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over recent years people have become increasingly annoyed with organizations and public figures taking advantage of tax havens the use of tax havens allows people and companies to pay lower rates of tax than they would in their native countries and this isn't a small issue five point three trillion pounds are about 8% of the world's wealth is estimated to be stored in offshore tax havens Moody's estimates that the giant US tech companies alone kept 1.4 trillion pounds offshore at the end of 2016 the Tax Justice Network estimates that the corporate and personal tax avoidance cost the world's governments 700 billion dollars a year in lost tax receipts so let's go through the basics what are tax havens how do they work and why is it all so controversial so as we've already touched on the use of tax havens is a financial technique which allows people and organizations to pay less tax a tax haven is a term used to describe any country which offers your systems and businesses lower rates of tax and your nation does there are numerous tax havens across the world which have favorable tax laws allowing people to pay lower tax rates these include famously bermuda the cayman islands Jersey the Bahamas Belize British Virgin Islands and Dora and many more countries there are a number of different ways which businesses and individuals can avoid taxes using tax havens first let's start with corporate tax avoidance one of the biggest ways that organizations can utilize tax havens is called corporate profit shifting this is where a business registers their headquarters in another country which has a lower rate of corporate tax in their native country for example the UK corporate tax rate is 19 percent so if a UK business moved its headquarters to Switzerland they'd be able to pay the lower 8.5 percent tax rate instead the difference would be even bigger if the business moves the Cayman Islands where there's a zero percent corporate tax rate by doing this the company books its profits in the tax haven and only has to pay the lower tax rate instead of paying the country where the sales actually took place allowing the company substantially reduce its tax bill and this isn't a rare occurrence in 2016 nearly two-thirds of the profits made by American multinational companies were booked in six low or zero tax countries these being Luxembourg the Netherlands Bermuda Islands Singapore and Switzerland one technique which is very popular with big companies is to move their patents code formula or algorithms to outposts in lower tax countries this then makes their very valuable assets legally reside in the low tax country the benefit of this is that the valuable asset then belongs to the branch of the company existing in the low tax area so for example a u.s. business could move its patents to Ireland a lower tax location and then the patents would belong to the Irish branch of the company at which point the Irish subsidiary could charge the US company to access the patents making it easy to funnel profits made in the u.s. to Ireland just passing them off as payments for the patents once the money's moved into Ireland it can then be taxed at the much lower rate again saving a big tax bill individuals can do a similar thing becoming a resident of a country with the lower tax rate allows people to pay less income tax and they would have done previously however there are also other methods which allow people to live in one country while paying their taxes in another this is done using trusts very simply this allows a person to move their assets into a trust where they're managed by appointed trustees these trustees are in charge of the trust and they manage the assets to provide value for the beneficiaries in this scheme the beneficiary would be the person who placed the assets and trust with the trustees permission assets within the trust can be given to beneficiaries at virtually any time very often the trustees have very little real control over what happens the assets instead they're just paid by the person who owned the assets to put their name to the trust and appear as if they're in control of it all using this technique a British person could put their car within a trust in a tax haven they can then make themselves a beneficiary thus giving themselves full access to the car the individuals would still own the vehicle and they could still use it however they wished but because it technically belonged to the trust and was under the protection of the trustees he'll be out of the UK government's remit as it will be registered to the tax haven and subject to their tax laws this system does still result in some tax being paid when the beneficiaries are paid they'll still have to pay income tax on those earnings however the major benefit is that no capital gains tax is paid and no tax is paid on a profit made from investing the money which is given to the trust no matter which technique is used a tax haven is very simply a place which charges lower taxes than your country this attracts people and corporations to move their money to these countries to avoid paying the high tax rates in their own country so is this a good deal for the tax haven while the country even want to be a tax haven well having low levels of tax allows the countries to benefit from giving itself a form of financial services industry often countries which become tax havens tend to have little other industry to bring in revenue they're frequently smaller island nations whose economies don't have much industry besides tourism becoming a tax haven brings in vast amounts of money the nation often tax havens still do have a tax rate even though it's incredibly low so even if a tiny percentage of the total money brought in by a nation is taxed it's likely still war money than it previously would have earned on top of this there's benefits related to job and business creation as tax havens often offer services such as trust management there's even been talk that the UK might become a tax haven after brexit leaving the EU would give the UK more flexibility to become a tax haven if it wanted to but is this something the UK is actually likely to do we're making a video on this topic which will be released on July 10 so make sure to subscribe to me cap top today this and all of our latest videos [Music]