Definitions

departure tax

Tax haven

A tax haven is a place where certain taxes are levied at a low rate or not at all.

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.

There are several definitions of tax havens. The Economist has tentatively adopted the description by Geoffrey 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. Similarly, others have suggested that any country which modifies its tax laws to attract foreign capital could be considered a tax haven. According to other definitions, 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.

One argument in favor of tax havens is that they help pressure developed countries to reduce their tax rates.

Origins

To a certain extent, the founding concept of a tax haven appeared as an economic response to the principle of taxes. For instance, in Ancient Greece, some of the Greek Islands were used as depositories by the sea traders of the era to place their foreign goods to thus avoid the two-percent tax imposed by the city-state of Athens on imported goods. In the Middle Ages, Hanseatic traders who set up business in London were exempt from tax. The U.S. is not new to tax haven users. In 1721, American colonies traded from Latin America to avoid English taxes.

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. For example, the Channel Islands claim their tax independence dating as far back as Norman Conquest, while the Isle of Man claims to 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. 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. However, the Bermudian claim is debatable when compared against the enactment of a Trust Law by Liechtenstein in 1926 to attract offshore capital.

Most economic commentators suggest that the first "true" tax haven was Switzerland, followed closely by Liechtenstein. 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 effort following the devastation of World War I. By and large, Switzerland, having remained neutral during the Great War, avoided these additional infrastructure costs and was consequently able to maintain a low-level of taxes. As a result, there was a considerable influx of capital into the country for tax related reasons. It is difficult, nonetheless, to pinpoint a single event or precise date which clearly identifies the emergence of the modern tax haven.

Developments

Presently, the growth of tax havens is primarily due to the considerable growth of offshore banking. This expansion is also due to the globalisation of the world's businesses. Indeed, they look for new markets and cheap labour. Midway through the twentieth century, when most of the world's colonies attained their emancipation and independence, they, for the most part, developed their own tax and trade regimes thus creating certain economic disparities around the world.

Such disparities, however, are not enough for a nation to qualify itself as a tax haven. In brief, a favourable, overall national environment is needed to spur a definition as a tax haven. In general, essential elements such as a stable political and economic government, as well as a strong network of communication facilities are needed for a nation to identify itself as a tax haven. Discretion is the main tax havens’ attraction. It is therefore very delicate for countries’ tax authorities to measure or compare tax avoidance. Nevertheless, some countries such as the US published reports and statistics showing the economic impact and the expansion of tax havens. This tax avoidance phenomenon have impact in terms of tax’s loss of revenue but also on the country.

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. 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, 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.

Economic and Political Stability

It is difficult to establish a country’s economic and politic stability at a precise point in time. Evaluating its politic risks for the coming years is even more difficult.

Nevertheless, a country’s political stability is a very important specification to look for when choosing a tax haven. Especially for long term users. Some stable countries are easily foreseeable. They are those attached to economically powerful countries : Monaco, Liechtenstein, Channel Islands, Bermuda, Andorra, etc. Others, even though independent are stable : Switzerland, Luxembourg, Holland.

The Bahamas closest island is fifty miles off the coast of Florida and its culture is heavily influenced by the United States of America. It is an archipelago composed of 700 islands, of which twenty-two islands are inhabitated with human settlements. The country's demographics are composed of approximately 75% of Sub-Saharan African descent and 25% White and other decent. The economy is capitalistic in nature, drawing from its colonial British history. However the division of wealth of the residential population is sharp, even though its GNP is one of the highest in the Caribbean.

Nonetheless, the Bahamas has had political stability since independence was granted by the British Crown in 1973. The country's proximity to the US has fostered considerable economic growth in the Tourism industry. With a thriving legal industry and strong adherence to the rule of law the Banking industry is recognized as stable and reliable by the Organisation for Economic Co-operation and Development (OECD).

Lebanon’s politic instability has scared off its investors. On the other hand , Bermudas is considered as a very stable country probably due to the good relations and the treaties signed with the US.

The CFCE (Centre Français du Commerce Exterieur) created a data bank to those wishing to trade or invest in foreign countries. Private specialist cabinet also provide this kind of information using different method and specialised in geographic areas. These specialist cabinets are : Data Resources Incorporated (DRI), World Political Risk Forecast (WPRF), Multinational Risk Inc., BERI periodically produces a « Political Risk Review ». The monthly UK magazine « Euromoney » published a political risk survey of over 30 countries.

