A tax havens, also known as a tax haven due to its lack of transparency, is simply a territorial political entity with an excessively permissive tax regime.
It can be an entire country, such as Luxembourg, or a part of a territory, such as the state of Delaware in the United States.
These are regions with a significantly low or nonexistent tax havens, where companies can legally register even if they don’t conduct business there. In theory, the citizens of these regions should benefit from such a low tax burden, but in reality, the situation is far more complex.
It turns out that many companies and corporations, as well as very wealthy individuals, open bank accounts in these locations to avoid paying taxes.
What are the Characteristics of a tax haven?
Classifying a country as a tax havens requires considering various factors. This depends on the legal criteria used by the government, organisation, or institution evaluating these territories. Key characteristics of tax havens include the following:
1. No or Very Low Tax Burden
- This is the main factor that attracts thousands of companies and individuals to tax havens.
- Foreign investors and companies are not required to pay income or corporate taxes.
- If they do have to make any payments, these are minimal and purely symbolic.
2. Secrecy and Opacity of Information
- Of course, one of the main attractions of tax havens is the concealment of information.
- Thanks to banking secrecy, it is virtually impossible to obtain information such as the origin of funds, capital movements, or the names of their owners.
- In many tax havens, the owners of these funds are not even required to appear in public records, remaining in the shadows. The use of nominees is a common practice.
3. Fiscal Elasticity
- The legal regulations regarding taxation and divorce are incredibly flexible. This allows banks, corporate lawyers, consulting firms, and other organisations to optimise their profits in these niches.
- This also includes the possibility for companies to register their legal domicile in these territories, even if they do not conduct any administrative or operational activities there.
4. Duality in Tax Matters
- The citizens of this territory and local businesses are often subject to restrictive legal frameworks that differ significantly from those applicable to international companies.
- This is attractive to foreign organisations, as they receive tax benefits that would not be available in their home countries.
- All of this contributes to the proliferation of so-called offshore companies in tax havens, created for tax fudging, money laundering, or other illicit financial happenings.
Why Tax Havens are a Problem?
Tax havens are a crucial factor in the unequal distribution of global wealth. Just 1% of the population owns more wealth than the remaining 99%.
If you think that tax havens have no impact on your daily life and only affect wealthy individuals and large corporations, we have bad news: that’s not the case.
1. Tax Burden
- The tax havens that companies evade in the countries where they operate means that the government does not receive this money.
- Consequently, the amount of money available to cover public spending needs decreases.
- This is simply the money that governments use to ensure that you, as a citizen, can enjoy the benefits of living in that country.
- In short, this means the wealthy are not disbursing their fair share of taxes, and the rest of the world is forced to bear the tax burden.
2. A Large-Scale Problem
- But this is only the tip of the iceberg, as the consequences of this quasi-legal activity give rise to several much more serious and profound problems for the global community. Let’s consider some other issues caused by tax havens:
- Banking secrecy, based on strict confidentiality, allows for the storage and subsequent transfer of illegally obtained capital.
- Thus, funds stolen through corruption or earned through drug trafficking, arms trafficking, or human trafficking can be hidden.
- In this way, any legal liability at the criminal, tax, and civil levels can be avoided.
- To cover budget deficits caused by this unethical manoeuvre, states have to raise taxes for ordinary citizens.
- The protection of capital of illegal origin is the primary means of laundering or legalising these assets.
- There are financial instruments that attract corporate capital or large personal fortunes, thereby encouraging tax evasion. Thus, the accumulation of wealth in large corporations is intensified, while the world’s population becomes poorer.
3. Everyone Wants to be Part
- Profiting from the use of tax havens benefits not only companies or individuals seeking to evade taxes.
- It’s easy to understand why a criminal organisation, a terrorist group, or an individual who has embezzled large sums of money from the state budget would place their capital in a tax havens.
- It’s also easy to understand how consulting and law firms profit from creating offshore companies. But the world of capital flight and concealment is far more complex.
- It turns out that banks are among the biggest beneficiaries, operating in tax havens and earning more than 25% of their income there.
- The formula is simple: they earn 42% profit on each transaction in tax havens, which exceeds the average 19% they earn outside them.
- This is an important fact that explains why the 20 largest banks in Europe conduct their business in these territories.
- Although in many cases they do not have a branch directly in their name, they use other banks as subsidiaries. If you want to know which banks these are, here they are:
- In Spain: Santander Group and BBVA
- In Germany: Deutsche Bank, Commerzbank, KfW
- In Italy: UniCredit and Intesa Sanpaolo
- In the Netherlands: ING and Rabobank
- In Sweden: Nordea
- In the United Kingdom: HSBC, Barclays, RBS, Lloyds Bank and Standard Commissioned
What are the Main Companies that Use Tax Havens?
- It’s common to hear stories about how many of the world’s largest and most profitable companies started small and achieved success through effort, hard work, and ingenuity.
