Chapter 1 What Is a Tax Haven

CHAPTER 1 WHAT IS A TAX HAVEN 1.1 Introduction The topic of tax havens conjures alluring images of secret bank accounts in exotic locations far from the prying eyes of the Revenue Authorities. A tax haven is a legal jurisdiction, which provides a no-tax or low-tax environment. It may be a foreign country or principality or dependency or a designated area within a country that has a series of unique characteristics, the primary one being relatively lower tax rates in comparison with other countries or surrounding areas. In Study on Tax Havens some offshore jurisdictions the reduced tax regime is aimed towards entities organized in the jurisdiction with all operations occurring outside the country. These jurisdictions seek to encourage investment and make up revenue losses by charging a variety of fees for the start up of the entity and on an annual basis. The available statistics indicate that a sizeable part of global financial activity is routed through tax havens. IMF calculations based on BIS data suggest that for selected Offshore Financial Centers (OFC), 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 IFC (International Financial Centers), namely London, the U.S. IBF, and the JOM (Japanese Offshore Market). Similarly, the Tax Justice Network estimates that US$11.5 trillion of assets are held 1 offshore by private individuals at a probable cost to their governments of US$255 billion a year in tax lost. This would be more than sufficient to fund the Millennium Development Goals as agreed by the United Nations. 1.2 Tax Havens – Broad Classification The Organization for Economic Co-operation and Development (OECD) describes a tax haven as a jurisdiction, which actively makes itself available for avoidance of taxes, which would otherwise be paid in a higher tax jurisdiction. The term “tax avoidance” should be noted, because there are ways of avoiding taxes without breaking the law, whereas the opposite term is tax evasion and this is generally classified as a crime. In the US, the IRS agents’ handbook defines tax haven as “a term that generally connotes any foreign country that has either a very low tax or no tax at all on certain categories of income.” The IRS itself defines at least 30 jurisdictions around the world as tax havens, including Austria, the Cayman Islands, Hong Kong, Liechtenstein, Panama, Singapore and Switzerland and lesser- known places such as Bahrain, Nauru, and Turks & Caicos Islands. However, the US is also considered a tax haven by some countries for VAT purposes as well as certain type of investment transactions on US Stock Exchanges by Non-US entities. Offshore, in its broadest sense of the term, means simply a jurisdiction other than your own. The country next door can be offshore for you. The term “Offshore” and “Tax Haven” have similar connotations and they have been used interchangeably in this study. In a more practical context offshore usually means a country or territory which offers specific benefits or incentives to foreigners, mostly by way of tax concessions. These come in different forms: -. 1. It may be complete tax exemption for all international business operated by non-residents (Seychelles, Belize). 2. No local tax or low-tax liability on all investment income regardless of the residence of the investor (Bahamas, Cayman Islands). 3. No local tax or low-tax liability on investment incomes in case of specified investments of non-residents (India). Study on Tax Havens 4. Local tax exemption for non-residents of that jurisdiction (Gibraltar, Channel Islands). 5. Tax holidays for certain types of investment (Portugal, Netherlands Antilles, Iceland). 6. Favorable tax treatment through treaties and agreements with the investor’s home country (Mauritius, Cyprus, Barbados, Netherlands, USA). In addition, some foreign countries may afford better legal protection from creditors and other potential litigants who might attempt to seize an individual’s wealth. This is the second most important aspect that determines why offshore jurisdictions are so popular - asset protection. It may even have nothing to do with tax, although usually both are intertwined. It’s just safer to be offshore. Except in the event of proven criminal activity (excluding so-called “fiscal offences” such as tax evasion or other money collection disputes), most offshore governments uphold 2 strict confidentiality laws for banks, corporate registries, and trust companies. These laws protect offshore investors from third parties, including both private and government authorities. 