The risk evaluation is an old practice for important international companies as political instability can lead to the loss of all investments in the country. Therefore the best protection is diversification according to the tax havens specificity. In addition, the possibility to move assets quickly from a country without jeopardising the company should also be an important factors to take into account when choosing a tax haven.

Failures

Although tax havens are traditionally linked with images of prosperity, there have also been notable failures.

  • Beirut formerly enjoyed a reputation as the only tax haven in the Middle East. However, its reputation took a severe dent after the Intra Bank crash of 1966, and the subsequent political and military deterioration of Lebanon destroyed any notion of the necessary stability for a successful tax haven.
  • Liberia enjoyed a prosperous ship registration industry. The fact that the ship registration business still continues is partly a testament to its early success, and partly a testament to moving the national Shipping Registry to New York City, but the series of violent and bloody civil wars in the 1990s and early 2000s severely damaged confidence in the jurisdiction.
  • Tangier enjoyed a brief but colourful existence as a tax haven in the period between the end of effective control by the Spanish in 1945 until it was formally reunited with Morocco in 1956.
  • A number of Pacific based tax havens have literally closed up shop (although not formally) in response to OECD demands for better regulation and transparency in the late 1990s.

Money and Exchange Control

Most of the tax havens have a double monetary control system which distinguish residents from non resident as well as foreign currency from the domestic one. In general, residents are subject to monetary controls but not non residents.

A company, belonging to a non resident, when trading overseas is seen as non resident in terms of exchange control. Therefore, it is possible for a foreigner to create a company in a tax haven to trade on an international basis. The company’s operations will not be subject to exchange controls as long as it uses foreign currency to trade outside. On the other hand, if the country does not have a stable currency , the authorisation to transfer profits and assets in convertible currency would not be granted. This situation can lead to a loss of interest to trade with that country.

Some tax havens have complex exchange control laws, it is therefore necessary to have, prior to any investment, the country authorisation. Investors have to be prudent in their commercial agreements if they have not received the country authorisation.

Tax havens, also have to have an easily convertible currency or linked to an easily convertible one. Most of them are convertible to US dollar or to pounds sterling. US dollars are nevertheless the more widely used and is welcome in all tax havens situated in the Caribbean. In Liberia, the US dollar is considered legal tender and US notes circulate in the country. The euro is used in Monaco.

Methodology

At the risk of gross oversimplification, it can be said that the advantages of tax havens are viewed in four principal contexts:

  • Personal residency. Since the early twentieth century, wealthy individuals from high-tax jurisdictions have sought to relocate themselves in low-tax jurisdictions. In most countries in the world, residence is the primary basis of taxation. In some cases the low-tax jurisdictions levy no, or only very low, income tax. But almost no tax haven assesses any kind of capital gains tax, or inheritance tax. Individuals who are unable to return to a high-tax country in which they used to reside for more than a few days a year are sometimes referred to as tax exiles.
  • Asset holding. Asset holding involves utilising a trust or a company, or a trust owning a company. The company or trust will be formed in one tax haven, and will usually be administered and resident in another. The function is to hold assets, which may consist of a portfolio of investments under management, trading companies or groups, physical assets such as real estate or valuable chattels. The essence of such arrangements is that by changing the ownership of the assets into an entity which is not resident in the high-tax jurisdiction, they cease to be taxable in that jurisdiction. Often the mechanism is employed to avoid a specific tax. For example, a wealthy testator could transfer his house into an offshore company; he can then settle the shares of the company on trust for himself for life, and then to his daughter. On his death, the shares will automatically vest in the daughter, who thereby acquires the house, without the house having to go through probate and being assessed with inheritance tax. (Most countries assess inheritance tax (and all other taxes) on real estate within their jurisdiction, regardless of the nationality of the owner, so this would not work with a house in most countries. It is more likely to be done with intangible assets.)
  • Trading and other business activity. Many businesses which do not require a specific geographical location or extensive labour are set up in tax havens, to minimise tax exposure. Perhaps the best illustration of this is the number of reinsurance companies which have migrated to Bermuda over the years. Other examples include internet based services and group finance companies. In the 1970s and 1980s corporate groups were known to form offshore entities for the purposes of "reinvoicing". These reinvoicing companies simply made a margin without performing any economic function, but as the margin arose in a tax free jurisdiction, it allowed the group to "skim" profits from the high-tax jurisdiction. Most sophisticated tax codes now prevent transfer pricing scams of this nature.
  • Financial intermediaries. Much of the economic activity in tax havens today consists of professional financial services such as mutual funds, banking, life insurance and pensions. Generally the funds are deposited with the intermediary in the low-tax jurisdiction, and the intermediary then on-lends or invests the money (often back into a high-tax jurisdiction). Although such systems do not normally avoid tax in the principal customer's jurisdiction, it enables financial service providers to provide multi-jurisdictional products without adding an additional layer of taxation. This has proved particularly successful in the area of offshore funds.

