- 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 competitionamong 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. [ Doggart, Caroline. 2002. "Tax Havens and their uses" (originally published 1970), Economist Intelligence Unit, ISBN 0862181631] Similarly, others have suggested that any country which modifies its tax laws to attract foreign capital could be considered a tax haven [ [http://www.theage.com.au/news/business/here-is-the-truth-about-tax-havens/2007/10/15/1192300685572.html The Truth About Tax Havens - retrieved 28 December 2007] ] . According to other definitions, [ [http://www.taxjustice.net/cms/upload/pdf/Identifying_Tax_Havens_Jul_07.pdfThe Truth About Tax Havens - retrieved 28 December 2007] ] 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. [ [http://www.foreignpolicy.com/story/cms.php?story_id=4230 Foreign Policy: Why Tax Havens Are a Blessing ] ]
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 Islandswere 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-stateof Athenson imported goods. In the Middle Ages, Hanseatic traders who set up business in Londonwere 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.Copyedit|date=May 2008
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 Leaguefirst embraced the concept of tax competitionas early as 1241, while others argue that the tax status of the Vatican Citywas the earliest example of a tax haven (the first Papal Statesbeing recognised in 756).
Various countries claim to be the oldest tax haven in the world. For example, the
Channel Islandsclaim their tax independence dating as far back as Norman Conquest, while the Isle of Manclaims 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. [" [T] he tax haven is a creature of the twentieth century, and began to be used extensively because of the high levels of tax which prevailed after the First World War" at para 26.1, "Tolley's International Tax Planning" (2002), ISBN 0754513394] Bermudasometimes 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. [See generally Introduction to "Tolley's International Initiatives Affecting Financial Havens" (2001), ISBN 0-406-94264-1] However, the Bermudian claim is debatable when compared against the enactment of a Trust Law by Liechtensteinin 1926 to attract offshore capital. [The "Personen-und Gesellschaftsrecht" of 20 January 1926]
Most economic commentators suggest that the first "true" tax haven was
Switzerland, followed closely by Liechtenstein. ["Tolley's Tax Havens" (2000), ISBN 0754504719] 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.
Presently, the growth of tax havens is primarily due to the considerable growth of offshore banking. This expansion is also due to the
globalisationof 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. [A usage which was still being echoed to some degree in the special report of " The Economist" in 1990, "Tax Havens and their uses", ISBN 0 85058 292 X, Special Report No. 1191. The report helpful includes indications of quality of lifein various tax havens which future tax exiles may wish to consider.] 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 taxationtreaty 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, [For example a double taxation treaty still exists between Barbadosand Japan, and another between Cyprusand Russia. Mauritiushas a double taxation treaty with Indiathat is used for tax mitigation, although India is seeking to renegotiate the treaty, [http://timesofindia.indiatimes.com/NEWS/India_Business/India_to_push_for_change_in_tax_treaty_with_Mauritius/articleshow/1068539.cms India to push for change in tax treaty with Mauritius] ] in the 1970s, most major countries began repealing their double taxation treaties with micro-states to prevent corporate taxleakage 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. [The best examples of this were probably Gibraltarand the British Virgin Islands.]
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.
Although tax havens are traditionally linked with images of prosperity, [According to [https://www.cia.gov/library/publications/the-world-factbook/rankorder/2004rank.html The CIA World factbook] tax havens make up 7 of top 12 countries in world (including the top 3) for highest GDP per capita (not counting Ireland as a tax haven for these purposes). In the case of Caribbean and African tax havens, this is all the more stark for the poverty nearby. For example, the two countries closest to Cayman in geographical terms are Jamaica and Cuba.] there have also been notable failures.
Beirutformerly 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, [cite web|url=http://www.time.com/time/magazine/article/0,9171,945606-1,00.html|title=Election Under Fire|publisher=Time Magazine|date=1976-05-17|accessdate = 2006-12-23] and the subsequent political and military deterioration of Lebanon destroyed any notion of the necessary stability for a successful tax haven.
Liberiaenjoyed 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.
Tangierenjoyed 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 Moroccoin 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
eurois used in Monaco.
At the risk of gross oversimplification, it can be said that the advantages of tax havens are viewed in four principal contexts: ["Tolley's Offshore Service" (2006), ISBN 1-405-71568-5]
*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 estateor 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. [This is a simplistic example; in most sophisticated tax codes there are extensive provisions for catching "gifts" (such as a declaration of trust) made for a specified time preceding death.] (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
reinsurancecompanies 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 pricingscams 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 insuranceand 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. [It has been estimated over 75% of the world's hedge funds (probably the riskiest form of collective investment vehicle) are domiciled in the Cayman Islands, with nearly US$1.1 Trillion AUM - [http://www.dailyii.com/article.asp?ArticleID=1039798&LS=EMS73445 "Institutional Investor"] , 15 May 2006, although statistics in the Hedge Fund industry are notoriously speculative.]
