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|An aspect of fiscal policy|
A tax haven is generally defined as a country or place with very low "effective" rates of taxation for foreigners ("headline" rates may be higher). In some traditional definitions, a tax haven also offers financial secrecy. However, while countries with high levels of secrecy but also high rates of taxation (e.g. the United States and Germany in the Financial Secrecy Index ("FSI") rankings), can feature in some tax haven lists, they are not universally considered as tax havens. In contrast, countries with lower levels of secrecy but also low "effective" rates of taxation (e.g. Ireland in the FSI rankings), appear in most § Tax haven lists.
Traditional tax havens, like Jersey, are open about zero rates of taxation, but as a consequence have limited bilateral tax treaties. Modern corporate tax havens have non-zero "headline" rates of taxation and high levels of OECD-compliance, and thus have large networks of bilateral tax treaties. However, their base erosion and profit shifting ("BEPS") tools enable corporates to achieve "effective" tax rates closer to zero, not just in the haven but in all countries with which the haven has tax treaties; putting them on § Tax haven lists. According to several studies, the § Top 10 tax havens include corporate-focused havens like Ireland, the Netherlands, Singapore, and the U.K., while Switzerland, Luxembourg, Hong Kong, and the Caribbean (Cayman Islands, Bermuda, British Virgin Islands), feature as both major traditional tax havens and major corporate tax havens. Corporate tax havens often serve as "conduits" to traditional tax havens.
Use of tax havens, traditional and corporate, are a loss of tax revenues to countries which are not tax havens. Estimates of the scale of taxes lost vary but the most credible have a range of US$100–250 billion per annum. In addition, capital held in tax havens can permanently leave the tax base (base erosion). Estimates of capital held in tax havens also vary with the most credible estimates between $7–10 trillion (up to 10% of global assets). The harmful use of traditional and corporate tax havens has been noted in developing nations, such in Africa, where the tax revenues are most needed to build their economies.
At least 15% of countries are tax havens. Tax havens are mostly successful and well governed economies, and being a haven has often brought prosperity. The top 10–15 GDP-per-capita countries, excluding oil & gas nations, are tax havens. Because of § Inflated GDP-per-capita (due to accounting BEPS flows), havens are prone to over-leverage (international capital misprice the artificial debt-to-GDP). This can lead to severe credit cycles and/or property/banking crisis when international capital flows are repriced. Ireland's Celtic Tiger and the subsequent financial crisis in 2009–13, is an example. Jersey is another. Research shows the § U.S. as the largest beneficiary, and U.S. multinational use of tax havens, has maximised long-term U.S. exchequer recipts.
The focus on combating tax havens (e.g OECD-IMF projects) has been on common standards, transparency and data-sharing. The rise of OECD-compliant corporate tax havens, whose base erosion and profit shifting ("BEPS") tools are responsible for most of the quantum of lost taxes, has led to criticism of this focus, versus actual taxes paid. Higher-tax jurisdictions, such as the United States and the European Union, departed from the OCED BEPS Project in 2017–18, to introduce anti-BEPS tax regimes, targeted raising net taxes paid by corporations in corporate tax havens (e.g. the U.S. Tax Cuts and Jobs Act of 2017 ("TCJA") GILTI-BEAT-FDII tax regimes, and the proposed EU Digital Services Tax regime and the proposed EU Common Consolidated Corporate Tax Base).
The consensus regarding a specific and exact definition of what constitutes a tax haven, is that there is none. This is the conclusion from non-governmental organisations, such as the Tax Justice Network, from the 2008 investigation by the U.S. Government Accountability Office, from the 2015 investigation by the U.S. Congressional Research Service, from the 2017 investigation by the European Parliament, and from leading academic researchers of tax havens.
The issue, however, is material as being labelled a "tax haven" has consequences for a country to develop and trade under bilateral tax treaties. When Ireland was "blacklisted" by G20 member Brazil in 2016, trade declined. It is even more onerous for corporate tax havens, whose foreign multinationals rely on the haven's extensive network of bilateral tax treaties, through which the foreign multinationals execute their BEPS transactions, re-routing global untaxed income to the haven.
The first important paper on tax havens was the February 1994 Hines-Rice paper by James R. Hines Jr.. As well as offering a number of insights into tax havens, it took the view that the diversity of countries that become tax havens was so great that detailed definitions were inappropriate. Hines merely noted that tax havens were: a group of countries with unusually low tax rates. Hines reaffirmed this approach in a 2009 paper with Dhammika Dharmapala. He refined it in 2016 to incorporate his research on § Incentives for tax havens around governance, which is broadly accepted in the academic lexicon.
Tax havens are typically small, well-governed states that impose low or zero tax rates on foreign investors.
In April 1998, the OECD produced a definition of a tax haven, as meeting "three of four" Criteria. It was produced as part of their Harmful Tax Competition: An Emerging Global Issue initiative. By 2000, when the OECD published their first list of tax havens, it included no OECD member countries as they were now all considered to have engaged in the OECD's new Global Forum on Transparency and Exchange of Information for Tax Purposes, and therefore would not meet Criteria ii and Criteria iii. Because the OECD has never listed any of its 35 members as tax havens, Ireland, Luxembourg, the Netherlands and Switzerland are sometimes defined as the "OECD tax havens". In 2017, only Trinidad & Tobago met the 1998 OECD definition, and it has fallen into disrepute.
