Tax haven

A tax haven is a term, often used pejoratively, to describe a place with very low tax rates for non-domiciled investors, even if the official rates may be higher.
In some older definitions, a tax haven also offers financial secrecy. However, while countries with high levels of secrecy but also high rates of taxation, most notably the United States and Germany in the Financial Secrecy Index rankings, can be featured in some tax haven lists, they are often omitted from lists for political reasons or through lack of subject matter knowledge. In contrast, countries with lower levels of secrecy but also low "effective" rates of taxation, most notably Ireland in the FSI rankings, appear in most. The consensus on effective tax rates has led academics to note that the term "tax haven" and "offshore financial centre" are almost synonymous. In reality, many offshore financial centers do not have harmful tax practices and are at the forefront among financial centers regarding AML practices and international tax reporting.
Developments since the early 21st century have substantially reduced the ability of individuals or corporations to use tax havens for tax evasion. These include the end of banking secrecy in many jurisdictions including Switzerland following the passing of the US Foreign Account Tax Compliance Act and the adoption by most countries, including typical tax havens, of the Common Reporting Standard – a multilateral automatic taxpayer data exchange agreement initiated by the Organisation for Economic Co-operation and Development. CRS countries require banks and other entities to identify the residence of account holders, beneficial owners of corporate entities and record yearly account balances and communicate such information to local tax agencies, which will report back to tax agencies where account holders or beneficial owners of corporations reside. CRS was intended to end offshore financial secrecy and tax evasion giving tax agencies knowledge to tax offshore income and assets. However, huge and complex corporations, like multinationals, can still shift profits to corporate tax havens using intricate schemes.
Traditional tax havens, like Jersey, are open to zero rates of taxation, and as a consequence, they have few bilateral tax treaties. Modern corporate tax havens have non-zero official 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 tools—such as ample opportunities to render income exempt from tax, for instance—enable corporations and non-domiciled investors to achieve de facto tax rates closer to zero, not just in the haven but in all countries with which the haven has tax treaties; thereby putting them on tax haven lists. According to modern studies, the include corporate-focused havens like the Netherlands, Singapore, the Republic of Ireland, and the United Kingdom; while Luxembourg, Hong Kong, the Cayman Islands, Bermuda, the British Virgin Islands, and Switzerland feature as both major traditional tax havens and major corporate tax havens. Corporate tax havens often serve as "conduits" to traditional tax havens.
The use of tax havens results in a loss of tax revenues to countries that are not tax havens. Estimates of the of taxes avoided 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. Estimates of capital held in tax havens also vary: the most credible estimates are between US$7-10 trillion. The harm of traditional and corporate tax havens has been particularly noted in developing nations, where tax revenues are needed to build infrastructure.
Over 15% of countries are sometimes labelled tax havens. Tax havens are mostly successful and well-governed economies, and being a haven has brought prosperity. The top 10-15 GDP-per-capita countries, excluding oil and gas exporters, are tax havens. Because of , havens are prone to over-leverage. This can lead to severe credit cycles and/or property/banking crises 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, and the use of tax havens by U.S corporates maximised U.S. exchequer receipts.
The historical focus on combating tax havens had been on common standards, transparency and data sharing. The rise of OECD-compliant corporate tax havens, whose BEPS tools were responsible for most of the lost taxes, led to criticism of this approach, versus actual taxes paid. Higher-tax jurisdictions, such as the United States and many member states of the European Union, departed from the OECD BEPS Project in 2017-18 to introduce anti-BEPS tax regimes, targeted raising net taxes paid by corporations in corporate tax havens.

History

Overview

While areas of low taxation are recorded in Ancient Greece, tax academics identify what we know as tax havens as being a modern phenomenon, and note the following phases in their development:

