Dateline: Kotor, Montenegro
I recently visited the island country of Vanuatu and hung out in Port Vila with a couple of bankers there who are part of the offshore banking circuit. Vanuatu has long been on my radar and I have studied it over the last two or three years, so this trip was the perfect opportunity to meet with many folks in the country, discuss what took them there, and delve deeper into Vanuatu’s banking industry.
The discussions not only allowed me to answer questions that clients have been asking me for a while about tax-free Vanuatu (or tax haven- as stated a few years back), but they were also an interesting way of looking at how the offshore banking world has changed in the last thirty years.
There are two distinct groups of expats in Vanuatu: the old and the new. The new folks are focused on investment opportunities and total return while those who have been there for twenty, thirty, and forty years are certainly focused on those things as well, but have also become patrons of the community.
It was interesting talking to the folks who have been there for decades because they still had promotional materials from the old days before the OECD, FATCA, and CRS came in with all the different reporting mechanisms that are now in place. Back then, Vanuatu advertised itself as a zero tax, zero disclosures, zero tax treaties, no rules tax haven- offshore jurisdiction.
In those days, while there were folks who used these banks merely for privacy, there were those who took advantage of the lax rules to try and hide suspicious activity. In a sense, they got a little too greedy and ruined it for the rest of us.
You can see why a lot of countries like Australia and New Zealand did not like that. I’m not saying I agree with them; I think that Vanuatu and countries like it often have little choice. The offshore sector makes up a substantial part of the economy for the 280,000 people who live in the South Pacific islands. But, for a long time — before the internet, the power of information sharing, and all the agreements that are in place today — you could come to a place like Vanuatu, put your money in a bank, and nobody would ever know the wiser.
Vanuatu, however, got a little carried away with the “no rules, do whatever you want, we won’t tell anybody, we’ll put the bankers in jail if they report you to your home country” attitude. That is what led Australia and New Zealand to make bigger demands of countries like Vanuatu. (While folks in the U.S. placed their money in places like the Cayman Islands, people in Australia and New Zealand were more likely to go to Vanuatu). Because of their proximity, the New Zealand and Australian governments were the first to put pressure on Vanuatu to regulate their banking sector.
Beginning in 1998, Vanuatu introduced its first value added tax (VAT) at 12.5%. This was part of the financial reform element of Vanuatu’s Comprehensive Reform Program, or CRP. Their plan to charge 12.5% for most goods and services was influenced primarily by New Zealand’s regime, which has since been raised to 15%. Almost twenty years later, Vanuatu is still at 12.5%.
There are several other favorable conditions that have not changed in the past twenty years in Vanuatu. While Vanuatu’s VAT is 12.5%, it has zero corporate tax ( hence our tax-free Vanuatu label) for international and domestic companies, and companies are exempt from capital and exchange control, making it a decent place to consider forming an offshore company. Even though accounts are kept, they do not have to be filed, nor are there auditing requirements.
What I like most about Vanuatu, however, is that it is not as well known or as popular (due to proximity) as many other offshore company jurisdictions such as Belize, the British Virgin Islands, or the Seychelles. Vanuatu is certainly on the radar of more powerful countries like Australia and has had to deal with pushback from their government after getting carried away with laidback regulations, but countries like Belize that have to deal with the United States government have much less freedom and flexibility.
All of these smaller countries have very few resources with which to defend themselves, but Vanuatu is in a much more favorable position than the traditional “tax havens” you find in the Caribbean that have come under fire from the U.S. government. Still, the Australian government is currently trying to convince Vanuatu to implement an income tax. The word is that it will not happen, but the idea is out there.
Possible Options for Vanuatu Income Tax
Since Vanuatu has not implemented any kind of income tax for businesses or individuals, there has been a lack of funds for necessary government services and equipment. The Customs Inlands and Revenue Department, or CIR, is responsible for the collection of duties and taxes. Most of the money they bring in is from Vanuatu’s VAT, but the Revenue Review Committee (RRC) has claimed that Vanuatu has an ineffective tax rate — especially since many running operations in Vanuatu are not VAT registered.