1.3 History of Tax Havens Some twenty years ago, there were only a handful of offshore centers, and to many their use was surrounded in an ‘air of secrecy’. Also, there were only a few professionals specializing in offshore practice, and those that did, typically made use of only one or two jurisdictions. Over the last twenty years, startling advances in technology and the telecommunications revolution have made it easier for individuals and businesses to access offshore facilities - so much so, that today’s offshore industry has developed in to a major global business, spanning all quarters of the world, involving, in one way or another, approximately half of the world’s financial transactions by value. Consequently, International Financial Services Centers are no longer surrounded by the ‘mystique’ of twenty years ago. They are used globally, twenty-four hours a day, each and every day, as an integral and important part of the world’s financial system i.e. Singapore, Hong Kong, Dubai, etc. The political and economic catalysts that influenced the growth of the offshore industry in the eighties and nineties will continue to influence growth in the next two decades also. These catalysts are: • Political and economic instability. • Market globalization and deregulation. • The internationalization of business. • The lifting of trade barriers. • A trend towards steady global economic growth. • A global relaxation of foreign exchange controls. In addition to political and economic catalysts there are also global tax related catalysts that continue to influence the growth of offshore industry. These include: • High tax regimes. • More effective tax recovery. Study on Tax Havens • The opportunities of utilizing double taxation treaties. An increasing number of countries, often but not exclusively ‘third world’, have seized upon this opportunity to offer companies based in high tax areas, a ‘tax haven ‘ if they move their legal identity to their own low tax shores. Not only does this save the organization tax, it ensures that the ‘haven’ country gets both revenue from registration fees (to its government) and employment and income for its citizens by way of formation agents and furthering their own businesses. There are a large number of offshore jurisdictions worldwide, each offering different entities but all sharing a common aim - to attract international business by way of offering a low or zero tax base from which to operate. 1.4 OECD Approach 3 The list of tax havens identified by the OECD in 2000 provides an overview of Offshore Financial Centers. Though most of the countries in this list are no longer considered by the OECD to be ‘uncooperative,’ and some prominent tax havens (such as the Cayman Islands) are not included, it shows the geographical distribution and range of Offshore Financial Centers. Islands and other small countries dominate the list, which includes countries from all over the world. • Andorra – a small country in Western Europe; • Anguilla – a group of islands in the Caribbean Sea, an overseas territory of the UK; • Antigua and Barbuda – a group of islands in the Caribbean Sea; • Aruba – a Caribbean island, part of the Kingdom of the Netherlands; • The Bahamas – a group of islands off the coast of Florida; • Bahrain – an group of islands off the coast of Saudi Arabia; • Barbados – a Caribbean island; • Belize – a small country in Central America; • British Virgin Islands – a group of islands in the Caribbean Sea, an overseas territory of the UK; • Cook Islands – a group of islands in the South Pacific Ocean, self-governing but in free association with New Zealand; • Dominica – a Caribbean island; • Gibraltar – a small country in Southwestern Europe, an overseas territory of the UK; • Grenada – a group of islands in the Caribbean Sea; • Guernsey/Sark/Alderney – a group of islands in the English Channel, a dependency of the British Crown; • Isle of Man – an island in the Irish Sea, a dependency of the British Crown; • Liberia – a West African country; • Liechtenstein – a small country in Western Europe; Study on Tax Havens • Maldives – a group of islands in the Indian Ocean; • Marshall Islands – a group of islands in the Pacific Ocean; • Monaco – a small country in Western Europe; • Montserrat – a Caribbean island, an overseas territory of the UK; • Nauru – a small South Pacific island; • Netherlands Antilles – a group of islands in the Caribbean Sea, part of the Kingdom of the Netherlands; • Niue – a small South Pacific island, self-governing but in free association with New Zealand; • Panama – a country in Central America; • Samoa – a group of islands in the South Pacific Ocean; 4 • Seychelles – a group of islands in the Indian Ocean; • St. Kitts and Nevis – a group of islands in the Caribbean Sea; • St. Lucia – a Caribbean island; • St. Vincent and the Grenadines – a group of islands in the Caribbean Sea; • Tonga – a group of islands in the South Pacific Ocean; • Turks and Caicos – a group of islands in the North Atlantic Ocean, an overseas territory of the UK; • US Virgin Islands – a group of islands in the Caribbean Sea, an external territory of the US; • Vanuatu – a group of islands in the South Pacific Ocean.

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