Harman Patil (Editor)

Tax haven

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Tax haven

Tax haven is a jurisdiction that offers favorable tax or other conditions to its taxpayers as relative to other jurisdictions. There is no generally accepted definition of what renders a country or jurisdiction a tax haven, but activities that are commonly associated with such places range far beyond tax. Most commonly it refers to those countries or jurisdictions that have a low-tax or no-tax regime or which offer generous tax incentives. Some definitions focus purely on tax: for example, a widely cited academic paper describes a tax haven as a jurisdiction where particular taxes, such as an inheritance tax or income tax, are levied at a low rate or not at all. Other definitions refer to a state, country, or territory which maintains a system of financial secrecy, which enables foreign individuals to hide assets or income to avoid or reduce taxes in the home jurisdiction. Some refer to "secrecy jurisdictions" as an alternative to "tax havens," to emphasise the secrecy element, and a Financial Secrecy Index ranks jurisdictions according to their size and secrecy.

Contents

Earnings from income generated from real estate (i.e. by renting property owned in an offshore jurisdiction) can also be eliminated in this way. If taxes (if any) are paid in the tax haven jurisdiction, companies can avoid taxes in their home jurisdiction because the tax had already been paid in the lower tax rate jurisdiction. Some taxes (such as inheritance tax on the real estate, VAT on the initial purchase price of the real estate, or transfer tax, annual immovable property taxes, and municipal real estate taxes) cannot be avoided or reduced, as these are levied by the country the real estate where the property is located, and hence need to be paid just the same as any other resident of that country. The only thing that can be done is picking a country that has the smallest rates on these taxes (or even no such taxes at all) before buying any real estate.

Individuals or corporate entities may establish shell subsidiaries or move themselves to areas with reduced or no taxation levels relative to typical international taxation. This creates a situation of tax competition among jurisdictions. Different jurisdictions may be havens for different types of taxes, and for different categories of people or companies. Sovereign jurisdictions or self-governing territories under international law have the power to enact tax laws affecting their territories, unless limited by previous international treaties.

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.

Definitions

There are several definitions of tax havens. In 2002 The Economist adopted the description by Geoffrey Colin Powell (former economic adviser to Jersey): "What ... identifies an area as a tax haven is the existence of a composite tax structure established deliberately to take advantage of, and exploit, a worldwide demand for opportunities to engage in tax avoidance." The Economist points out that this definition would still exclude a number of jurisdictions traditionally thought of as tax havens. Similarly, an Australian journalist suggested that any country which modifies its tax laws to attract foreign capital could be considered a tax haven.

According to other definitions, the central feature of a haven is that its laws and other measures can be used to evade or avoid the tax laws or regulations of other jurisdictions. the U.S. Government Accountability Office in its December 2008 report on the use of tax havens by American corporations, was unable to find a satisfactory definition of a tax haven but regarded the following characteristics as indicative of it: no or nominal taxes; lack of effective exchange of tax information with foreign tax authorities; lack of transparency in the operation of legislative, legal or administrative provisions; no requirement for a substantive local presence; and self-promotion as an offshore financial center.

As of February 2008 the Organisation for Economic Co-operation and Development (OECD) identified three key factors in considering whether a jurisdiction is a tax haven:

  • No or only nominal taxes – Tax havens impose no or only nominal taxes (generally or in special circumstances) and offer themselves, or are perceived to offer themselves, as a place to be used by non-residents to escape high taxes in their country of residence.
  • Protection of personal financial information – Tax havens typically have laws or administrative practices under which businesses and individuals can benefit from strict rules and other protections against scrutiny by foreign tax authorities. This prevents the transmittance of information about taxpayers who are benefiting from the low tax jurisdiction.
  • Lack of transparency – A lack of transparency in the operation of the legislative, legal or administrative provisions is another factor used to identify tax havens. The OECD is concerned that laws should be applied openly and consistently, and that information needed by foreign tax authorities to determine a taxpayer’s situation is available. Lack of transparency in one country can make it difficult, if not impossible, for other tax authorities to apply their laws effectively. ‘Secret rulings’, negotiated tax rates, or other practices that fail to apply the law openly and consistently are examples of a lack of transparency. Limited regulatory supervision or a government’s lack of legal access to financial records are contributing factors.
  • However, the OECD found that its definition caught certain aspects of its members' tax systems (some countries have low or zero taxes and ring fencing for certain favored groups). Its later work has focused on the single aspect of information exchange. This is generally thought to be an inadequate definition of a tax haven, but is politically expedient, because it includes the small tax havens (with little power in the international political arena) but exempts the powerful countries with tax haven aspects such as the US and UK.