The OECD and tax havens

The Organisation for Economic Co-operation and Development (OECD) identifies three key factors in considering whether a jurisdiction is a tax haven:

  1. No or only nominal taxes. Tax havens impose no or only nominal taxes (generally or in special circumstances) and offer themselves, or are perceived to offer themselves, as a place to be used by non-residents to escape high taxes in their country of residence.
  2. Protection of personal financial information. Tax havens typically have laws or administrative practices under which businesses and individuals can benefit from strict rules and other protections against scrutiny by foreign tax authorities. This prevents the transmittance of information about taxpayers who are benefiting from the low tax jurisdiction.
  3. Lack of transparency. A lack of transparency in the operation of the legislative, legal or administrative provisions is another factor used to identify tax havens. The OECD is concerned that laws should be applied openly and consistently, and that information needed by foreign tax authorities to determine a taxpayer’s situation is available. Lack of transparency in one country can make it difficult, if not impossible, for other tax authorities to apply their laws effectively. ‘Secret rulings’, negotiated tax rates, or other practices that fail to apply the law openly and consistently are examples of a lack of transparency. Limited regulatory supervision or a government’s lack of legal access to financial records are contributing factors.

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.

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.

Anti-avoidance

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:

  1. attributing the income and gains of the company or trust in the tax haven to a taxpayer in the high-tax jurisdiction on an arising basis. Controlled Foreign Corporation legislation is probably the best example of this.
  2. transfer pricing rules, standardisation of which has been greatly helped by the promulgation of OECD guidelines.
  3. restrictions on deductibility, or imposition of a withholding tax when payments are made to offshore recipients.
  4. taxation of receipts from the entity in the tax haven, sometimes enhanced by notional interest to reflect the element of deferred payment. The EU withholding tax is probably the best example of this.
  5. exit charges, or taxing of unrealised capital gains when an individual, trust or company emigrates.

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.

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. 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.

The United States has entered into Tax Information Exchange Agreements (TIEA) with a number of tax havens.

Incentives

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, 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. 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.

Examples

, Tax rates around the world The U.S. National Bureau of Economic Research has suggested that roughly 15% of countries in the world are tax havens, that these countries tend to be small and affluent, and that better governed and regulated countries are more likely to become tax havens, and are more likely to be successful if they become tax havens.