19th century New Jersey and Delaware Corporations. In the 1880s, New Jersey was in financial difficulty and the governor, Leon Abbett, backed a plan by a New York lawyer, Mr. Dill, to create a more liberal regime for establishing corporate structures, including the availability of "off-the-shelf companies". Delaware followed with the General Incorporation Act in 1898, on the basis of lobbying from other New York lawyers. Because of the restrictive incorporation regime in the Anglo-Saxon world as a result of the South Sea Bubble, New Jersey and Delaware were successful, and though not explicitly tax havens, many future tax havens would copy their "liberal" incorporation regimes.
Post World War I. 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 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, most tax academics identify the Zurich-Zug-Liechtenstein triangle as the first "tax haven hub" created during the mid-1920s. Liechtenstein's 1924 Civil Code created the infamous Anstalt corporate vehicle, while Zurich and Zug developed the Aktiengesellschaft/''Societé Anonyme and other brass plate companies. Tax academic Ronen Palan identifies two of the three major groups of tax havens, as emerging during this period:
* British Empire–based tax havens. The 1929 court case of Egyptian Delta Land and Investment Co. Ltd. V. Todd in Britain created the "non-resident corporation" and recognised a British-registered company with no business activities in Britain as not liable to British taxation. Tax academic Sol Picciotto noted the creation of such "non-resident" companies was "a loophole which, in a sense, made Britain a tax haven". The ruling applied to the British Empire, including Bermuda, Barbados, and the Cayman Islands.
* European-based tax havens. The Zurich-Zug-Liechtenstein triangle expanded and was joined by Luxembourg in 1929 when they created tax-free holding companies. However, in 1934, as a reaction to the global depression, the Swiss Banking Act of 1934 put bank secrecy under Swiss criminal law. Secrecy and privacy would become an important and distinctive part of the European-based tax havens, in comparison with other tax havens.
Post–World War II offshore financial centres. Currency controls enacted post–World War II led to the creation of the Eurodollar market and the rise in offshore financial centres. Many of these OFCs were traditional tax havens from the post-World War I phase, including the Cayman Islands and Bermuda, however new centres such as Hong Kong and Singapore began to emerge. The Tangier International Zone was an extreme case of tax leniency and banking secrecy in the period following its wartime suspension, but that was brought to an end in 1960 as a consequence of Moroccan independence. London's position as a global financial centre for these OFCs was secured when the Bank of England ruled in 1957 that transactions executed by British banks on behalf of a lender and borrower who were not located in the UK, were not to be officially viewed as having taken place in the UK for regulatory or tax purposes, even though the transaction was only ever recorded as taking place in London. The rise of OFCs would continue so that by 2008, the Cayman Islands would be the 4th largest financial centre in the world, while Singapore and Hong Kong had become major Regional Financial Centres. By 2010, tax activists would promote the notion that OFCs are synonymous with tax havens, and that most of their services involved taxation.
Emerging economy–based tax havens. As well as the dramatic rise in OFCs, from the late 1960s onwards, new tax havens began to emerge to service developing and emerging markets, which became Palan's third group. The first Pacific tax haven was Norfolk Island, a self-governing external territory of Australia. It was followed by Vanuatu, Nauru, the Cook Islands, Tonga, Samoa, the Marshall Islands, and Nauru. All these havens introduced familiar legislation modeled on the successful British Empire and European tax havens, including near-zero taxation for exempt companies, and non-residential companies, Swiss-style bank secrecy laws, trust companies laws, offshore insurance laws, flags of convenience for shipping fleets and aircraft leasing, and beneficial regulations for new online services.
Corporate-focused tax havens. In 1981, the US IRS published the Gordon Report on the use of tax havens by US taxpayers, which highlighted the use of tax havens by US corporations. In 1983, US corporation McDermott International executed the first tax inversion to Panama. The EU Commission showed that Apple Inc. had begun to use the infamous Double Irish BEPS tool as early as 1991. US tax academic James R. Hines Jr. showed in 1994 that US corporations were achieving effective rates of taxation of circa 4% in corporate-focused OECD tax havens like Ireland. When in 2004, the US Congress stopped "naked tax inversions" by US corporations to Caribbean tax havens with the introduction of IRS Regulation 7874, a much larger wave of US corporate "merger inversions" started that involved moving to OECD tax havens. A new class of corporate tax haven had emerged that was OECD-compliant, and transparent, but offered complex base erosion and profit shifting tools that could achieve net tax rates similar to traditional tax havens. Initiatives by the OECD to curb tax havens would mainly impact Palan's third group of Emerging economy–based tax havens, however, the corporate-focused tax havens were drawn from the largest OFCs that had emerged from the British Empire–based tax havens and European-based tax havens'', and included the Netherlands, Singapore, Ireland, USA and the U.K., and even reformed traditional tax havens such as Luxembourg, Hong Kong, the Caribbean, and Switzerland. The scale of their BEPS activities meant that this group of 10 jurisdictions would dominate academic tax haven lists from 2010, including Hines' 2010 list, the Conduit and Sink OFC 2017 list, and Zucman's 2018 list.