    In deciding whether or not a jurisdiction is a tax haven, the first factor to look at is whether there are no or nominal taxes. If this is the case, the other two factors—whether or not there is an exchange of information and transparency—must be analyzed. Having no or nominal taxes is not sufficient, by itself, to characterize a jurisdiction as a tax haven. The OECD recognizes that every jurisdiction has a right to determine whether to impose direct taxes and, if so, to determine the appropriate tax rate.

    Classification

    Corporations, to avoid or reduce overall taxation may use multiple types of tax havens. Three types of tax haven types form a Dutch Sandwich:

  • Primary tax havens – the location where financial capital winds up. Subsidiary shell companies there have obtained rights to collect profits from corporate intellectual property (IP) by transfers from their parent.
  • Semi-tax havens – locations that produce goods for sale primarily outside of their territorial boundaries and have flexible regulations to encourage job growth, such as free trade zones, territorial-only taxation, and similar inducements.
  • Conduit tax havens – locations where income from sales, primarily made outside their boundaries, is collected, and then distributed. Semi-tax havens are reimbursed for actual product costs, perhaps with a commodity markup. The remaining profits are transferred to the primary tax haven, because it holds rights to profits due to the corporate IP. By matching outflow to income, they do not retain capital and their role, while crucial, remains invisible.
  • Large multinational corporations may have dozen of such entities in tax haven jurisdictions interacting with each other. Each haven can claim that it does not satisfy definitions that attempt to place all tax havens into a single class. Even increased transparency may not change the effectiveness of corporate tax avoidance.

    Capital held offshore

    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.

    Lost tax revenue

    The Tax Justice Network estimated that global tax revenue lost in 2012 to tax havens is between US$190 billion and $255 billion per year, assuming a 3% capital gains rate, a 30% capital gains tax rate, and $21 trillion to $32 trillion hidden in tax havens worldwide. The Zucman study uses different methodology, and estimates lost global tax revenue at US$190 billion. If such hidden offshore assets are considered, many countries with governments nominally in debt are shown to be net creditor nations.

    In 2016 a massive data leak known as the "Panama Papers" cast some doubt on the size of previous estimates of lost revenue.

    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.

    Examples

    The U.S. National Bureau of Economic Research has suggested that roughly 15% of the countries in the world are tax havens, that these countries tend to be small and affluent, and that better governed and regulated countries are more likely to become tax havens, and are more likely to be successful if they become tax havens.

  • Switzerland
  • Luxembourg – primarily a conduit tax haven
  • Other sovereign countries that have such low tax rates and lax regulation that they can be considered semi-tax havens are:

  • Netherlands – primarily a conduit tax haven. See also Dutch Sandwich. Also, the Netherlands does not have a direct tax on royalties.
  • Ireland. See also Double Irish arrangement (to cease entirely by 2020).
  • United States – favoured for its tax secrecy (see United States as a tax haven)
  • Sub-national jurisdictions commonly labelled as tax havens include:

  • Jersey (United Kingdom)
  • Isle of Man (United Kingdom)
  • British Overseas Territories
  • Bermuda
  • Gibraltar
  • British Virgin Islands
  • Cayman Islands
  • Delaware, United States
  • Puerto Rico (United States)
  • Some tax havens, including some of the ones listed above, do charge income tax as well as other taxes such as capital gains tax, inheritance tax, and so forth. Criteria distinguishing a taxpayer from a non-taxpayer can include citizenship and residency and source of income. For example, in the United States foreign nonresidents are not charged various taxes including income tax on interest on U.S. bank deposits by income tax; since the Clinton administration the IRS has proposed collecting information on these depositors to share with their home countries as a regulation; these regulations were eventually finalized in April 2012.

    In September 2013, British Prime Minister David Cameron said "I do not think it is fair any longer to refer to any of the Overseas Territories or Crown Dependencies as tax havens. They have taken action to make sure that they have fair and open tax systems. It is very important that our focus should now shift to those territories and countries that really are tax havens." Mr Cameron's comments were interpreted as a direct reference to Jersey, Guernsey, Isle of Man, the British Virgin Islands and the Cayman Islands, and followed a period of negotiations with those (and other) British territories during which those jurisdictions had made a number of concessions relating to tax transparency and sharing of information. Anti-tax haven pressure groups immediately accused the Prime Minister of taking leave of his senses, and commenting sarcastically "It was Cameron's father's tax haven activities that are repotted [sic] to have paid for his Eton education. Was it ever realistic to think he'd change his spots?".

