Tax Havens

A tax haven is a nation other than your own that has lower tax rates and more confidential banking procedures than are found where you reside or normally do business. These havens are made up of about 70 countries and jurisdictions (generally small in size) that provide no-tax or low-tax status and offer a variety of taxation-related incentives to individuals and organizations who wish to bank, incorporate, or headquarter their business within the country in question.

Tax havens are controversial, especially since much of the world's wealth (up to one third) is held “offshore” in such entities. Opinions also differ as to their overall impact, so it is helpful to distinguish between the legal, illegal, and unethical practices associated with tax havens. After all, tax collectors have been unpopular as far back as biblical times. In the Middle Ages, Robin Hood and William Tell were romanticized for fighting against oppressive taxation. A number of serious researchers have also argued that the American Revolution was a successful scheme of tax resistance.

Tax havens are part of the ongoing development of global financial markets. The offshore banking phenomenon began as a legal way for bankers to avoid the taxes and lending restrictions associated with highly regulated national financial markets. Deregulation of national financial markets arose in the 1980s in part as a response to the loss of business in international lending to offshore banks. National (as well as state and local) governments also play the game of offering tax-break incentives to attract foreign investment. Lobbyists also work overtime in the halls of Congress to create or hang on to various legal (if perhaps not always ethical) tax shelters and loopholes.

Tax haven countries offer their services in exchange for service fees and being enriched with assets that help make them politically and economically stable. Foreign corporations, trusts, and partnerships may have valid business purposes for using offshore entities and accounts. Most, however, do so for illegal rather than legitimate reasons.

Lack of transparency (noncooperation with banking regulators of other countries) is one of the major criticisms. Wealthy foreign individuals and enterprises often use these offshore nations as financial centers to disguise business transactions and hide assets. In this context, the world of offshore finance is one of dummy companies, shadow bank accounts, untraceable post office boxes, foreign registries, and other questionable activities. One example involves the substantive role of tax havens in disguising and sheltering illegal drug profits.

Growing resources are being devoted to identifying transactions that are blatantly illegal attempts to defraud creditors, investors, and taxing entities. Such use of tax havens generally serves no business purpose other than to divert income and conceal assets for taxpayers who have no actual operations in the foreign tax haven. Scams are rampant.

The size of the problem is staggering for those nations witnessing a flow of resources overseas through electronic money transfers and other means. In his book Offshore: The Dark Side of the Global Economy, reporter William Brittain-Catlin estimates that one third of the world's wealth—or $7 trillion—and 80% of international banking transactions take place in the shadowy offices of banks in the Cayman Islands or the Islamic financial center of Labuan, Malaysia. As much as half of world trade might be routed through tax havens, with huge chunks of capital in the world's stock exchanges “parked” offshore at some point. Furthermore, London's Tax Justice Network (TJN) in 2003 reported that rich individuals worldwide had hidden more than $11.5 trillion of their assets in such hideaways.

...