With this predicament in mind, it would seem likely that Vanuatu would introduce additional tax measures. Nevertheless, it is unclear what form those measures could take and when they would come into play.
The Revenue Review Committee does not support a flat tax rate, so any personal tax would be calculated according to financial brackets, as is the case in many other countries.
For example, a person who makes 0 to 750,000 vatu (roughly $7,000 USD) a year would have a 0% tax rate. A person who makes 750,001 to 3,500,000 vatu ($32,000 USD) a year would have a tax rate of 10%. And someone who makes more than 3,500,000 vatu would have a tax rate of 17%; more specifically, they would pay 275,000 vatu ($2,500 USD) plus an additional 17% for anything exceeding 3,500,000 vatu.
Based on the number of low income individuals in Vanuatu, an estimated 85% of residents would not pay income tax. With all that being said, the effects of a personal tax would be minimal, both for the government and for residents.
The RRC recommended a corporate tax rate of 17%, which would ensure that Vanuatu remains a competitive region as far as looking for a place to invest. It would also be an effective tax rate from which Vanuatu would see a noticeable difference, unlike with the proposal of a personal tax rate.
There would, however, be drawbacks to a corporate tax. An estimated 1% of the manufacturing sector would disappear. There’s a 10% chance that 2% of the retail trade sector would leave. There’s a 25% chance that 18% of the finance and insurance industries would leave. And there is a 5% chance that 35% of the professional, scientific, technical, and administrative service industries would leave.
Increasing VAT (highly unlikely)
Although it’s been mentioned, I can almost guarantee that Vanuatu will not have an increase in their value added tax. The RRC is strongly against the idea because it would increase the cost of living in an area where a lot of people already have a low income.
At least 80% of Vanuatu households spend the majority — if not all — of their income on imported goods; raising VAT would decrease the quality of life for a lot of people in Vanuatu.
All of these tax scenarios are only being considered as possibilities. There are many factors that must be taken into consideration before any income tax plan is implemented. However, as mentioned, most people think that an income tax is unlikely to come about in Vanuatu anytime soon.
Onshore is the New Offshore
Taking all of this into consideration, is Vanuatu a good option for offshore banking? I have long said that ‘onshore is the new offshore’ largely because the traditional offshore jurisdictions got so carried away with the ‘no rules’ attitude that they became unattractive. Low tax and some regulation is much better than a place that offers no taxes and no regulation and subsequently attract the wrong types of individuals and businesses.
I’m in favor of having privacy, but there is a way to do so in this day and age both legally and in compliance with all of your home country’s laws. That’s what’s important. The big countries are trying to squash the small countries and so I’ve said onshore is the new offshore because it’s getting harder to send your money into offshore banks.
It’s also getting harder to get your money out of offshore banks. Try to go to your U.S. banker and tell them you want to wire $50,000 to Vanuatu and see what they say. See if they try to talk you out of it or simply get freaked out. For that reason, onshore places that offer a lot of the benefits of offshore jurisdictions have become a much better option.
That said, you might be surprised by my opinion on Vanuatu. I look at Vanuatu as a good place to have as a call option — a tunnel. My suggestion would be to open a bank account, but not to put all your money there. Place a little bit of money there and then use it as a call option as the country changes over the next ten, fifteen or twenty years.
Offshore Banks in Vanuatu
Another benefit of opening a bank account in Vanuatu is that your capital can be in any currency and in any amount and there are no exchange controls. Offshore banking is one of Vanuatu’s main money-makers.
A lot of business owners prefer banking in tax-free Vanuatu instead of Belize or the Cayman Islands because those jurisdictions strictly prohibit doing business with locals, whereas Vanuatu allows business interaction between non-residents and residents.
