Tax Haven

Swipe Tax Haven Vs...

A tax haven is a term, sometimes used negatively and for political reasons, to describe a place with very low tax rates for non-domiciled investors, even if the official rates may be higher.

Currently tax havens no longer exist for individuals or their corporations as most countries are part of the global CRS automatic financial surveillance network by the OCDE. CRS requires countries to force banks and other entities to identify the residence of account holders and beneficial owners of corporate entities and report account balances to local tax agencies, which will report back to tax agencies where account holders or beneficial owners of corporations reside, ending any financial or banking secrecy and allowing tax agencies to claim to offshore investors residence tax rates for foreign accounts. However very large and complex corporations, like multinationals, can still shift profits to corporate tax havens using intricate schemes.

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 ("FSI") 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 § Tax haven lists. The media consensus on effective tax rates poured by certain academics and politicians is 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.

Jurisdictions that were formerly known as tax havens, like Jersey, are open about zero rates of taxation, known more accurately as tax neutrality. Some such offshore Financial Centers (OFCs) have limited bilateral tax treaties, however the connotations associated with this may be misleading, as the consequence is that full tax set by the relevant jurisdictions receiving the proceeds from these OFCs is payable there. They now operate with high levels of OECD compliance.

Modern corporate tax havens have non-zero "headline" rates of taxation, may also high levels of OECD compliance, and have large networks of bilateral tax treaties. However, their base erosion and profit shifting ("BEPS") tools enable corporates to achieve "effective" tax rates closer to zero, not just in the haven but in all countries with which the haven has tax treaties; sometimes putting them on tax haven lists. According to modern studies, the § Top 10 tax havens include corporate-focused havens like the Netherlands, Singapore, Ireland, and the U.K., 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.

Use of tax havens results in a reduction of tax revenues in certain countries and the movement of taxable profits from some jurisdiction to others. Estimates of the § Financial scale of taxes avoided vary and very few are credible, but some more measured estimates assert a range of US$100–250 billion per annum. In addition, capital held in tax havens can permanently leave the tax base (base erosion). Estimates of capital held in tax havens also vary: the most credible estimates are between US$7–10 trillion (up to 10% of global assets). The harm of traditional and corporate tax havens has been said to be particularly acute in developing nations, where the tax revenues are needed to build critical infrastructure. In reality, it is often the misappropriation of resources and the illegitimate movement of public monies to private citizens that is most problematic.

Over 15% of countries are sometimes labelled tax havens, adding to the growing redundancy of the phrase. Financial services has brought prosperity to OFCs. The top 10–15 GDP-per-capita countries, excluding oil and gas exporters, are OFCs but GDP-per-capita does have limitations in utility, and many OFCs appear particularly distorted because of their low populations. Because of § Inflated GDP-per-capita (due to accounting BEPS flows), some OFCs are prone to over- leverage (international capital misprice the artificial debt-to-GDP). 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 § U.S. as the largest beneficiary, and use of tax havens by U.S. corporates maximised U.S. exchequer receipts.

Historical focus on combating tax havens (e.g. OECD–IMF projects) had been on common standards, tax transparency and data sharing with tax authorities. 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. This has highlighted the disconnect between the public perception of tax havens being tropical islands mainly in the Caribbean, and the reality of corporate tax avoidance taking place within the EU, USA, Singapore - the modern corporate tax havens. The misdirection of focus caused some 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 (e.g. the U.S. Tax Cuts and Jobs Act of 2017 ("TCJA") GILTI–BEAT–FDII tax regimes and move to a hybrid "territorial" tax system, and proposed EU Digital Services Tax regime, and EU Common Consolidated Corporate Tax Base).