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A tax haven is a place where certain taxes are levied at a low rate or not at all. Tax havens are often also characterised by secrecy.
Individuals and/or firms can find it attractive to move themselves to areas with lower tax rates. This creates a situation of tax competition among governments. Different jurisdictions tend to be havens for different types of taxes, and for different categories of people and/or companies.
Different definitions of tax havens exist. The Economist has tentatively adopted the description by 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.Doggart, Caroline. 2002. Tax Havens and their uses (originally published 1970), Economist Intelligence Unit, ISBN 0862181631 Similarly, others have suggested that any country which modifies its tax laws to attract foreign capital could be considered a tax havenThe Truth About Tax Havens - retrieved 28 December 2007. According to other definitions,[http://www.taxjustice.net/cms/upload/pdf/Identifying_Tax_Havens_Jul_07.pdf The Truth About Tax Havens - retrieved 28 December 2007] 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.
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The Organisation for Economic Co-operation and Development (OECD) identifies three key factors in considering whether a jurisdiction is a tax haven:[http://www.oecd.org/document/63/0,3343,en_2649_37427_30575447_1_1_1_37427,00.html Tax Haven Criteria - retrieved 26 Feb 2008].
However the OECD found that its definition caught certain aspects of its members\' tax systems (most developed countries have low or zero taxes for certain favoured groups). Its later work has therefore 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 USA and UK.[citation needed]
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 analysed. Having no or nominal taxes is not sufficient, by itself, to characterise a jurisdiction as a tax haven. The OECD recognises that every jurisdiction has a right to determine whether to impose direct taxes and, if so, to determine the appropriate tax rate.
The use of differing tax laws between two or more countries to try and mitigate tax liability is probably as old as taxation itself. It is sometimes suggested that the practice first reached prominence relating to the use (or avoidance of) the Cinque ports and later the staple ports in the twelfth and fourteenth centuries respectively. Others suggest that the Hanseatic League first embraced the concept of tax competition as early as 1241, while others argue that the tax status of the Vatican City was the earliest example of a tax haven (the first Papal States being recognised in 756).
Various countries claim to be the oldest tax haven in the world; the Channel Islands claim tax independence dating from the Norman Conquest, and the Isle of Man can 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."[T]he tax haven is a creature of the twentieth century, and began to be used extensively because of the high levels of tax which prevailed after the First World War" at para 26.1, Tolley\'s International Tax Planning (2002), ISBN 0754513394 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.See generally Introduction to Tolley\'s International Initiatives Affecting Financial Havens (2001), ISBN 0-406-94264-1 However, the Bermudian claim is debatable when compared against the enactment of a Trust Law by Liechtenstein in 1926 to attract offshore capital.The Personen-und Gesellschaftsrecht of 20 January 1926
Most commentators suggest that the first true tax haven was Switzerland, followed closely by Liechtenstein.Tolley\'s Tax Havens (2000), ISBN 0754504719 During the early part of the twentieth century, Swiss banks had long been a capital haven for people fleeing social upheaval in Russia, Germany, South America and elsewhere. However, in the years immediately following World War I, many European governments raised taxes sharply to help pay for reconstruction. Switzerland, having remained neutral, avoided these costs and was able to keep taxes low, leading to an inflow of capital for purely tax related reasons. Nonetheless, it is difficult to point to a single event or date which constituted 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 the special report of The Economist in 1990, Tax Havens and their uses, ISBN 0 85058 292 X, Special Report No. 1191. The report helpful includes indications of quality of life in various tax havens which future tax exiles may wish to consider. However, from the 1950s onwards, there was significant growth in the use of tax havens by corporate groups to mitigate their global tax burden. This 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. Thus, corporations, by structuring the group ownership through the smaller jurisdiction, could take advantage of the double taxation treaty, thereby paying taxes at the much lower rate. Although some of these double tax treaties survive,For example a double taxation treaty still exists between Barbados and Japan, and another between Cyprus and Russia. Mauritius has a double taxation treaty with India that is used for tax mitigation, although India is seeking to renegotiate the treaty, India to push for change in tax treaty with Mauritius in the 1970s, most major countries began repealing their double taxation treaties with micro-states 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.The best examples of this were probably Gibraltar and the British Virgin Islands.
Although tax havens are traditionally linked with images of prosperity,According to The CIA World factbook tax havens make up 7 of top 12 countries in world (including the top 3) for highest GDP per capita (not counting Ireland as a tax haven for these purposes). In the case of Caribbean and African tax havens, this is all the more stark for the poverty nearby. For example, the two countries closest to Cayman in geographical terms are Jamaica and Cuba. there have also been notable failures.
At the risk of gross oversimplification, it can be said that the advantages of tax havens are viewed in four principal contexts:Tolley\'s Offshore Service (2006), ISBN 1-405-71568-5
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:
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.Companies incorporated in tax havens are often used as bond issuing vehicles in securitisations for tax reasons.
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.The United Kingdom is one country that has strict forced disclosure rules. - http://www.hmrc.gov.uk/aiu/index.htm 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.
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 industrialised 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 this is a way to encourage conglomerates from industrialised nations to transfer needed skills to the local population. Still yet, some countries simply find it costly to compete in many other sectors with industrialised nations and have found a low tax rate mixed with a little self-promotion can go a long way to lure companies to their domiciles.
