Established tax exemptions for pension
fund managers in high-tax areas are under attack in
some countries, notably in the UK.
As a generalisation,
investment managers in low-tax areas have a considerable
tax advantage over their colleagues in high-tax areas,
which is eventually reflected in better returns for
the investor. Offshore jurisdictions which have good
double-tax treaty networks (surprisingly, there are
quite a few) are often able to receive investment income
even from high-tax countries without the imposition
of withholding tax, and usually offer tax-exempt or
tax-reduced local regimes, so that the final investor
has access to gains in a fund or an investment with
little or no intervening taxation.
It is obvious
that a fund which pays a composite rate of 10% tax on
its profits will grow much more quickly that one which
pays 20%, and differentials on this scale are easy to
achieve just as a result of picking a low-tax base as
against a high-tax base.
At a more
basic level, bank interest has traditionally almost
never been subject to withholding taxation in offshore
jurisdictions. However, the EU Savings Tax Directive,
introduced in 2005, has meant that savings interest
received in any of the signatory countries will
be subject to a withholding tax, or to information exchange,
in order to ensure that it is taxed in the EU resident's
home country).
The STD
notwithstanding, however, a roll-up money market fund
is going to grow more quickly offshore than in a country
which imposes 30% corporation tax on its gains. Of course,
if you are resident in a high-tax area, the taxman will
eventually catch up with the gains, but it may be at
a much lower rate of Capital Gains Tax - or you may
have retired and emigrated by then!
For in-depth
information on the taxation regime in most offshore
jurisdictions, see The Offshore Legal and Tax Regimes
section of any jurisdiction in www.lowtax.net.
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