    Former tax havens

  • Beirut, Lebanon formerly had a reputation as the only tax haven in the Middle East. However, this changed after the Intra Bank crash of 1966, and the subsequent political and military deterioration of Lebanon dissuaded foreign use of the country as a tax haven.
  • Liberia had a prosperous ship registration industry. The series of violent and bloody civil wars in the 1990s and early 2000s severely damaged confidence in the jurisdiction. The fact that the ship registration business still continues is partly a testament to its early success, and partly a testament to moving the national shipping registry to New York, United States.
  • Tangier had a brief but colorful existence as a tax haven in the period between the end of effective control by the Spanish in 1945 until it was formally reunited with Morocco in 1956.
  • A number of Pacific based tax havens have reduced their effectiveness to operate as tax havens in response to OECD demands for better regulation and transparency in the late 1990s. Vanuatu's Financial Services commissioner announced in May 2008 that his country would reform its laws so as to cease being a tax haven. "We've been associated with this stigma for a long time and we now aim to get away from being a tax haven."
  • As of March 2013, major Cyprus banks have sustained severe damage from Greek bond defaults and (at least temporarily) closed their doors in an attempt to stem a flight of capital from the island. Depositors are expected to incur heavy losses.
  • Methodology

    The advantages of tax havens can be viewed in the following four principal contexts:

    Personal residency

    Since the early 20th century, wealthy individuals from high-tax jurisdictions have sought to relocate themselves in low-tax jurisdictions. In most countries in the world, residence is the primary basis of taxation—see tax residence. The low-tax jurisdictions 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.

    Corporate residency

    Corporate persons, in contrast to natural persons, are generally locked into their historic country, new corporations however can be established in a country of choice. Each corporation can establish subsidiary corporations in many countries, some for trading purposes and some with tax planning justification. That allows them to take advantage of the variety of laws, regulations, tax treaties and conventions in multiple countries, without overtly engaging in any questionable activities. Only in extreme cases will they move their formal corporate headquarters. The country of residency may choose what laws to pass to tax profits of their corporations and the profits of corporations resident elsewhere who trade in their country.

    Asset holding

    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 jurisdiction, they cease to be taxable in that jurisdiction.

    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.

    Trading and other business activity

    Many businesses which do not require a specific geographical location or extensive labor are set up in a jurisdiction 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 jurisdiction, it allowed the group to "skim" profits from the high-tax jurisdiction. Most sophisticated tax codes now prevent transfer pricing schemes of this nature.

    Financial intermediaries

    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 jurisdiction, and the intermediary then on-lends or invests the money (often back into a high-tax jurisdiction). Although such systems do not normally avoid tax in the principal customer's jurisdiction, it enables financial service providers to provide multi-jurisdictional 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.

    Anonymity and bearer shares

    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. 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.

    In 2012 the Guardian wrote that there are 28 persons as directors for 21,500 companies.

    Money and exchange control

    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.

    Incentives and benefits for tax haven countries

    There are several reasons for a nation to become a tax haven. Some nations may find they do not need to charge as much as some industrialized countries in order for them to be earning sufficient income for their annual budgets. Some may offer a lower tax rate to larger corporations, in exchange for the companies locating a division of their parent company in the host country and employing some of the local population. Other domiciles find that this is a way to encourage conglomerates from industrialized nations to transfer needed skills to the local population.

    According to Investopedia,

    Although most offshore financial centers impose no corporate income tax, their governments still financially benefit from having thousands of companies registered in their jurisdiction. That is because tax haven governments typically impose a registration fee on all newly incorporated business entities like companies and partnerships. Also, companies are required to pay a renewal fee each year to still be recognized as an operating company.

    There are also additional fees that are imposed on the companies depending on the type of business activity that they engage in. For example, banks, mutual funds and other companies in the financial services business usually need to pay for an annual license to operate in that industry. All of these various fees add up to create a strong source of recurring revenue for tax haven governments. It is estimated that the British Virgin Islands collects over $200 million each year in the form of corporate fees.

    Many industrialized countries claim that tax havens act unfairly by reducing tax revenue which would otherwise be theirs. Various pressure groups also claim that money launderers also use tax havens extensively, although extensive financial and know your customer regulations in tax havens can actually make money laundering more difficult than in large onshore financial centers with significantly higher volumes of transactions, such as New York City or London. In 2000, the Financial Action Task Force published what came to be known as the "FATF Blacklist" of countries which were perceived to be uncooperative in relation to money laundering; although several tax havens have appeared on the list from time to time (including key jurisdictions such as the Cayman Islands, Bahamas and Liechtenstein), no offshore jurisdictions appear on the list at this time.