(†) The fourth Criteria was withdrawn after rejections from the U.S. and dropped from the OCED's 2002 report, and the definition was adjusted to "two of three" Criteria.
The 1998 OECD definition is most frequently invoked by the "OECD tax havens". However, it has been discounted by tax haven academics, including the 2015 U.S. Congressional Research Service investigation into tax havens, as being restrictive, and enabling low-tax havens (e.g. Criteria i cases), to avoid the OECD definition by improving transparency (e.g. Criteria ii & iii cases).
Thus, the evidence (limited though it undoubtedly is) does not suggest any impact of the OECD initiative on tax-haven activity. [..] Thus, the OECD initiative cannot be expected to have much impact on corporate uses of tax havens, even if (or when) the initiative is fully implemented— Dhammika Dharmapala, "What Problems and Opportunities are created by Tax Havens?" (December 2008)
In April 2000, the Financial Stability Forum (or FSF), introduced the related concept of an offshore financial centre (or OFC), which the IMF adopted. An OFC is similar to a "tax haven" and the terms are sometimes used interchangeably, but the term OFC is less controversial or pejorative. The FSF-IMF definition focuses on the BEPS tools that havens use, and on Hines' observation that these BEPS tools create artificial financial distortions in the haven. The FSF-IMF list captured some emerging corporate tax havens, such as the Netherlands, which were too nascent when Hines looked at them in 1994.
In December 2008, Dharmapala wrote that the OECD process had removed much of the need for bank secrecy in any definition of a tax haven and that it was now first and foremost, low or zero corporate tax rates, which has become the general financial dictionary definition of a tax haven. In October 2009, the Tax Justice Network introduced the Financial Secrecy Index ("FSI") and the term secrecy jurisdiction, to highlight issues in regard to OECD-compliant countries who have high tax rates and do not appear on academic lists of tax havens, but have transparency issues. The FSI does not assess tax rates or BEPS flows in its calculation, however, it is often misinterpreted as a tax haven definition in the financial media, particularly when it lists the U.S and Germany as major secrecy jurisdictions.
In October 2010, Hines published a new list of 52 tax havens and ranked them by analysing corporate investment flows. Hines' leading tax havens were dominated by corporate tax havens, who Dharmapala noted in 2014 were the bulk of global tax haven activity through BEPS tools. In July 2017, the University of Amsterdam's CORPNET group ignored any definition of a tax haven and focused on a purely quantitive approach analysing 98 million global corporate connections on the Orbis database. CORPNET's list of top 5 Conduit OFCs, and top 5 Sink OFCs, matched 9 of the top 10 havens in Hines' 2010 list, only differing in the U.K. who only transformed their tax-code in 2009-12. CORPNET's Conduit and Sink OFCs study split the understanding of a tax haven into two classifications:
In June 2018, tax academic Gabriel Zucman (et alia) published research that also ignored any definition of a tax haven, but estimated the corporate profit shifting (i.e. BEPS), and enhanced corporate profitability that Hines and Dharmapala had noted. Zucman pointed out that the CORPNET research under-represented havens associted with U.S. technology firms, like Ireland and Caymans, as Google, Facebook and Apple don't appear on Orbis. Even still, Zucman's 2018 list of top 10 havens also matched 9 of the top 10 havens in Hines' 2010 list, but with Ireland as the largest global haven. These lists (Hines 2010, CORPNET 2017 and Zucman 2018), and others, which followed a purely quantitive approach, showed the consensus around the largest corporate tax havens, was firm.
Three main types of tax haven lists have been produced to date:
Commentators also highlight proxy indicators, of which the two most prominent are:
The post-2010 rise in quantitative techniques of identifying tax havens has seen a consistency amongst the ten largest tax havens. Dharmapala notes that as corporate BEPS flows dominate tax haven activity, these are mostly corporate tax havens. Nine of the top ten tax havens in Gabriel Zucman's June 2018 study, appear in the top ten lists of the two other quantitative studies since 2010. Four of the top five Conduit OFCs are represented, however, the United Kingdom only transformed its tax code in 2009-2012. All five of the top 5 Sink OFCs are represented, although Jersey only appears in the Hines 2010 list.
The strongest consensus amongst academics regarding the world's largest tax havens is therefore: Ireland, Singapore, Switzerland and the Netherlands (the Conduit OFCs), and the Cayman Islands, British Virgin Islands, Luxembourg, Hong Kong and Bermuda (the Sink OFCs), with the United Kingdom (a Conduit OFC) still potentially in transformation.
Of these ten major havens, all bar the United Kingdom and the Netherlands featured on the original 1994 Hines-Rice list, and four of them, namely Ireland, Singapore, Switzerland (3 of the 5 top Conduit OFCs), and Hong Kong (a top 5 Sink OFC), featured in the Hines-Rice 7 major tax havens sub-category; highlighting a lack of progress in curtailing tax havens.
In terms of proxy indicators (per above), this list, excluding Canada, contains all seven of the global jurisdictions that received more than one U.S. tax inversion since 1982 (see here). In addition, six of these major tax havens are in the top 15 GDP-per-capita (note, the IMF and World Bank do not include the three Caribbean islands in GDP-per-capita tables).