There are two offshore banks in Vanuatu; one is the Vanuatu National Bank or the National Bank of Vanuatu and the other is the Pacific Private Bank.
Vanuatu National Bank is run by the Ni-Vanuatus. It was opened in the early 90s and has 25 branches spread across every island that has a substantial population. The Vanuatu National Bank is nothing exciting, but they will open an account for your Vanuatu offshore company if you’re still living in 1999.
Pacific Private Bank is run by Europeans. It is a small boutique operation that has been in business for about twenty years. Pacific Private Bank is a bit more interesting because they’ve decided to take a very limited amount of customers and charge high fees — about 250 euros a month and 500 euros to open an account for your offshore company.
Despite the high fees which I would generally advise to avoid, the fact is they are much more flexible than other banks you may be considering, largely because the central bank in Vanuatu is rather flexible as well. They’ll take Know Your Customer (KYC) measures and they’ll do disclosures, but they have flexibility that banks in Europe and other places don’t necessarily have. So, if you have an offshore company that you’re having trouble opening an offshore account for, it’s going to cost you, but you could go to Vanuatu.
Surprisingly there are only two offshore banks in Vanuatu. It is surprising when you consider that it only costs about half a million in capital and about $8,000 a year in fees to actually run your own bank. For some folks, coming to Vanuatu and owning a bank would be more interesting than just having some money here.
If you’re not interested in starting your own offshore bank, then I look at Vanuatu as a place where you can put a small amount of money in the banking system, report it as you’re required to, but understand that they’re going be a little bit more flexible in working with you. They will do KYC and they will be FATCA compliant, but they will have more flexibility than in many other FATCA compliant countries.
As I was talking to the guys from Pacific Private Bank, they were running around like mad men just to file the FATCA forms. It makes you wonder why they bother accepting Americans, but they want clients so it’s good news for those of us from the US who want the option of a FATCA compliant bank that still offers quite a bit of privacy and flexibility.
Advantages of Vanuatu for International Businesses
Vanuatu did not earn the title of “tax haven” just for its banks. The country’s laws for international businesses have contributed to tax-free Vanuatu ’s reputation as well. International companies have been exempt from paying taxes in the country for over twenty years. The International Companies Act exempts international businesses from business license fees, tax on income, capital gains, and stamp duty. You are not required to hold annual meetings and you do not need to file an annual return.
There is no requirement to appoint an auditor, either. Your records can be kept anywhere in the world in whatever manner you find fit. You only have to have one shareholder and one director to register your business. You’ll have privacy and reporting is kept at a minimum. The only information that will be available about your business is the name, the nature of the business, and any charges against your business.
The Bottom Line
Vanuatu is an interesting call option. It’s hard to declare any one jurisdiction as the complete solution for someone’s offshore strategy, especially without knowing their situation, but you can take all of this as general advice worth considering.
Vanuatu is an interesting place. It’s more off the radar — perhaps not if you’re from Australia or New Zealand — but if you’re from anywhere else, then it’s more off the radar than some of the places that have gotten into real trouble in the Caribbean.
The cost of living in Vanuatu is generally very low, but Vanuatu does rely on its imports, so most items that are not produced locally are likely to be expensive.
Vanuatu is not really the type of place someone would come to just for fun and no business; there are other places that are better suited for fun if that’s what you’re looking for. If you need an offshore bank account for a specific need – whether it’s for you or for a company, that’s where places like Vanuatu come into play.
Vanuatu offers privacy and freedom that isn’t available in a lot of other places. It’s for people who have had trouble with other places and it’s best suited for those interested in offshore banking and business formation.
If you’re looking for more information on offshore banking, subscribe to the Nomad Capitalist YouTube channel where we have lots of new information coming out on a regular basis. We break down all the different offshore banking jurisdictions and examine how each fits into your bigger offshore picture. Vanuatu is certainly a valid option, but knowing what will work for you depends on why you want an offshore account and what your end goals are. Be sure to figure that out first.