Many industrialised 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,Such as ATTAC and the Tax Justice Network. See for example: Offshore watch although extensive financial and KYC 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.See for example the views expressed in The Guardian in 2001. 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.
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Some tax havens including some of the ones listed above do charge income tax as well as other taxes such as capital gains, inheritance tax, and so forth. Criteria distinguishing a taxpayer from a non-taxpayer can include citizenship and residency and source of income.
While incomplete, and with the limitations discussed below, the available statistics nonetheless indicate that offshore banking is a very sizeable activity. IMF calculations based on BIS data suggest that for selected OFCs (Offshore Financial Centres), on balance sheet OFC cross-border assets reached a level of US$4.6 trillion at end-June 1999 (about 50 percent of total cross-border assets), of which US$0.9 trillion in the Caribbean, US$1 trillion in Asia, and most of the remaining US$2.7 trillion accounted for by the IFCs (International Financial Centers), namely London, the U.S. IBFs, and the JOM (Japanese Offshore Market).http://www.imf.org/external/np/mae/oshore/2000/eng/back.htm
Tax Justice Network, an anti-tax haven pressure group, suggests that global tax revenue lost to tax havens exceeds US$255 billion per year, although those figures are not widely accepted. Estimates by the OECD suggest that by 2007 capital held offshore amounts to somewhere between US$5 trillion and US$7 trillion, making up approximately 6-8% of total global investments under management. Of this, approximately US$1.4 trillion is estimate to be held in the Cayman Islands alone.Places in the sun, The Economist, February 22 2007
The Center for Freedom and Prosperity disputes claims about foregone tax revenue. Academic researchers also have found that tax havens actually boost prosperity in neighboring jurisdictions by creating tax-efficient platforms for economic activity - much of which would not occur if subject to onerous taxes if controlled by a domestic entity.
On 25 January 2007 Senator Byron Dorgan (for himself and on behalf of Carl Levin and Russ Feingold) presented a bill to the U.S. Senate to amend the U.S. Internal Revenue Code 1986 to treat controlled foreign corporations which are established in tax havens as domestic corporations, and subject to full taxation as such within the U.S.S. 396, GovTrack, January 25 2007
The proposed amendment would define the following countries as tax havens for the purposes of the legislation: Andorra, Anguilla, Antigua and Barbuda, Bahamas, Bahrain, Barbados, Belize, Bermuda, British Virgin Islands, Cayman Islands, Cook Islands, Cyprus, Dominica,The bill spells the name of Dominica incorrectly. Gibraltar, Grenada, Guernsey, Isle of Man, Jersey, Liberia, Liechtenstein, Maldives, Malta, Marshall Islands, Mauritius, Monaco, Montserrat, Nauru, Netherlands Antilles, Niue, Panama, Samoa, San Marino, St. Kitts and Nevis,Interestingly, the bill refers to the Territory as St. Christopher and Nevis, a name which the Territory itself has not used generally since the last century. St. Lucia, St. Vincent and the Grenadines, Seychelles, Tongo, Turks and Caicos, and Vanuatu.
That draft legislation was superseded by the unambiguously named Stop Tax Haven Abuse Act which was introduced by Senator Levin together with Presidential candidate Barack Obama and Senator Norm Coleman.Retrieved from www.senate.gov 31 August 2007 The Act would introduce a large number of measures designated to attack transactions perceived to facilitate unlawful tax avoidance by the use of offshore tax havens. Broadly same list of countries above was included in the earlier bill as designated tax havens, but with the addition of Aruba, Costa Rica, Sark and Alderney (which are treated, curiously, as sub-sets of Guernsey rather than independent jurisdicions), Hong Kong, Latvia, Luxembourg, Singapore, Switzerland and the removal of Andorra, Bahrain, Liberia, Maldives, Marshall Islands, Monaco, Montserrat, Niue, San Marino, Seychelles and Tongo.
Some of the measures highlighted include:
Many of the intiatives appear politically populist rather than a serious attempt to curb tax mitigation schemes.In particular the prohibition against granting patents for tax mitigation schemes are wholly implausible in commercial terms; legal schemes of that nature rarely pass the innovation test required for a patent, and even where they might, the schemes are rarely (if ever) patented (which would be more likely to lead to them being both copied and brought vigorously to the attention of the Government). Other aspects of the legislation seem to be predicated on outdated stereotypes of tax havens, and assume that most tax havens continue to operate a culture of secrecy and with complete disregard for modern know-your-client requirements,In fact, the U.S. already has unilateral mutual assistance treaties with most major tax havens; see for example in the British Virgin Islands the Mutual Legal Assistance (United States of America) Act, 1990 and the Mutual Legal Assistance (Tax Matters) Act, 2003 (also relating to a bilateral agreement with the U.S.). and bear little relationship to modern commercial practice.Washington Times - Commentary and Financial Times - Financial standards under fire. The fact that the bill is expressed to designate four European Union countries (Cyprus, Latvia, Luxembourg and Malta) and three other leading global economies (Hong Kong, Singapore and Switzerland) automatically as non-cooperative tax havens might indicate the limited prospects of the bill becoming law in its current form.
Led by the Center for Freedom and Prosperity, various free-market groups, think tanks, and taxpayer organizations have encouraged the Bush Administration to reject legislation seeking to penalize low-tax jurisdictions.
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