Sovereign States that feature mainly as major corporate tax havens, are:
Sovereign States that feature as both major corporate tax havens, and major traditional tax havens, include:
Sovereign (semi-sovereign) States that feature mainly as traditional tax havens (but have non-zero tax rates), include:
Sub-national States that are very traditional tax havens (i.e. explicit 0% rate of tax), include (fuller list on table opposite):
U.S. dedicated entities:
Neither the U.S. or Germany have appeared on any tax haven lists by the main academic leaders in tax haven research, namely: James R. Hines Jr., Dhammika Dharmapala or Gabriel Zucman. There are no known cases of foreign firms executing tax inversions to the U.S. or Germany for tax purposes, a basic sense-check of a corporate tax haven.
|Total liquid net
|Amount of which |
|$5 – $30MM||$10.7||$5.1|
|$1 – $5MM||$17.4||$4.7|
|All > $1MM||$44.8||$19.6|
|Rest < $1MM||$10.3||$1.0|
While incomplete, and with the limitations discussed below, the available statistics nonetheless indicate that offshore banking is a very sizable activity. The OECD estimated in 2007 that capital held offshore amounted to between $5 trillion and $7 trillion, making up approximately 6–8% of total global investments under management.
A more recent study by Gabriel Zucman of the London School of Economics estimated the amount of global cross-border wealth held in tax havens (including the Netherlands and Luxembourg as tax havens for this purpose) at US$7.6 trillion, of which US$2.46 trillion was held in Switzerland alone. The Tax Justice Network (an anti-tax haven pressure group) estimated in 2012 that capital held offshore amounted to between $21 trillion and $32 trillion (between 24–32% of total global investments), although those estimates have been challenged.
In 2000, the International Monetary Fund calculated based on Bank for International Settlements data that for selected offshore financial centres, on-balance sheet cross-border assets held in offshore financial centres reached a level of $4.6 trillion at the end of June 1999 (about 50 percent of total cross-border assets). Of that $4.6 trillion, $0.9 trillion was held in the Caribbean, $1 trillion in Asia, and most of the remaining $2.7 trillion accounted for by the major international finance centres (IFCs), namely London, the U.S. IBFs, and the Japanese offshore market. The U.S. Department of Treasury estimated that in 2011 the Caribbean Banking Centers, which include Bahamas, Bermuda, Cayman Islands, Netherlands Antilles and Panama, held almost $2 trillion dollars in United States debt. Of this, approximately US$1.4 trillion is estimated to be held in the Cayman Islands alone.
The Wall Street Journal in a study of 60 large U.S. companies found that they deposited $166 billion in offshore accounts in 2012, sheltering over 40% of their profits from U.S. taxes. Similarly, Desai, Foley and Hines in the Journal of Public Economics found that: "in 1999, 59% of U.S. firms with significant foreign operations had affiliates in tax haven countries", although they did not define "significant" for this purpose. In 2009, the U.S. Government Accountability Office (GAO) reported that 83 of the 100 largest U.S. publicly traded corporations and 63 of the 100 largest contractors for the U.S. federal government were maintaining subsidiaries in countries generally considered havens for avoiding taxes. The GAO did not review the companies' transactions to independently verify that the subsidiaries helped the companies reduce their tax burden, but said only that historically the purpose of such subsidiaries is to cut tax costs.
James Henry, former chief economist at consultants McKinsey & Company, in his report for the Tax Justice Network gives an indication of the amount of money that is sheltered by wealthy individuals in tax havens. The report estimated conservatively that a fortune of $21 trillion is stashed away in off-shore accounts with $9.8 trillion alone by the top tier—less than 100,000 people—who each own financial assets of $30 million or more. The report's author indicated that this hidden money results in a "huge" lost tax revenue—a "black hole" in the economy—and many countries would become creditors instead of being debtors if the money of their tax evaders would be taxed.
The Tax Justice Network estimated in 2012 that global tax revenue lost to tax havens was circa $190 to $255 billion per year (assuming a 3% capital gains rate, a 30% capital gains tax rate, and $21 to $32 trillion hidden in tax havens. The Zucman study uses different methodology, but also estimates $190 billion in lost revenue.
The UN Economic Commission for Africa estimates that illegal financial flows cost the continent around $50 billion per year. The OECD estimates that two-thirds ($30 billion) occur from tax avoidance and evasion from non-African firms. The avoidance of taxation by international corporations through legal and illegal methods stifles development in African countries. The Sustainable Development Goals (SDGs) will be difficult to obtain if these losses persist.
However, the tax policy director of the Chartered Institute of Taxation expressed skepticism over the accuracy of the figures. If true, those sums would amount to approximately 5 to 8 times the total amount of currency presently in circulation in the world. Daniel J. Mitchell of the Cato Institute says that the report also assumes, when considering notional lost tax revenue, that 100% money deposited offshore is evading payment of tax.
In October 2009, research commissioned from Deloitte for the Foot Review of British Offshore Financial Centres said that much less tax had been lost to tax havens than previously had been thought. The report indicated "We estimate the total UK corporation tax potentially lost to avoidance activities to be up to £2 billion per annum, although it could be much lower." An earlier report by the U.K. Trades Union Congress, concluded that tax avoidance by the 50 largest companies in the FTSE 100 was depriving the UK Treasury of approximately £11.8 billion. The report also stressed that British Crown Dependencies make a "significant contribution to the liquidity of the UK market". In the second quarter of 2009, they provided net funds to banks in the UK totaling $323 billion (£195 billion), of which $218 billion came from Jersey, $74 billion from Guernsey and $40 billion from the Isle of Man.
