Dispelling Myths: Do HNWIs Keep Money in Offshores for Tax Evasion Purposes?

Offshore areas have long been considered the destinations where wealthy people hide their money to avoid taxation. Pandora Papers, a scandal related to leaking financial information of prominent business people and politicians, was an indirect confirmation of the fact. The global challenge made the governments of leading states tighten control and stiffen taxation laws by implementing new regulation mechanisms. Many offshore jurisdictions support the implementation of transparency and cash flow control measures and automatically exchange tax information.

Let’s look at the myths that people still believe in and the reasons that stimulated their appearance. Please find out the economic and financial advantages that the HNWIs see in offshores and how they use these jurisdictions to increase and protect their assets legally.

Myths about Offshore Jurisdictions

The legal and economic situation worldwide is undergoing a radical transformation. The leading states are cracking down on offshore jurisdictions while regulators are increasing transparency and control. At the same time, myths about the lack of tax regulation are still widespread. In this connection, many people are convinced that wealthy individuals keep their money in offshore banks to evade taxes and for no other purpose. Let’s delve into the popular myths.

Myth 1. Wealthy People Do Not Violate Tax Laws; They Simply Use the Existing Loopholes

There is a widespread opinion that wealthy people skillfully exploit legal loopholes. In reality, the legal systems of many countries are being improved, and access to tax evasion schemes that used to be popular is being closed.

The financial mechanisms and procedures used in offshore jurisdictions were created to ensure asset protection and confidentiality and increase the efficiency of international business rather than fiscal burden reduction only. The systems that regulate and control financial operations are being updated regularly to comply with new global standards and prevent illegal financial schemes.

Myth 2. Everyone Cheats on Taxes

The idea that everyone is trying to evade taxes is widespread and, to a large extent, exaggerated. Some individuals and companies can violate tax laws, but this does not mean that all taxpayers participate in such activities. The majority of people and organizations understand the need to comply with tax laws and the consequences of failure to do so.

The prevalence of this myth is connected with high-profile cases and scandals involving high-ranking individuals. Nevertheless, it does not reflect the general picture. Many taxpayers diligently comply with their obligations by trusting their affairs with honest accountants and lawyers. Laws, international standards, and the transparency of taxation systems are being constantly improved, which makes tax evasion much less accessible.

Myth 3. Only UNHWIs Evade Taxes

There is a widespread opinion that only UHNWIs use tax evasion schemes, but this does not fully reflect the situation. The wealthiest indeed have access to complicated tax strategies and instruments, but this does not mean that they are the only ones who violate tax laws. For example, business owners can conceal a part of their income or exaggerate expenses, which results in underpayment of taxes. Family enterprises also play a role in the tax gap. Moreover, there are cases when software is used (for example, in the restaurant business) to hide sales figures and reduce tax burdens.

Myth 4. All Tax Havens Are Located on Islands

The notion of a tax haven is traditionally associated with exotic islands and remote jurisdictions, but some of them may be located much closer than people usually think. In reality, you will find them not only on faraway islands but also in a number of countries with a high level of financial development.

For example, separate US states (Delaware, Nevada, and Wyoming) offer favorable tax conditions to businesses. These jurisdictions can ensure low taxes, a high degree of confidentiality, and flexibility in corporate structure management, making them attractive for international business. Some European countries and regions, such as Luxembourg, Malta, Cyprus, and Switzerland, also provide tax benefits and special conditions for business.

Myth 5. It Is Impossible to Prevent Tax Evasion

It is considered that fighting tax evasion is a hopeless project, and it is practically impossible to reduce the scale of this phenomenon. However, this is not true. Here are the methods that help detect unreported and hidden income:

• Implementation of latest technologies, including the use of automated data analysis systems and transaction monitoring programs.
• International cooperation and automatic financial information exchange regulated by OECD standards.
• Improvement of laws and law enforcement systems (closing loopholes and imposing more stringent liability for violations contribute to a more equitable tax system).
• Increasing public awareness and education on taxation matters.

Why HNWIs Keep Their Money in Offshores

Wealthy people choose offshore jurisdictions to keep their assets for many other reasons than just tax burden optimization. These include:

• Financial conditions. Offshore banks can offer higher interest rates and ensure a stable capital and service level as compared to the financial institutions in the homeland.
• Confidentiality. Offshore jurisdictions often provide a high level of information and data protection from potential criminal threats and unauthorized encroachments. Third parties cannot learn anything about a person’s financial condition and operations. At the same time, tax inspectors can obtain information via international agreements (FATCA and CRS).
• Legal protection. Some countries’ legal systems may be inefficient or corrupted. In this case, offshores can provide protection against unfavorable court decisions and the possibility of avoiding legal proceedings. Island jurisdictions often do not recognize the decisions of foreign courts and create financial and administrative barriers to filing lawsuits.
• Protection against governmental action. In case of economic crises or financial problems, local governments may implement measures that complicate access to the funds. For example, levies on retirement savings were implemented in Ireland during the crisis. Offshore accounts will help you protect assets against such actions or freezing.
• Inflation. If the inflation level in the country is high, assets transfer to an offshore jurisdiction will protect you against inflation-related risks. Capital conversion into more stable currencies helps to preserve its cost in conditions of economic instability.

Conclusion

When we examine the myths about wealthy individuals keeping their money in offshore accounts only for tax evasion purposes, we see that the reality is much more complicated. Offshore jurisdictions really provide opportunities for fiscal optimization and asset protection, but tax manipulation prevention measures are becoming more efficient as international control and transparency increase.

Historically, offshores were often associated with tax fraud, but now they provide lawful financial and legal advantages. The key factors for their use include higher interest rates, better confidentiality, and more reliable asset protection.

Suppose you are considering the possibility of keeping offshore assets or planning to use international financial instruments. In that case, we are ready to help you navigate the nuances and provide competent support. Contact us for professional consultancy and support in the achievement of your financial goals.