    Regulation measures

    To avoid tax competition, many high tax jurisdictions have enacted legislation to counter the tax sheltering potential of tax havens. Generally, such legislation tends to operate in one of five ways:

    1. Attributing the income and gains of the company or trust in the tax haven to a taxpayer in the high-tax jurisdiction on an arising basis. Controlled Foreign Corporation legislation is an example of this.
    2. Transfer pricing rules, standardization of which has been greatly helped by the promulgation of OECD guidelines.
    3. Restrictions on deductibility, or imposition of a withholding tax when payments are made to offshore recipients.
    4. Taxation of receipts from the entity in the tax haven, sometimes enhanced by notional interest to reflect the element of deferred payment. The EU withholding tax is probably the best example of this.
    5. Exit charges, or taxing of unrealized capital gains when an individual, trust or company emigrates.

    However, many jurisdictions employ blunter rules. For example, in France securities regulations are such that it is not possible to have a public bond issue through a company incorporated in a tax haven.

    Also becoming increasingly popular is "forced disclosure" of tax mitigation schemes. Broadly, these involve the revenue authorities compelling tax advisors to reveal details of the scheme, so that the loopholes can be closed during the following tax year, usually by one of the five methods indicated above. Although not specifically aimed at tax havens, given that so many tax mitigation schemes involve the use of offshore structures, the effect is much the same.

    Anti-avoidance came to prominence in 2010/2011 as nongovernmental organizations and politicians in the leading economies looked for ways of reducing tax avoidance, which plays a role in forcing unpopular cuts to social and military programs. The International Financial Centres Forum (IFC Forum), a trade organisation for companies located in the British Overseas Territories and Crown Dependencies, has asked for a balanced debate on the issue of tax avoidance and an understanding of the role that the tax neutrality of small international financial centres plays in the global economy.

    U.S. Legislation

    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.

    Bank data leak 2013

    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.

    Liechtenstein banking scandal

    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.

    German legislation

    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.

    UK Foot report

    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."

    G20 tax haven blacklist

    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:

    1. Those that have substantially implemented the standard (includes most countries but China still excludes Hong Kong and Macau).
    2. Tax havens that have committed to – but not yet fully implemented – the standard (includes Montserrat, Nauru, Niue, Panama, and Vanuatu)
    3. Financial centres that have committed to – but not yet fully implemented – the standard (includes Guatemala, Costa Rica and Uruguay).
    4. Those that have not committed to the standard (an empty category)

    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.

    Criticism

    Tax havens have been criticized because they often result in the accumulation of idle cash which is expensive and inefficient for companies to repatriate. The tax shelter benefits result in a tax incidence disadvantaging the poor. Many tax havens are thought to have connections to fraud, money laundering and terrorism. While investigations of illegal tax haven abuse have been ongoing, there have been few convictions. Lobbying pertaining to tax havens and associated transfer pricing has also been criticized.

    Some politicians, such as magistrate Eva Joly, have begun to stand up against the use of tax havens by large companies. She describes the act of avoiding tax as a threat to democracy. Accountants' opinions on the propriety of tax havens have been evolving, as have the opinions of their corporate users, governments, and politicians, although their use by Fortune 500 companies and others remains widespread. Reform proposals centering on the Big Four accountancy firms have been advanced. Some governments appear to be using computer spyware to scrutinize some corporations' finances.

    Effect of developing countries

    Illicit capital flight from the developing world is estimated at ten times the size of aid it receives and twice the debt service it pays. About 60 per cent of illicit capital flight from Africa is from transfer mispricing, where a subsidiary in a developing nation sells to another subsidiary or shell company in a tax haven at an artificially low price to pay less tax. An African Union report estimates that about 30% of sub-Saharan Africa's GDP has been moved to tax havens. One tax analyst believes that if the money were paid, most of the continent would be "developed" by now.

    History

    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.

    Most economic commentators suggest that the first "true" tax haven was Switzerland, followed closely by Liechtenstein. 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 jurisdiction with a high tax burden (that the company would otherwise be subject to), and a smaller jurisdiction with a low tax burden. By structuring the group ownership through the smaller jurisdiction, corporations could take advantage of the double taxation treaty, paying taxes at the much lower rate. Although some of these double tax treaties survive,, 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 jurisdiction would not accrue any local tax liability.

    References

    Tax haven Wikipedia


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