The Tax Justice Network reports that this system is "basically designed and operated" by a group of highly paid specialists from the world’s largest private banks (led by UBS, Credit Suisse, and Goldman Sachs), law offices, and accounting firms and tolerated by international organizations such as Bank for International Settlements, the International Monetary Fund, the World Bank, the OECD, and the G20. The amount of money hidden away has significantly increased since 2005, sharpening the divide between the super-rich and the rest of the world.
Almost all tax havens, both traditional and corporate, have a high GDP-per-capita ranking. This is because the haven's national economic statistics are artificially inflated by the BEPS accounting flows that add to the haven's GDP (and even GNP), but are not taxable in the haven. Havens make up most of the top 10-15 GDP-per-capita tables, excluding oil and gas nations (see table below). Research into tax havens suggest a high GDP-per-capita score, in the absence of material natural resources, as an important proxy indicator of a tax haven. At the core of the FSF-IMF definition of an offshore financial centre is a country where BEPS flows are out of proportion to the size of the indigenous economy. Apple's Q1 2015 "leprechaun economics" BEPS transaction in Ireland was a dramatic example.
This artificial inflation of GDP can attract excess foreign capital, who misprice their capital by using a Debt-to-GDP metric for the haven, thus producing phases of stronger economic growth. However, the increased leverage leads to more severe credit cycles, particularly where the artificial nature of the GDP is exposed to foreign investors. Examples being the Irish financial crisis in 2009–2013.
|International Monetary Fund (2017)||World Bank (2016)|
In several research papers, James R. Hines Jr. showed that tax havens were typically small but well-governed nations and that being a tax haven had brought significant prosperity. In 2009, Hines and Dharmapala suggested that roughly 15% of countries are tax havens, but they wondered why more countries had not become tax havens given the observable economic prosperity it could bring.
There are roughly 40 major tax havens in the world today, but the sizable apparent economic returns to becoming a tax haven raise the question of why there are not more.
Hines and Dharmapala concluded that governance was a major issue for smaller countries in trying to become tax havens. Only countries with strong governance and legislation which was trusted by foreign corporates and investors, would become tax havens. Hines and Dharmapala's positive view on the financial benefits of becoming a tax haven, as well as being two of the major academic leaders into tax haven research, put them in sharp conflict with non-governmental organisations advocating tax justice, such as the Tax Justice Network, who accused them as promoting tax avoidance.
An unexpected conclusion of the original 1994 Hines-Rice paper was that: low foreign tax rates [from tax havens] ultimately enhance U.S. tax collections. Hines observed that as a result of paying little or no foreign taxes, from using tax havens, U.S. multinationals had avoided building up foreign tax credits that would reduce their ultimate U.S. tax liability. Hines's conclusion would influence U.S. policy towards tax havens, and explain why, in spite of public disclosure of tax avoidance by firms such as Google, Facebook, and Apple, with Irish BEPS tools, little has been done by the U.S. to stop them.
Tax justice campaign groups have interpreted Hines' research as the U.S. engaging in unfair tax competition with higher-tax nations (i.e. the U.S. exchequer earning excess taxes at the expense of others). The 2017 TCJA seems to support this view with the U.S. exchequer being able to levy a 15.5% repatriation tax on over $1 trillion of untaxed offshore profits built up by U.S. multinationals with BEPS tools from non-U.S. revenues. Had these U.S. multinationals paid taxes on these non-U.S. profits in the countries in which they were earned, there would have been the little further liability to U.S. taxation.
Academics who study tax havens, however, attribute Washington's support of U.S. multinational use of tax havens to a "political compromise" between Washington, and even other higher-tax OECD nations, to compensate for the shortcomings of the U.S. "worldwide" tax system. Hines had advocated for a switch to a "territorial" tax system, as most other nations use, which would remove U.S. multinational need for tax havens. In 2016, Hines, with German tax academics, showed that German multinationals make little use of tax havens because their tax regime, a "territorial" system, removes any need for it.
Hines' research was cited by the by the Council of Economic Advisors ("CEA") in drafting the TCJA legislation in 2017, and advocating for moving to a hybrid "territorial" tax system framework.
A controversial area of research into tax havens is the suggestion that tax havens actually promote global economic growth by solving perceived issues in the tax regimes of higher-taxed nations (e.g. the above discussion on the U.S. "worldwide" tax system as an example). Major academic leaders in tax haven research, such as Hines and Dharmapala, cite evidence that, in certain cases, tax havens can appear to promote economic growth in higher-tax countries, and can support beneficial hybrid tax regimes of higher taxes on domestic activity, but lower taxes on international sourced capital or income:
The effect of tax havens on economic welfare in high tax countries is unclear, though the availability of tax havens appears to stimulate economic activity in nearby high-tax countries.
Tax havens change the nature of tax competition among other countries, very possibly permitting them to sustain high domestic tax rates that are effectively mitigated for mobile international investors whose transactions are routed through tax havens. [..] In fact, countries that lie close to tax havens have exhibited more rapid real income growth than have those further away, possibly in part as a result of financial flows and their market effects.
The boundaries with wider contested economic theories on the effects of corporate taxation on economic growth, and whether there should be corporate taxes, are easy to blur. Other major academic leaders in tax haven research, such as Zucman, highlight the injustice of tax havens and see the effects as lost income for the development of society. It remains a controversial area with advocates on both sides.