The OECD and tax havens
Organisation for Economic Co-operation and Development(OECD) identifies three key factors in considering whether a jurisdiction is a tax haven: [ [http://www.oecd.org/document/63/0,3343,en_2649_37427_30575447_1_1_1_37427,00.htmlTax Haven Criteria - retrieved 26 Feb 2008] ]
#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.
#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.
#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. [Hay, "Towards a level playing field - regulating corporate vehicles in cross border transactions", [http://www.itio.org/documents/TowardsaLevel.pdf] ]
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.
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:
# 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 Corporationlegislation is probably the best example of this.
transfer pricingrules, standardisation of which has been greatly helped by the promulgation of OECD guidelines.
# restrictions on deductibility, or imposition of a withholding tax when payments are made to offshore recipients.
# 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.
# exit charges, or taxing of unrealised capital gains when an individual, trust or company emigrates.
However, many jurisdictions employ blunter rules. For example, in
Francesecurities regulations are such that it is not possible to have a public bond issue through a company incorporated in a tax haven. [Companies incorporated in tax havens are often used as bond issuing vehicles in securitisations for tax reasons.]
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. [The United Kingdom is one country that has strict forced disclosure rules. - http://www.hmrc.gov.uk/aiu/index.htm] 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. [ [http://www.pbs.org/wgbh/pages/frontline/shows/tax/schemes/cayman.html] , [http://www.escapeartist.com/OREQ21/Asset_Protection.html] , [http://www.aruba.com/news/business/first-ever-tax-information-exchange-agreement-tiea-with-aruba-and-united-states-goes-into-effect/] ]
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 revenuewhich would otherwise be theirs. Various pressure groups also claim that money launderers also use tax havens extensively, [Such as ATTACand the Tax Justice Network. See for example: [http://visar.csustan.edu/aaba/jerseypage.html Offshore watch] ] although extensive financial and KYCregulations 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. [See for example the views expressed in [http://www.guardian.co.uk/waronterror/story/0,,563715,00.html "The Guardian"] in 2001.] In 2000 the Financial Action Task Forcepublished 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.
See also|List of offshore financial centres,
Tax rates around the worldThe 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. [Working paper 12802, [http://www.nber.org/papers/w12802] . The paper implicitly adopts the "smaller" tax haven approach, ie. disregarding larger countries which have either low taxes rates (for example, Russia), or systems of taxation which permit them to be used to structure tax avoidance schemes (for example, the United Kingdom). It also excludes non-sovereign tax havens (for example, Delawareor Labuan).]
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.
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 sheetOFC cross-border assetsreached 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). [ [http://www.imf.org/external/np/mae/oshore/2000/eng/back.htm Offshore Financial Centers - IMF Background Paper ] ] 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. [ [http://www.economist.com/surveys/displaystory.cfm?story_id=8695139 Places in the sun] , The Economist, " February 22 2007"]
Center for Freedom and Prosperitydisputes 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. [Hines, "Lessons from behavioral responses to international taxation", (1999) 52 National Tax Journal 305-322]
A 2006 academic paper indicated that: "in 1999, 59% of U.S. firms with significant foreign operations had affiliates in tax haven countries", [Desai, Foley and Hines, "The demand for tax haven operations", Journal of Public Economices 90 (2006) at page 514.] although they did not define "significant" for this purpose.
Proposed U.S. legislation
25 January 2007Senator Byron Dorgan(for himself and on behalf of Carl Levinand Russ Feingold) presented a bill to the U.S. Senateto 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. [ [http://www.govtrack.us/congress/billtext.xpd?bill=s110-396 S. 396] , GovTrack, " January 25 2007"]
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, [The bill spells the name of Dominica incorrectly.] 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, [Interestingly, the bill refers to the Territory as St. Christopher and Nevis, a name which the Territory itself has not used generally since the last century.] 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 Obamaand Senator Norm Coleman. [ [http://www.senate.gov/~levin/newsroom/release.cfm?id=269516 Retrieved from www.senate.gov 31 August 2007] ] 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 companyor offshore trustis 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".
