Tax Havens

Tax Haven Definitions

Tax havens are defined as:

  1. A sovereign nation, state or jurisdiction within a country with:
    • Low or nil taxes
    • Lack of transparent in the way offshore legislative and administrative provisions are carried out
    • Ring-fenced tax structures, whereby local residents and companies are isolated or excluded from the special tax treatments offered to non-resident nationals and corporations
    • Legislation that:
      1. prevents or frustrates effective information exchange with regard to foreign nationals and corporations benefiting from tax privileges, thus promoting tax avoidance and and tax evasion
      2. is specially designed to attract foreign capital
  2. Any country whose taxes are lower in relation to those of another
  3. Any country with low or nil taxes that provides confidential financial and legal services to non-resident nationals and corporations.

In offshore literature, tax haven definitions reflect different points of view on tax havens. Above, the first definition of tax haven gives the primary position of institutions such as the Organisation of Economic Co-operation and Development (OECD), the Financial Action Task Force (FATF), the U.S. Government Accountability Office and Tax Justice Network. The OECD is an organisation based in Paris and has been actively involved in European concerns such as regional, social, political and economic integration within Europe. Increasing Europe"s wealth and political stability, while countering the effects of tax havens and international tax competition on the EU"s economy have always formed a major part of the OECD"s international ventures.

Likewise, the FATF is actively engaged in combating money laundering and terrorist financing throughout the world. The FATF"s attention has been focused on offshore financial centres and tax havens which are identified as one of the main channels for the movement of funds derived from activities such as illegal substance trafficking, terrorism, organised crime and contraband trade. The Financial Stability Forum (FSF), which was convened in 1999 collaborates both with the OECD and FATF in promoting international financial stability, information exchange and international co-operation in matters involving financial surveillance and supervision such as due diligence, risk management, internal controls, disclosure practices, auditing standards and securities in conjunction with the International Organisation of Securities Commissions (IOSCO).

Meanwhile, the U.S. Accountability Office is the investigative body responsible for auditing and evaluating the United States Congress. In fulfilling its functions, the Accountability Office has paid attention to tax havens and the offshore activities of U.S residents and companies. Like the EU, the U.S. authorities view tax havens as motivators of tax evasion and channels for criminal finance. One of the most recent organizations formed in the fight against tax havens is the Tax Justice Network, which was registered in November 2006 and consists of several organizations and agencies from countries including Germany, Ghana, Mozambique, Switzerland and the United States.

Tax Haven Countries

Tax havens include countries such as Andorra, Antigua and Barbuda, the Bahamas, Cayman Islands, British Virgin Islands, Monaco, Isle of Man, Guernsey, Samoa, Bermuda, Cyprus, Gibraltar, Dominica, Belize, Panama and Vanuatu. Other offshore centers such as Barbados are considered low tax jurisdictions and not tax havens due to the taxes that are levied on the profits of offshore companies registered in Barbados, although legislative provisions for corporate discretion and privacy are established and regular offshore financial operations are conducted.

Attempts to Classify some Countries as Tax Havens

Many authors on tax havens frequently tend to classify tax havens as former British colonies that promote unfair tax practices in order to develop their economies through the provision of offshore companies and bank accounts. In this regard, since the main income from offshore activities is generated through annual fees that offshore entities pay to the local governments of tax havens, harmful tax competition is undertaken by offshore tax havens as a means of financial assistance. A recent report published by the Tax Justice Network, "How tax havens cause poverty and undermine welfare states", explains that "their (tax havens) role became politically visible for the first time with concerns over terrorist finance after September 11th, which led to the founding of a Financial Action Task Force within the IMF. Additionally their role is regarded as being central in corruption, drug trafficking and illegal capital flight".

This statement gives the TJN"s position on tax havens. It also complements the OECD"s tax haven perspective; but underlines the reasons presented in defense of countries and territories that were labeled as tax havens and against which sanctions were placed by the FATF subsequent to the OECD"s Report on harmful tax competition. However, the TJN tries to sympathize with tax havens. An example of this is summarized in a statement by the TJN, in which it recognises the heavy dependence of small islands on hosting harmful tax practices and the possibility of losing investment and economic growth form efforts to tackle the abuses. The TJN also indicates that the biggest culprits are financial centres such as Britain, Switzerland and the United States.

Tax Havens of the World Reaction

Over the years, tax haven definitions emerged to explain and describe the principle roles and characteristics of "tax havens". However, as catchy, upbeat and attractive the expression "tax haven" may sound, many proponents of the tax haven industry tend to favor the term "offshore jurisdiction", which is neutral in terms of referring to the "offshore" nature of services (offshore financial services) provided by a country, rather than "tax haven", which makes direct reference to "tax" and hence can be pejorative with regards to harmful international tax competition and the underground economy. Moreover, although the terms "tax haven" and "offshore jurisdiction" are often synonymously used in the marketing and promotion of offshore financial centres, the grounds on which tax haven definitions were originally formulated by the OECD in referring primarily to harmful international tax competition and tax evasion caused several countries to promote themselves as "low tax jurisdictions" rather than tax havens.

Despite all of this, however, as financial services become more advanced and diverse as a result of trade liberalisation and technology, the concept of tax haven shifted from the traditional emphasis of tax avoidance and has expanded to encompass a broad spectrum of financial services, transactions and judicial entities such as offshore companies, offshore foundations, offshore LLC's, offshore banks and investment practices (mutual funds, securities trading, holdings, hedge funds, etc).

This also includes tailored and specialized financial and legal services such as risk management, asset management, asset protection, tax planning, succession and estate planning, insurance and establishing investment and trade platforms through offshore banks and agencies. The role of tax havens thus extends far beyond just taxes.

Tax havens allow for doing business discreetly, undertaking new ventures and achieving privacy and confidentiality when handling family and business matters. The modern tax haven allows for the simplest and most complex of people and businesses to protect their wealth, plan their future and save for rainy days.

Criticism of OECD

Tax haven definitions which emphasize the unfair tax role of offshore jurisdictions have often been criticized as one-sided and imbalanced. As it relates to tax havens, besides tax havens, two other groups of countries, namely, non-OECD member countries and their dependencies and OECD member countries are identified as countries capable of having harmful preferential tax systems.

Technically, what this signifies is that any country can be guilty of harmful tax competition, but not every country is considered a tax haven even though its tax policies are harmful. Hence, what distinguishes tax havens from the other two groups of jurisdictions with harmful tax competition is the intent of tax havens to deliberately exploit and take advantage of the global demand for opportunities to avoid taxes and the design of low tax structures with the objective of attracting foreign capital.

In Defense of Tax Havens

Defendants of the offshore industry refute this perspective on the logic that any country can be a tax haven in relation to another as long as its taxes are lower than those of another. Also, it is believed that developed countries which regard tax havens as the biggest cause of capital and labor flight, should seek ways of finding the root of the problem; one of which is identified as insufficient tax incentives and very high taxes which tend to suffocate personal and corporate financial growth.

Offshore finance services are not only based in islands and small states but found worldwide. The largest financial centres such as London and New York, and countries like Switzerland and Singapore offer secrecy and other special advantages to attract foreign capital flows. A great number of the Fortune 500 companies utilize some form of offshore entity. "Offshore" is a necessary and harmless mechanism that contributes positively to the global system of finance.

Get to top