  • Andorra. No personal income tax.
  • Anguilla - A British Overseas Territory and offshore banking centre
  • Antigua and Barbuda
  • Aruba
  • The Bahamas levies neither personal income nor capital gains tax, nor are there inheritance taxes.
  • Barbados - A 'Low-tax regime' not 'Tax haven'. - The government of Barbados sent off a high level note to members of the United States Congress recently in protest of the label "Tax Haven" stating it has the potential to undermine or override the Barbados/United States double taxation agreement.
  • Belize No capital gains tax.
  • Bermuda does not levy income tax on foreign earnings, and allows foreign companies to incorporate there under an "exempt" status. Exempt companies may not hold real estate in Bermuda or trade there, nor may they be involved in banking, insurance, assurance, reinsurance, fund management or similar business, such as investment advice, without a license. The island also maintains a stable, clean reputation in the business world. At present, there are no benefits for individuals. In fact, for a non-Bermudian to own a house on the island, they would have to pay a minimum of $15,000 a year in land tax alone.
  • Bosnia and Herzegovina - 10% corporate income tax, 10% income tax, 10% capital gain tax
  • British Virgin Islands: the 2000 KPMG report to the United Kingdom government indicated that the British Virgin Islands was the domicile for approximately 41% of the world's offshore companies, making it by some distance the largest offshore jurisdiction in the world by volume of incorporations. The British Virgin Islands has, so far, avoided the scandals which have tainted less well regulated offshore jurisdictions.
  • Bulgaria - corporate tax is 10% , income tax is 10% , tax on dividends is 5%, no capital gain tax
  • Campione d'Italia an Italian enclave within Switzerland
  • Cayman Islands No capital gains tax.
  • In the Channel Islands, no tax is paid by corporations or individuals on foreign income and gains. Non-residents are not taxed on local income. Local taxation is at a fixed rate of 20% in Jersey, Guernsey, & Alderney and 0% in Sark.
  • Cook Islands
  • Cyprus: this jurisdiction has grown recently in popularity and anticipates further future growth. As a jurisdiction Cyprus is in a position to exploit its unusual position as an offshore jurisdiction which is within the EU.
  • Gibraltar ceased to be considered a tax haven after 30th June 2006. No new Exempt Company certificates are being issued from that date. All previous Exempt Company certificates will be ineffective from 2010
  • Hong Kong's tax rates are low (17%) enough that it can be considered a tax haven. Hong Kong does not levy tax on capital gain as well.
  • Ireland did not tax the foreign income of authors and artists until 2006. Corporation tax is only 10% or 12.5%. Income not remitted to Ireland by Irish residents not-domiciled in either Ireland or the UK can escape taxation Ireland.
  • The Isle of Man does not charge corporation tax, capital gains tax, inheritance tax or wealth tax. Personal income tax is levied at 10% on the worldwide income of Isle of Man residents, up to a maximum tax liability of £100,000. Banking income tax is levied on the profits of Isle of Man based banks at 10%.
  • Labuan, a Malaysian island off Borneo
  • Liechtenstein
  • Luxembourg
  • Macau
  • Malta - Shareholders of certain companies pay less than 5% tax
  • Mauritius - based front companies of foreign investors are used to avoid paying taxes in India utilising loopholes in the bilateral agreement on double taxation between the two countries, with the tacit support of the Indian government, who are keen to improve figures relating to inward investment. The use of Mauritius as a gateway to funnel foreign investments into India has always been controversial. Mauritius's financial regime has a number of the key characteristics of a tax haven, which has helped to facilitate this.
  • Macedonia - corporate taxes 10 %, income taxes 10 %, tax on reinvestment profit 0 %
  • Monaco does not levy a personal income tax.
  • Nauru - No taxes. Only tax in country is an airport departure tax.
  • Netherlands Antilles
  • Nevis
  • New Zealand does not tax foreign income derived by NZ trusts settled by foreigners of which foreign residents are the beneficiaries. Nor does it tax the foreign income of new residents for four years. No capital gains tax.
  • Norfolk Island - no personal income tax.
  • Panama 'Offshore' entities are not prohibited from carrying on business activities in Panama, other than banks with International or Representation Licenses (see Offshore Business Sectors) but will be taxed on income arising from domestic trading, and will need to segregate such trading in their accounts.
  • Russia - 13% income tax
  • Samoa
  • San Marino
  • Sark
  • Seychelles
  • St Kitts and Nevis
  • St Vincent and the Grenadines
  • Switzerland is a tax haven for foreigners who become resident after negotiating the amount of their income subject to taxation with the canton in which they intend to live. Typically taxable income is assumed to be five times the accommodation rental paid. Vaud is the most popular canton for this scheme. For businesses, the canton of Zug is popular, with over 6000 holding companies.
  • Turks and Caicos Islands The attraction of the Exempt Company lies in a combination of its tax exempt status and minimal disclosure and administrative requirements. In order to obtain tax exempt status the subscribers must at the time of incorporation lodge at the Companies Registry a signed declaration stating that the business of the company will be mainly carried on outside the Turks and Caicos Islands. The subscribers are not required to inform the Registrar of the identity of the beneficial owners. An exempt company must nominate a representative resident in the Islands for the purpose of service of legal process. There are more than 15,000 International Business Companies registered in the Turks and Caicos Islands.
  • Until 2008, the UK was a tax haven for people of foreign domicile. This was eliminated by Prime Minister Gordon Brown, responding to unions and Labour Party lawmakers.
  • Some states within the United States, particularly Delaware, offer incentives for businesses to locate there. Many banks and other financial companies are domiciled in the state of Delaware even though Delaware is one of the smallest states in the United States. Nevada and Wyoming are particularly well known for not having any state income tax or corporation tax.
  • Uruguay - used to have no personal income tax. However, the current government decided to introduce income tax as of 2007.
  • United Arab Emirates for individuals and Jebel Ali Free Zone for companies.
  • United States Virgin Islands offers a 90% exemption from U.S. income taxes and 100% exemption from all other taxes and customs duties to certain qualified taxpayers.
  • Vanuatu's Financial Services commissioner announced in May 2008 that his country would reform its laws so as to cease being a tax haven. "We've been associated with this stigma for a long time and we now aim to get away from being a tax haven.
  • 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.