Since the early 20th century, wealthy individuals from high-tax countries have sought to relocate themselves in low-tax countries. In most countries in the world, residence is the primary basis of taxation—see tax residence. The low-tax country chosen may levy no, or only very low, income tax and may not levy capital gains tax, or inheritance tax. Individuals are normally unable to return to their previous higher-tax country for more than a few days a year without reverting their tax residence to their former country. They are sometimes referred to as tax exiles.[page needed]
Corporations can establish subsidiary corporations and/or regional headquarters in corporate tax havens for tax planning purposes. Where a corporate moves their legal headquarters to a haven, it is known as a corporate tax inversion. The rise of intellectual property, or IP, as a major BEPS tax tool, has meant that corporates can achieve much of the benefits of a tax inversion, without needing to move their headquarters. Apple's $300 billion quasi-inversion to Ireland in 2015 (see leprechaun economics) is a good example of this.
Asset holding involves utilizing an offshore trust or offshore company, or a trust owning a company. The company or trust will be formed in one tax haven, and will usually be administered and resident in another. The function is to hold assets, which may consist of a portfolio of investments under management, trading companies or groups, physical assets such as real estate or valuable chattels. The essence of such arrangements is that by changing the ownership of the assets into an entity which is not tax resident in the high-tax country, they cease to be taxable in that country.[page needed]
Often the mechanism is employed to avoid a specific tax. For example, a wealthy testator could transfer his house into an offshore company; he can then settle the shares of the company on trust (with himself being a trustee with another trustee, whilst holding the beneficial life estate) for himself for life, and then to his daughter. On his death, the shares will automatically vest in the daughter, who thereby acquires the house, without the house having to go through probate and being assessed with inheritance tax. Most countries assess inheritance tax, and all other taxes, on real estate within their jurisdiction, regardless of the nationality of the owner, so this would not work with a house in most countries. It is more likely to be done with intangible assets.[page needed]
Many businesses which do not require a specific geographical location or extensive labor are set up in a country to minimize tax exposure. Perhaps the best illustration of this is the number of reinsurance companies which have migrated to Bermuda over the years. Other examples include internet-based services and group finance companies. In the 1970s and 1980s corporate groups were known to form offshore entities for the purposes of "reinvoicing". These reinvoicing companies simply made a margin without performing any economic function, but as the margin arose in a tax-free country, it allowed the group to "skim" profits from the high-tax country. Most sophisticated tax codes now prevent transfer pricing schemes of this nature.[page needed]
Much of the economic activity in tax havens today consists of professional financial services such as mutual funds, banking, life insurance and pensions. Generally, the funds are deposited with the intermediary in the low-tax country, and the intermediary then on-lends or invests the money in another location. Although such systems do not normally avoid tax in the principal customer's country, it enables financial service providers to provide international products without adding another layer of taxation. This has proved particularly successful in the area of offshore funds. It has been estimated over 75% of the world's hedge funds, probably the riskiest form of collective investment vehicle, are domiciled in the Cayman Islands, with nearly $1.1 trillion US Assets under management although statistics in the hedge fund industry are notoriously speculative.
Bearer shares allow for anonymous ownership, and thus have been criticized for facilitating money laundering and tax evasion; these shares are also available in some OECD countries as well as in the U.S. state of Wyoming.:7 In a 2010 study in which the researcher attempted to set-up anonymous corporations found that 13 of the 17 attempts were successful in OECD countries, such as the United States and the United Kingdom, while only 4 of 28 attempts were successful in countries typically labeled tax havens. The last two states in America permitting bearer shares, Nevada and Delaware made them illegal in 2007. In 2011, an OECD peer review recommended that the United Kingdom improve its bearer share laws. The UK abolished the use of bearer shares in 2015.
Most tax havens have a double monetary control system, which distinguish residents from non-resident as well as foreign currency from the domestic, the local currency one. In general, residents are subject to monetary controls, but not non-residents. A company, belonging to a non-resident, when trading overseas is seen as non-resident in terms of exchange control. It is possible for a foreigner to create a company in a tax haven to trade internationally; the company’s operations will not be subject to exchange controls as long as it uses foreign currency to trade outside the tax haven. Tax havens usually have currency easily convertible or linked to an easily convertible currency. Most are convertible to US dollars, euro or to pounds sterling.
The Foreign Account Tax Compliance Act (FATCA) was passed by the US Congress to stop the outflow of money from the country into tax haven bank accounts. With the strong backing of the Obama Administration, Congress drafted the FATCA legislation and added it into the Hiring Incentives to Restore Employment Act (HIRE) signed into law by President Obama in March 2010.
FATCA requires foreign financial institutions (FFI) of broad scope – banks, stock brokers, hedge funds, pension funds, insurance companies, trusts – to report directly to the Internal Revenue Service (IRS) all clients who are U.S. persons. Starting January 2014, FATCA requires FFIs to provide annual reports to the IRS on the name and address of each U.S. client, as well as the largest account balance in the year and total debits and credits of any account owned by a U.S. person. If an institution does not comply, the U.S. will impose a 30% withholding tax on all its transactions concerning U.S. securities, including the proceeds of sale of securities.
In addition, FATCA requires any foreign company not listed on a stock exchange or any foreign partnership which has 10% U.S. ownership to report to the IRS the names and tax identification number (TIN) of any U.S. owner. FATCA also requires U.S. citizens and green card holders who have foreign financial assets in excess of $50,000 to complete a new Form 8938 to be filed with the 1040 tax return, starting with fiscal year 2010. The delay is indicative of a controversy over the feasibility of implementing the legislation as evidenced in this paper from the Peterson Institute for International Economics.