- And while this may be true, what they don’t tell you is how they avoid paying enormous sums of money to maintain their status as corporate giants.
- In the United States, approximately 50 companies maintain their capital in tax havens.
- Together, they hold a staggering €151,179.44 billion, which they use to pay minimal or zero taxes in the countries where they operate.
- This list is headed by Apple, Pfizer, Microsoft, Universal Electric, IBM, Merck, Alphabet (Google), Cisco Systems, Johnson & Johnson, and Oracle.
- Other well-known names include PepsiCo, Coca-Cola, Intel, JPMorgan Chase, Home Depot, Universal Motors, Wells Fargo, Walt Disney, AT&T, and Mondelez International.
- As you can see, one of the ways these companies became giants was, to a significant extent, by shifting the tax burden onto those who buy or acquire their goods and services: the perfect business model.
Which are the Agencies that Act against Tax Havens?
- Given the destructive impact of tax havens, they have become essential for the world’s largest economies.
- Currently, several states have joined forces to minimise the impact of tax havens on the economy.
- One example is the creation of the Organisation for Economic Cooperation and Development (OECD). The European Blending’s intention to apply pressure mechanisms on states classified as tax havens may, first and foremost, focus attention on eliminating confidentiality. The reason is apparent: without this protection, the origin of capital, its movement, and, of course, its owner can be traced.
- The OECD first did this in 1998, compiling a list of countries that encourage tax evasion.
- It took seven years, due to delays from Luxembourg, Switzerland, Austria, and Belgium, before a law on interest income tax was finally adopted in Europe in 2005.
- But the success up to that point was only partial, as the information did not include the capital’s origin.
- 2014 marked a significant milestone in the fight against tax evasion: 51 countries joined an international agreement to abolish bank secrecy.
- This was also made possible by pressure from the international system, which saw states urgently needing resources after the 2008 financial crisis.
List of Tax Havens
As expected, the list of states and territories considered tax havens is, unfortunately, very long.
The OECD, the European Union, the World Bank, and individual countries each maintain their own lists of countries considered tax havens. This difference is due to the criteria each organisation uses to justify including a country in its classification.
1. OECD Black List
According to OECD data, Trinidad and Tobago is the only tax haven in the world. The following countries have, to varying degrees, relaxed their bank secrecy laws due to fears of sanctions:
- Andorra
- Anguilla
- Antigua and Barbuda
- Aruba
- Bahamas
- Bahrain
- Bermuda
- Belize
- Cyprus
- Curaçao
- Dominican Republic
- Gibraltar
- Grenada
- Guernsey
- Cook Islands
- Isle of Man
- Also Cayman Islands
- Marshall Islands
- British Virgin Islands
- Turks and Caicos Islands
- US Virgin Islands
- Seychelles
- Liberia
- Liechtenstein
- Maldives
- Malta
- Mauritius
- Monaco
- Montserrat
- Nauru
- Niue
- Samoa
- Saint Kitts and Nevis
- Saint Vincent and the Grenadines
- San Marino
- Saint Lucia
- Trinidad and Tobago
- And also Vanuatu
2. International Monetary Fund
For its Part, the World Bank, taking into account innumerable sources such as the aforementioned NGO Oxfam, includes:
- Hong Kong
- Singapore
- Luxembourg
- United Arab Emirates
- Netherlands
- Switzerland
- Taiwan
- Panama
- Ireland
- Serbia
- Oman
- Palau
- Guam
- United States of America
- As well as Germany
- Guernsey
- Lebanon
- Japan
- Thailand
- Canada
- Malaysia
- Barbados
- Ghana
- Montenegro
- North Macedonia
- Botswana
- Sovereignty
- Bosnia and Herzegovina
- Sri Lanka
- Yemen
- Tunisia
- Syria
- Pakistan
- Iran
- Ethiopia
- North Korea
- Fiji
- Greenland
- Albania
- Faroe Islands
- Cambodia
- As well as American Samoa
3. The European Union
Like other European countries, it has its own criteria for defining a territory as a tax haven.
In particular, signing and implementing a tax information exchange agreement is a condition for a country’s removal from the list. In addition, it has developed several tax control mechanisms. Some of these requirements are:
The International Fiscal Transparency Regime
The purpose of this instrument is to ensure that residents contribute funds to state budgets through personal income tax havens. It also aims to prevent tax evasion by individuals who have invested capital in companies located in low-tax jurisdictions.
The Model 720
This information declaration requires the taxpayer to declare their property, assets, and rights located in a foreign country.
Model 232
This declaration must be filed by those considered liable for corporate tax and non-resident income tax. It focuses on transactions between related parties in commercial or family operations to prevent tax evasion. Furthermore, for companies operating under the corporate tax and non-resident income tax regimes, it is crucial to stay informed of regulatory changes, such as the transition to the digital filing of corporate tax returns. This initiative aims to improve the precision and transparency of tax information, emphasising the importance of meticulous accounting, especially in transactions with related parties, to prevent tax fraud.