Offshore banking, commonly known as underground economy is notorious for organized crime, tax evaders, and money laundering. These banks are frequently used as a tax haven. Many people who do not wish to pay their taxes and find places to hide their income without having to pay tax on it, invest in such offshore banks. Tax haven is when people invest in foreign banks where they have to pay a considerably less amount of tax compared to their own country. Many times the tax is not even charged.

Wealthy individuals and prosperous businessmen exploit the advantages of offshore banking to the fullest. However, on a brighter side, the less developed economies of the world benefit by businesses landing on their shores. There are considerable differences in tax laws in different countries. There are different regulations for commercial and personal accounts. And it is always worth enquiring before you actually open an account and set up your business.

The majority of countries will impose taxes on those earning income within the country and their global income. some people will move to countries with favorable tax havens and save money doing so. Others will set up businesses in those countries or set up legal entities like offshore companies, offshore foundations and offshore trusts. They then transfer assets to these new companies or trusts. This means they do not have to declare their income to the country they reside in.

USA has a creditable method of ensuring that citizens do not have a chance to evade taxes; by taxing them on both their domestic and international incomes. This has prompted some people to give up their US citizenship to avail of greener pastures in foreign lands. US tax laws however exempt a citizen to up to USD 80,000 of their salary and household costs if they are residing abroad. Some of these kinds of incomes are siphoned away from taxes. US citizens can also establish offshore foundations and trusts, which in turn can be operated as tax havens.

It is most obviously advantageous for a country to be tagged as a tax haven. The tax haven country may not be required to levy huge taxes as their more developed counterparts. Some nations offer attractive tax incentives to companies, in order to lure them to set up businesses and hence bring in scopes of employment of local labor. These have obvious benefits like giving their economies, the much-needed push. There's also an improvement in the standard of living and the local labor pool gets to acquire new technical skills. And with businesses coming and setting up units in the less developed nations, the latter doesn't have to go into a competition with their industrialized counterparts.

Many are against these tax havens declaring them to encourage people to evade taxes in their own counties. They also feel that money laundering can be more widely practiced. This is not necessarily so as these tax havens do cut down on the black markets and sometimes have tougher laws for laundering money.

Not all tax havens are completely tax-free and some do charge taxes on income and assets. Different countries will vary in the laws and regulations. It is wise to look into this carefully when considering using a tax haven. In this way you will find a tax haven that is right for your needs.