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.

These days all countries impose or demand taxes from residents earning within the country. Thus traders and businessmen, first check various laws of different countries, to see which one will benefit them the most and where they will have to pay the least amount as tax, before starting their industry. Many traders even choose countries where they can legally set up offshore companies, offshore foundations and offshore trusts. They later transfer their assets to their new companies or trusts. Hence they do not pay income tax in countries where they are residents of.

According to the laws of United States of America, residents cannot evade or escape from paying tax, whether they have a local or global business or industry. It is compulsory for all American citizens to pay taxes. Thus many people give up their citizenship to take advantage of tax exemptions. However, the strict laws of America do not permit residents to exclude their income over and above $80,000 if they are living over seas. US citizens are allowed to set up offshore trusts and companies which can be used only to reduce tax.

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.

Most countries are against the system of Tax havens. They are of the opinion that this system encourages the residents and locals not to pay taxes in their own country. Due to tax havens people will be tempted into money laundering. However, money laundering is not an obvious result of tax havens as it reduces the money only in the black markets. Laws are very tough on money laundering.

Moreover, you should be aware of the fact that not all tax havens are completely tax free. They always charge some tax on income and assets. Various countries however have different tax laws. Thus you should be very careful and logical while opting for tax havens.