An unintended consequence of FATCA and its cost of compliance for non-US banks is that some non-US banks are refusing to serve American investors. Concerns have also been expressed that, because FATCA operates by imposing withholding taxes on U.S. investments, this will drive foreign financial institutions (particularly hedge funds) away from investing in the U.S. and thereby reduce liquidity and capital inflows into the US.
A 2012 report by the British Tax Justice Network estimated that between US$21 trillion and $32 trillion is sheltered from taxes in unreported tax havens worldwide. If such wealth earns 3% annually and such capital gains were taxed at 30%, it would generate between $190 billion and $280 billion in tax revenues, more than any other tax shelter. If such hidden offshore assets are considered, many countries with governments nominally in debt are shown to be net creditor nations. However, despite being widely quoted, the methodology used in the calculations has been questioned, and the tax policy director of the Chartered Institute of Taxation also expressed skepticism over the accuracy of the figures. Another recent study estimated the amount of global offshore wealth at the smaller—but still sizable—figure of US$7.6 trillion. This estimate included financial assets only: "My method probably delivers a lower bound, in part because it only captures financial wealth and disregards real assets. After all, high-net-worth individuals can stash works of art, jewelry, and gold in 'freeports,' warehouses that serve as repositories for valuables—Geneva, Luxembourg, and Singapore all have them. High-net-worth individuals also own real estate in foreign countries." A study of 60 large US companies found that they deposited $166 billion in offshore accounts during 2012, sheltering over 40% of their profits from U.S. taxes.
Details of thousands of owners of offshore companies were published in April 2013 in a joint collaboration between The Guardian and the International Consortium of Investigative Journalists. The data was later published on a publicly accessible website in an attempt to "crowd-source" the data. The publication of the list appeared to be timed to coincide with the 2013 G8 summit chaired by British Prime Minister David Cameron which emphasised tax evasion and transparency.
Germany announced in February 2008 that it had paid €4.2 million to Heinrich Kieber, a former data archivist of LGT Treuhand, a Liechtenstein bank, for a list of 1,250 customers of the bank and their accounts' details. Investigations and arrests followed relating to charges of illegal tax evasion. The German authorities shared the data with U.S. tax authorities, but the British government paid a further £100,000 for the same data. Other governments, notably Denmark and Sweden, refused to pay for the information regarding it as stolen property. The Liechtenstein authorities subsequently accused the German authorities of espionage.
However, regardless of whether unlawful tax evasion was being engaged in, the incident has fuelled the perception among European governments and the press that tax havens provide facilities shrouded in secrecy designed to facilitate unlawful tax evasion, rather than legitimate tax planning and legal tax mitigation schemes. This in turn has led to a call for "crackdowns" on tax havens. Whether the calls for such a crackdown are mere posturing or lead to more definitive activity by mainstream economies to restrict access to tax havens is yet to be seen. No definitive announcements or proposals have yet been made by the European Union or governments of the member states.
Peer Steinbrück, the former German finance minister, announced in January 2009 a plan to amend fiscal laws. New regulations would disallow that payments to companies in certain countries that shield money from disclosure rules to be declared as operational expenses. The effect of this would make banking in such states unattractive and expensive.
In November 2009, Sir Michael Foot, a former Bank of England official and Bahamas bank inspector, delivered a report on the British Crown Dependencies and Overseas Territories for HM Treasury. The report indicated that while many of the territories "had a good story to tell", others needed to improve their abilities to detect and prevent financial crime. The report also stressed the view that narrow tax bases presented long term strategic risks and that the economies should seek to diversify and broaden their tax bases.
It indicated that tax revenue lost by the UK government appeared to be much smaller than had previously been estimated (see above under Lost tax revenue), and also stressed the importance of the liquidity provided by the territories to the United Kingdom. The Crown Dependencies and Overseas Territories broadly welcomed the report. The pressure group Tax Justice Network, unhappy with the findings, commented that "[a] weak man, born to be an apologist, has delivered a weak report."
At the London G20 summit on 2 April 2009, G20 countries agreed to define a blacklist for tax havens, to be segmented according to a four-tier system, based on compliance with an "internationally agreed tax standard." The list as per 2 April 2009 can be viewed on the OECD website. The four tiers were:
Those countries in the bottom tier were initially classified as being 'non-cooperative tax havens'. Uruguay was initially classified as being uncooperative. However, upon appeal the OECD stated that it did meet tax transparency rules and thus moved it up. The Philippines took steps to remove itself from the blacklist and Malaysian Prime Minister Najib Razak had suggested earlier that Malaysia should not be in the bottom tier.
In April 2009 the OECD announced through its chief Angel Gurria that Costa Rica, Malaysia, the Philippines and Uruguay have been removed from the blacklist after they had made "a full commitment to exchange information to the OECD standards." Despite calls from the former French President Nicolas Sarkozy for Hong Kong and Macau to be included on the list separately from China, they are as yet not included independently, although it is expected that they will be added at a later date.
Government response to the crackdown has been broadly supportive, although not universal. Luxembourg Prime Minister Jean-Claude Juncker has criticised the list, stating that it has "no credibility", for failing to include various states of the USA which provide incorporation infrastructure which are indistinguishable from the aspects of pure tax havens to which the G20 object. As of 2012, 89 countries have implemented reforms sufficient to be listed on the OECD's white list. According to Transparency International half of the least corrupted countries were tax havens.