    Amounts

    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).

    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.

    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. Some support for this is found in academic studies which suggests that the tax elasticity of investment is approximately -0.6.

    A 2006 academic paper indicated that: "in 1999, 59% of U.S. firms with significant foreign operations had affiliates in tax haven countries", although they did not define "significant" for this purpose.

    Modern developments

    Proposed U.S. legislation

    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.

    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, 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, St. Lucia, St. Vincent and the Grenadines, Seychelles, Tongo, Turks and Caicos, and Vanuatu.

    That draft legislation was superseded late in the same year 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. 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:

    • creating a presumption that an offshore company or offshore trust is controlled by the U.S. taxpayer who formed it.
    • empowering the U.S. Treasury to take special measures against foreign jurisdictions which "impede" U.S. tax enforcement.
    • requiring U.S. financial institutions that open accounts for foreign entities controlled by U.S. clients, or open accounts in offshore secrecy jurisdictions for U.S. clients, or establish entities offshore for U.S. clients, to report such actions to the IRS.
    • taxing income originating from offshore trusts used to buy real estate, artwork and jewelry for U.S. persons, and treating as trust beneficiaries those persons who actually receive offshore trust assets.
    • increasing current penalties on promoters of unlawful tax shelter.
    • prohibiting the U.S. Patent and Trademark Office from issuing patents for "inventions designed to minimize, avoid, defer, or otherwise affect liability for Federal, State, local, or foreign tax".
    • requiring hedge funds and company formation agents to establish anti-money laundering programmes equivalent to those which apply to banks and other financial institutions.

    Many of the intiatives appear politically populist rather than a serious attempt to curb tax mitigation schemes. 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, and bear little relationship to modern commercial practice. 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.

    Although the Stop Tax Haven Abuse Act ran out of time in 2007, Senator Levin has promised to re-introduce it during 2008.

    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. The Cato Institute has been particularly scathing in its commentary on the draft legislation.

    Liechtenstein banking scandal

    In February 2008 Germany announced that it had paid €4.2 million to Heinrich Kieber, a former data archivist of LGT Treuhand, a Liechtenstein bank, for a list of 1,250 customers of the bank and their accounts details. Investigations and arrests followed relating to charges of illegal tax evasion. The German authorities shared the data with U.S. tax authorities, but the British government paid a further ₤100,000 for the same data. Other governments, notably Denmark and Sweden, refused to pay for the information regarding it as stolen property. The Liechtenstein authorities subsequently accused the German authorities of espionage.

    However, regardless of whether unlawful tax evasion was being engaged in, the incident has fuelled the perception amongst European governments and press that tax havens provide facilities shrouded in secrecy designed to facilitate unlawful tax evasion, rather than legitimate tax planning and legal tax mitigation schemes. This in turn has led to a call for "crackdowns" on tax havens. Whether the calls for such a crackdown are mere posturing or lead to more definitive activity by mainstream economies to restrict access to tax havens is yet to be seen. No definitive announcements or proposals have yet been made by the European Union or governments of the member states.

    Whether or not unlawful tax avoidance was going on, Liechtenstein's reputation has inevitably been damaged, as customers expect their banks, whether onshore or offshore, to protect their data against unauthorised disclosure.

    See also

    Notes

    Further reading

    • Baker, Raymond W., "Capitalism's Achilles' Heel: Dirty Money, and How to Renew the Free-Market System.", (2005)
    • Henry, James S., "The Blood Bankers: Tales from the Global Underground Economy.", (2003)

    External links

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