hedge funds and company formation agents to establish anti-money launderingprogrammes 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. [In particular the prohibition against granting patents for tax mitigation schemes are wholly implausible in commercial terms; legal schemes of that nature rarely pass the innovation test required for a patent, and even where they might, the schemes are rarely (if ever) patented (which would be more likely to lead to them being both copied and brought vigorously to the attention of the Government).] 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, [In fact, the U.S. already has unilateral mutual assistance treaties with most major tax havens; see for example in the
British Virgin Islandsthe Mutual Legal Assistance (United States of America) Act, 1990 and the Mutual Legal Assistance (Tax Matters) Act, 2003 (also relating to a bilateral agreement with the U.S.).] and bear little relationship to modern commercial practice. [ [http://www.washtimes.com/commentary/20040209-090310-4341r.htm "Washington Times" - Commentary] and [http://www.ft.com/cms/s/38b1ff06-f781-11db-86b0-000b5df10621.html "Financial Times" - Financial standards under fire] .] The fact that the bill is expressed to designate four European Unioncountries (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 Institutehas been particularly scathing in its commentary on the draft legislation. [ [http://www.cato.org/pub_display.php?pub_id=9283 Cato Institute, 18 March 2008] ]
Liechtenstein banking scandal
In February 2008 Germany announced that it had paid €4.2 million to Heinrich Kieber, [Mr Kieber seems to be an unlikely hero for law enforcement authorities. A convicted fraudster, reports indicate that after initially stealing the information, he
blackmailed the Liechtenstein authorities into reducing and dropping criminal charges against him relating to property fraud in Spain. However, before returning the disks he made copies of which, which he later sold to foreign governments after he left the country. Further reports indicate that he now lives under a new name in Australia. [http://www.spiegel.de/international/business/0,1518,537640,00.html] ] 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. [ [http://www.guardian.co.uk/business/2008/mar/02/tax.personalfinancenews "The Guardian", 2 March 2008] ; [http://www.telegraph.co.uk/opinion/main.jhtml?xml=/opinion/2008/02/27/do2704.xml "The Daily Telegraph", 27 February 2008] ; [http://www.spiegel.de/international/business/0,1518,537640,00.html "Der Spiegel", 25 February 2008] ] Other governments, notably Denmark and Sweden, refused to pay for the information regarding it as stolen property. [ Denmark's tax minister, Kristian Jensen, said: "I think it's a moral problem to reward a criminal for some information that he stole... I don't like this and I don't think this ethic is the best way to ensure that taxes are paid correctly."] The Liechtenstein authorities subsequently accused the German authorities of espionage. [ [http://www.telegraph.co.uk/news/main.jhtml?xml=/news/2008/02/20/wliech120.xml "The Daily Telegraph", 26 February 2008] ; [http://www.moneyweek.com/file/43013/a-global-crackdown-on-tax-havens.html "Money Week", 29 February 2008] ]
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. [ [http://www.accountancyage.com/accountancyage/news/2210944/germany-call-tax-haven "Accountancy Age", 3 March 2008] ; [http://business.timesonline.co.uk/tol/business/money/tax/article3510661.ece "The Times", 9 March 2008] ; [http://www.guardian.co.uk/money/2008/mar/05/capitalgainstax.moneyinvestments?gusrc=rss&feed=worldnews "The Guardian", 5 March 2008] ] 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 Unionor 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.
ATTACNGO's criticism of tax haven and underground economy
Free economic zone
International Business Corporation
List of offshore financial centres
Offshore Financial Centres
Tax avoidance and tax evasion
* 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)"
* [http://www.imf.org/external/ns/cs.aspx?id=55 Offshore Banking and Financial Centers]
* [http://www.imf.org/external/np/mae/oshore/2000/eng/back.htm Offshore Financial Centers -- IMF Background Paper]
* [http://digital.library.unt.edu/govdocs/crs/search.tkl?type=subject&q=Tax%20havens&q2=LIV Congressional Research Service (CRS) Reports regarding tax havens]
* [http://www.taxjustice.net/cms/front_content.php?idcat=2 Tax Justice Network]
* [http://www.heritage.org/Research/Taxes/BG1395.cfm An OECD Proposal To Eliminate Tax Competition Would Mean Higher Taxes and Less Privacy] - Heritage Foundation: Washington D.C.
* [http://admin.fnst.org/uploads/1044/24-OP-pdf.pdf The Moral Case for tax Havens]
* [http://www.heritage.org/research/features/index/chapters/pdfs/Index2004_Chap2.pdf The Economics of Tax Competition: Harmonization vs. Liberalization]
* [http://www.cato.org/pub_display.php?pub_id=9283 "Why tax havens are a blessing" - the Cato Institute]
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