In December 2017, European Union adopted blacklist of tax havens in a bid to discourage the most aggressive tax dodging practices. It also had a so-called gray list which includes those who have committed to change their rules on tax transparency and cooperation. The 17 blacklisted territories are: American Samoa, Bahrain, Barbados, Grenada, Guam, South Korea, Macau, The Marshall Islands, Mongolia, Namibia, Palau, Panama, Saint Lucia, Samoa, Trinidad and Tobago, Tunisia, United Arab Emirates. Some activists denounced the listing process as a whitewash and had called for the inclusion in the blacklist of some EU countries accused of facilitating tax avoidance, like Luxembourg, Malta, Ireland and the Netherlands.
The Common Reporting Standard is an information standard for the automatic exchange of tax and financial information on a global level developed by the Organisation for Economic Co-operation and Development in 2014. Participating in the CRS from 1 January 2017 onwards are Australia, the Bahamas, Bahrain, Brazil, Brunei Darussalam, Canada, Chile, China, The Cook Islands, Hong Kong, Indonesia, Israel, Japan, Kuwait, Lebanon, Macau, Malaysia, Mauritius, Monaco, New Zealand, Panama, Qatar, Russia, Saudi Arabia, Singapore, Switzerland, Turkey, the United Arab Emirates, Uruguay.
The use of differing tax laws between two or more countries to try to mitigate tax liability is probably as old as taxation itself. In Ancient Greece, some of the Greek Islands were used as depositories by the sea traders of the era to place their foreign goods to thus avoid the two-percent tax imposed by the city-state of Athens on imported goods. The practice may have first reached prominence through the avoidance of the Cinque Ports and later the staple ports in the twelfth and fourteenth centuries respectively. In 1721, American colonies traded from Latin America to avoid British taxes.
Various countries claim to be the oldest tax haven in the world. For example, the Channel Islands claim their tax independence dating as far back as Norman Conquest, while the Isle of Man claims to trace its fiscal independence to even earlier times. Nonetheless, the modern concept of a tax haven is generally accepted to have emerged at an uncertain point in the immediate aftermath of World War I. Bermuda sometimes optimistically claims to have been the first tax haven based upon the creation of the first offshore companies legislation in 1935 by the newly created law firm of Conyers Dill & Pearman. However, the Bermudian claim is debatable when compared against the enactment of a Trust Law by Liechtenstein in 1926 to attract offshore capital.[not specific enough to verify]
Most economic commentators suggest that the first "true" tax haven was Switzerland, followed closely by Liechtenstein.[page needed] Swiss banks had long been a capital haven for people fleeing social upheaval in Russia, Germany, South America and elsewhere. However, in the early part of the twentieth century, during the years immediately following World War I, many European governments raised taxes sharply to help pay for reconstruction efforts following the devastation of World War I. By and large, Switzerland, having remained neutral during the Great War, avoided these additional infrastructure costs and was consequently able to maintain a low level of taxes. As a result, there was a considerable influx of capital into the country for tax related reasons. It is difficult, nonetheless, to pinpoint a single event or precise date which clearly identifies the emergence of the modern tax haven.
The use of modern tax havens has gone through several phases of development subsequent to the interwar period. From the 1920s to the 1950s, tax havens were usually referenced as the avoidance of personal taxation. The terminology was often used with reference to countries to which a person could retire and mitigate their post retirement tax position, a usage which was still being echoed to some degree in a 1990 report, which included indications of quality of life in various tax havens which future tax exiles may wish to consider.
From the 1950s onward, there was significant growth in the use of tax havens by corporate groups to mitigate their global tax burden. The strategy generally relied upon there being a double taxation treaty between a large country with a high tax burden (that the company would otherwise be subject to), and a smaller country with a low tax burden. By structuring the group ownership through the smaller country, corporations could take advantage of the double taxation treaty, paying taxes at the much lower rate. Although some of these double tax treaties survive,[when?], for example between Barbados and Japan, between Cyprus and Russia and Mauritius with India, which India sought to renegotiate in 2007, most major countries began repealing their double taxation treaties with micro-states in the 1970s, to prevent corporate tax leakage in this manner.
In the early to mid-1980s, most tax havens changed the focus of their legislation to create corporate vehicles which were "ring-fenced" and exempt from local taxation (although they usually could not trade locally either). These vehicles were usually called "exempt companies" or "international business corporations". However, in the late 1990s and early 2000s, the OECD began a series of initiatives aimed at tax havens to curb the abuse of what the OECD referred to as "unfair tax competition". Under pressure from the OECD, most major tax havens repealed their laws permitting these ring-fenced vehicles to be incorporated, but concurrently they amended their tax laws so that a company which did not actually trade within the country would not accrue any local tax liability.
A country with little or no taxation that offers foreign individuals or corporations residency so that they can avoid tax at home.
A tax haven is a country or place which has a low rate of tax so that people choose to live there or register companies there in order to avoid paying higher tax in their own countries.
a place where people pay less tax than they would pay if they lived in their own country
The “tax havens” are locations with very low tax rates and other tax attributes designed to appeal to foreign investors.
Tax havens are typically small, well-governed states that impose low or zero tax rates on foreign investors.
Various attempts have been made to identify and list tax havens and offshore finance centres (OFCs). This Briefing Paper aims to compare these lists and clarify the criteria used in preparing them.
