Tax+haven

Globalization is reducing trade barriers and increasing capital flows among countries. The availability of great amounts of mobile capital represents an opportunity for many countries to attract investors. Countries that attract the transfer of business activities and reported profits through low, often nominal or zero tax rates are the, so-called, tax havens. In the literature the word 'Offshore Jurisdiction' is used as well. This is a more neutral and academic alternative. This definition is the definition that will be used in this Wikispace. There is no single, unambiguous definition of a tax, however this one fits this context best. Individuals and/or entities can find it attractive to move themselves to these countries or establish their administration there. This can create competition among countries and their governments. A central feature of a tax haven is that its laws and other measures can be used to evade or avoid the tax laws or regulations of other jurisdictions. The term jurisdiction is used here to describe any territory with its own legal system, regardless of whether it is an independent sovereign state (Dubai), a dependent, associated or overseas territory (Cayman Islands) or an internal zone to which a special legal regime has been applied (Labuan). The Tax Justice Network is an organization which tries to deal with the tax havens and map them. To be a tax haven, a country has to meet its tax haven criteria. The Organization for Economic Co-operation and Development (OECD) identified these in June 2000. But, first there will be a general overview of the history of tax havens. toc

=1. Introduction = The phenomenon, known as the offshore financial economy, began to emerge in the late 1950’s after the creation of the London-based Euromarket. Large sums of financial capital accumulated outside the country of residence, which provided a basis for the emergence of transnationalism. Financial specialists operating from different jurisdictions managed the capital; they set themselves up as tax havens. That means jurisdictions offering a combination of lax tax regulation, low or zero taxation on income, secrecy facilities and an absence of effective information exchange. In 1961 people already recognized that the activities of tax havens were bad for the public interest. More than 50 years later, it has become clear that tax havens are currently major players in the global financial markets. Since countries have the right to determine their own tax rates, the OECD introduced a distinction between (1) countries that charge a generally applicable tax rate that is lower than the ones levied in other countries, (2) countries where the tax system has preferential features that lead to no or low taxation for some companies and (3) countries that impose no or only a nominal tax on income. It is the latter that will be used in this page.

= 2. Criteria for being a tax haven = In 1998 the OECD set out a number of factors/criterions for identifying tax havens. The four key factors were: 1) No or nominal tax on the relevant income 2) Lack of effective exchange of information 3) Lack of transparency 4) No substantial activities These key factors will be explained briefly.

2.1 Criterion 1
A tax haven can be a jurisdiction which has no or only nominal taxes, in general or in special circumstances, and offers itself a place to be used by non-residents to escape tax in their country of residence. This factor is not sufficient in itself to classify a country as a tax haven. That is why the other factors are in play.

2.2 Criterion 2
In addition to low or nominal taxation, tax havens typically offer secrecy to protect investors against scrutiny by outside authorities (Preuss 2012). In this respect, there is great emphasis on the exchange of information between the respective authorities with regard to a specific tax enquiry, which should be provided on an ‘upon request’ basis. This request can occur where one country’s competent authority asks for particular information from another authority. A jurisdiction can have laws or administrative practices which prevent this effective exchange of relevant information.

2.3 Criterion 3
This criterion goes hand in hand with the second criterion. If a jurisdiction is able to provide certain information, it might be that they are hiding something. They should have availability of reliable information, particularly accounting, bank and ownership information and the power to obtain this information. There should be respect for taxpayer’s rights and strict confidentiality of information exchanged.

2.4 Criterion 4
This indicates the absence of a requirement that the activity be substantial, since it would suggest that a jurisdiction might be attempting to attract investment or transactions that are purely tax driven. However, this factor was not considered when determining whether a jurisdiction was cooperative. This criterion was rejected in 2001 and formally withdrawn in 2002. If a jurisdiction meets this criterion, then it can be considered as a tax haven.

= 3. Examples of tax havens = According to the U.S. National Bureau of Economic Research has suggested that roughly 15% of the countries in the world are tax havens. It is hard to come up with a list of tax havens, but it is possible to show a list of commonly cited tax havens, as shown by the OECD. Some examples are: Cyprus, Monaco, Luxembourg and San Marino. Next to these, countries as Ireland, Netherlands and Switzerland are considered as tax havens since they have lax regulation and low tax rates. As one sees, there are European tax havens as well. Next to these, there are certain non-sovereign jurisdictions which are commonly labelled as tax havens. Some examples are: British overseas territory (e.g. Cayman Islands), Curacao and Alaska.

= 4. Consequences of tax havens = Now we have a clear understanding of a tax haven, it is possible to take a closer look at the activities of a tax haven and what consequences these activities has for the society. There has not much attention been paid to these activities. However, it has become increasingly apparent that tax havens provide a supply side stimulus that encourages and enables grand scale corruption by providing an operational base used by legal and financial professionals to exploit legislative gaps and lax regulation (Christensen 2011). This creates corruption and this is recognized as harmful to the sustainable development of countries. Corruption is defined as the misuse of entrusted power for private gains (Christensen 2011). Tax havens contribute to this by encouraging and enabling capital flight, tax evasion, and facilitating illicit financial flows originating from the proceeds of corrupt activities. These activities are disguised in tax havens and are highly damaging to market economies. A theory that helps understanding these kind of activities is the fraud theory, which is included in the 'Fraud Triangle' model which tries to explain why people engage in this kind of behavior.