Bahrain: A Tax-Free Haven For Expats And Businesses

Tax havens are countries that offer minimal or no tax liability to foreign businesses and individuals. They are politically and economically stable, and often have secrecy laws that block information on deposits from foreign tax authorities. While depositing money in a tax haven is legal, it can be misused for illegal tax avoidance. In 2017, the EU blacklisted 17 countries, including Bahrain, as tax havens. However, in 2018, Bahrain was removed from the list after making specific commitments to adapt its tax rules and practices to EU standards.

Bahrain was included on the EU's tax haven blacklist in 2017

In 2017, Bahrain was included on the European Union's (EU) blacklist of 17 countries deemed to be non-cooperative jurisdictions for tax purposes, also referred to as tax havens. The EU's investigation into these tax havens began in September 2016 and resulted in the official blacklist being released on December 5, 2017. Bahrain was listed alongside American Samoa, Barbados, Grenada, Guam, South Korea, Macau, the Marshall Islands, Mongolia, Namibia, Palau, Panama, Saint Lucia, Samoa, Trinidad and Tobago, Tunisia, and the United Arab Emirates (UAE).

The EU blacklist has implications for the countries included. EU institutions may lose their right to engage in financial operations in these countries, and financial institutions from these countries may face challenges conducting business in the EU. Additionally, the blacklisted countries will face restrictions on receiving EU funding and investments from the European Investment Bank. The EU member states can also impose their own sanctions based on the blacklist.

The EU's decision to blacklist Bahrain was based on the country's failure to comply with European Union tax standards, particularly in the areas of tax transparency, fair tax competition, and implementation of Base Erosion and Profit Shifting (BEPS) measures. The EU commissioner for economic and financial affairs, taxation and customs, Pierre Moscovici, emphasized the need for non-compliant countries to face harsher penalties and quickly fulfill their commitments to improve tax governance.

The inclusion of Bahrain on the EU tax haven blacklist has political and reputational implications, especially since Bahrain is a significant financial center with a "favorable" tax regime. Bahrain and the UAE promote business opportunities and free zones, and being on the blacklist could damage their reputation and deter investment. However, it is important to note that the EU listing does not entail any explicit penalty mechanism.

In 2018, Bahrain was removed from the EU's tax haven blacklist

In 2017, Bahrain was added to the EU's tax haven blacklist, which included 17 jurisdictions deemed by Brussels to be tax havens. This was surprising given Bahrain's desire to encourage investment in infrastructure and transformation projects. As a result of the announcement, EU institutions lost their right to engage in financial operations in the country.

However, Bahrain was removed from the blacklist in 2018. The Bahraini government had initiated the process of approving agreements that would allow it to collect information from its financial institutions and automatically exchange it with other countries annually. Bahrain also entered into a dialogue with the EU to ensure understanding and recognition of its efforts to ensure financial transparency, international cooperation, and a robust regulatory environment.

The EU's blacklist is a tool to encourage compliance and cooperation with its transparency initiatives. The specific requirement that Bahrain needed to meet was the Base Erosion and Profit Sharing (BEPS) Minimal Standard, which Bahrain was able to comply with by October 2018.

Tax havens offer low or no tax liability for foreign businesses and individuals

These countries and territories have become attractive destinations for foreign capital, although a person who banks or invests in a tax haven may be violating the laws of their home country. Tax havens may be found in another country or merely in a separate jurisdiction. For example, some U.S. states have no income tax, making them attractive to corporations looking to pay less in taxes overall, although this does not help them avoid federal taxes.

In recent times, tax havens have been under increasing international political pressure to cooperate with foreign tax fraud inquiries. While depositing money in a tax haven is legal, it is contingent on the depositor paying the taxes required by their home jurisdiction.

The advantages of tax havens are not limited to low or no taxes. They may also offer benefits in the area of credit, as it may be less expensive for U.S.-based companies to borrow funds internationally. Additionally, some tax havens have strong privacy protections and share limited or no financial information with foreign tax authorities.

Tax havens may be used illegally to hide money from tax authorities

While tax havens are not inherently illegal, they can be used to illegally hide money from tax authorities.

One of the most common ways people hide their wealth in tax havens is by setting up a legal vehicle, such as a corporation or trust, to hold their wealth or assets without disclosing information about their identity or the value of their wealth or assets. These secretive structures serve as a firewall between the owner and their wealth, obscuring their identity and helping them hide the true value of their wealth. This enables them to pay less tax than they should.

There are a range of financial instruments that people can use to hide their wealth, often supported by a large infrastructure of professionals, including lawyers, accountants, bankers, and company formation agents. Some secrecy jurisdictions choose not to collect information about companies established under their jurisdiction, so they cannot be forced to reveal information about their clients. Others actively put up barriers to international cooperation and transparency by making it illegal for bankers to disclose client information to investigative authorities.

The ultra-rich are ten times more likely to evade taxes than the average citizen. They are also more likely to use offshore accounts and shell companies to conceal their wealth. This has a significant impact on inequality, as it reduces the amount of tax revenue available for public services, infrastructure, and social programs.

While developments over the past decade have reduced the ability of individuals and corporations to use tax havens for tax evasion, very large and complex corporations can still shift profits to corporate tax havens using intricate schemes. Traditional tax havens, like Jersey, are open about their zero rates of taxation and, as a consequence, have few bilateral tax treaties. Modern corporate tax havens, on the other hand, have non-zero headline rates of taxation and high levels of OECD compliance, but their base erosion and profit-shifting tools enable corporates to achieve effective tax rates closer to zero.

Tax havens can be found in separate jurisdictions within a country

Additionally, some U.S. states and territories are popular tax havens for individuals. For instance, Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming do not impose state income tax. These locations may be considered tax havens for individuals looking to minimise their tax liability.

Intranational tax havens, such as these, can provide benefits such as reduced taxes and increased privacy for corporations and individuals. However, they may also contribute to revenue loss for governments, exacerbating inequality and creating regulatory challenges.

Frequently asked questions