Such profit shifting leads to a total annual revenue loss of $250 billion globally
With a conservatively estimated annual revenue loss of USD 100 to 240 billion, the stakes are high for governments around the world. The impact of BEPS on developing countries, as a percentage of tax revenues, is estimated to be even higher than in developed countries.
Tax havens are low-tax jurisdictions that offer businesses and individuals opportunities for tax avoidance. They attract disproportionate shares of world foreign direct investment, and, largely as a consequence, their economies have grown much more rapidly than the world as a whole over the past 25 years.
ABSTRACT: Per capita real GDP in tax haven countries grew at an average annual rate of 3.3 percent between 1982 and 1999, which compares favorably to the world average of 1.4 percent.
Jersey bet its future on finance but since 2007 it has fallen on hard times and is heading for bankruptcy. Is the island’s perilous present Britain’s bleak future?
There is no generally agreed definition of what a tax haven is.
Table 1: Jurisdictions Listed as Tax Havens or Financial Privacy Jurisdictions and the Sources of Those Jurisdictions
Table 1. Countries Listed on Various Tax Haven Lists
There is no single definition of a tax haven, although there are a number of commonalities in the various concepts used
Although tax havens have attracted widespread interest (and a considerable amount of opprobrium) in recent years, there is no standard definition of what this term means. Typically, the term is applied to countries and territories that offer favorable tax regimes for foreign investors.
We identify 41 countries and regions as tax havens for the purposes of U. S. businesses. Together the seven tax havens with populations greater than one million (Hong Kong, Ireland, Liberia, Lebanon, Panama, Singapore, and Switzerland) account for 80 percent of total tax haven population and 89 percent of tax haven GDP.
Concerning the characterization of tax havens, we follow the definition proposed by Hines and Rice (1994) which has been recently used by Dharmapala and Hines (2009).
The four OECD member countries Luxembourg, Ireland, Belgium and Switzerland, which can also be regarded as tax havens for multinationals because of their special tax regimes.
Alex Cobham of the Tax Justice Network said: It’s disheartening to see the OECD fall back into the old pattern of creating ‘tax haven’ blacklists on the basis of criteria that are so weak as to be near enough meaningless, and then declaring success when the list is empty.”
One of the criteria, for example, is that a country must be at least “largely compliant” with the Exchange Of Information on Request standard, a bilateral country-to-country information exchange. According to Turner, this standard is outdated and has been proven to not really work.
Ireland does not meet any of the OECD criteria for being a tax haven but because of its 12.5 per cent corporation tax rate and the open nature of the Irish economy, Ireland has on a few occasions been labelled a tax haven.
Some experts see no difference between tax havens and OFCs and employ the terms interchangeably.
Yet today it is difficult to distinguish between the activities of tax havens and OFCs.
Table 1: 52 Tax Havens
It focuses particularly on the dominant approach within the economics literature on income shifting, which dates back to Hines and Rice (1994) and which we refer to as the “Hines-Rice” approach.
Appendix Table 2: Tax Havens
New Gabriel Zucman study claims State shelters more multinational profits than the entire Caribbean
The 17 countries on the European list are American Samoa, Bahrain, Barbados, Grenada, Guam, South Korea, Macau, the Marshall Islands, Mongolia, Namibia, Palau, Panama, St Lucia, Samoa, Trinidad & Tobago, Tunisia and the UAE
It was certainly an improvement on the list recently published by the Organisation for Economic Co-operation and Development, which featured only one name – Trinidad & Tobago – but campaigners believe the European Union has much more to do if it is to prove it is serious about addressing tax havens.
EU members were not screened but Oxfam said that if the criteria were applied to publicly available information the list should feature 35 countries including EU members Ireland, Luxembourg, the Netherlands and Malta
Amount of Tax Haven Connections (Figure 1, Page 11), Amount of Tax Haven Profits (Figure 4, Page 16)
The new research draws on data from countries such as Ireland, Luxembourg and the Netherlands that hadn’t previously been collected.
Study claims State shelters more multinational profits than the entire Caribbean
We’ve got evidence of offshore structures, most assuredly we have. But not only haven’t we got any evidence of tax dodging all the evidence we do have points to less tax dodging than many think.
The eight major pass-through economies—the Netherlands, Luxembourg, Hong Kong SAR, the British Virgin Islands, Bermuda, the Cayman Islands, Ireland, and Singapore—host more than 85 percent of the world’s investment in special purpose entities, which are often set up for tax reasons.
First, many these claims rest heavily on work done by James Hines of the University of Michigan and a few others – research that is fatally flawed.
According to economics professor James Hines, tax havens serve as healthy competition for high-tax countries, nudging them toward less-restrictive financial policy. By providing alternatives to tightly controlled financial sectors, Hines wrote in a 2010 paper, tax havens discourage regulations that act as “a drag on local economies.”
Germany taxes only 5% of the active foreign business profits of its resident corporations. [..] Furthermore, German firms do not have incentives to structure their foreign operations in ways that avoid repatriating income. Therefore, the tax incentives for German firms to establish tax haven affiliates are likely to differ from those of U.S. firms and bear strong similarities to those of other G-7 and OECD firms.
Applying Hines and Rice’s (1994) findings to a statutory corporate rate reduction of 15 percentage points (from 35 to 20 percent) suggests that reduced profit shifting would result in more than $140 billion of repatriated profit based on 2016 numbers.
But the CEA did not misinterpret the Desai, Foley, and Hines paper.
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