Tax Havens

The increasing mobility of goods, services, capital, and labor that defines economic globalization has posed ever-greater challenges to national tax authorities, in part because some jurisdictions aim to attract revenue or other income from agents trying escape taxes levied elsewhere. When such policies loom large as a state strategy, the state may become known as a tax haven. This term, as used by the rich-state Organisation for Economic Cooperation and Development (OECD) in its 1998 report Harmful Tax Competition, refers to the more than three dozen, typically small, territories that gear their policies to the enticement of foreign investment that is almost entirely financial (claims on capital and its earnings) rather than real (actual capital stock and its productivity). The tax haven's role beyond allowing secrecy is almost entirely financial intermediation, but even most of that apparent contribution is typically performed in other countries. These jurisdictions typically have stable governments, good transportation and communications, and no impediments to the exchange of international currencies.

According to the 1998 OECD report, the tax havens (1) impose little or no tax on relevant income along with one or more of the following: (2) lack of effective exchange of information, (3) lack of transparency, and (4) “insubstantial” activity attached to the claim of haven location. Items 2 and 3 are linked because if no local laws compel appropriate transaction recording, there is no information for authorities to share.

The tax havens are often treated as a relatively homogenous group because so many of them are small in physical size and population, and most of the same jurisdictions appear on multiple lists. In fact, they differ dramatically in the extent to which their attempts to be used as tax havens have succeeded. For example, using total external banking liabilities as a measure of tax haven activity, only five jurisdictions, the Cayman Islands, Jersey, Singapore, the Bahamas, and Hong Kong, accounted for 83.7% of the total in the Bank of International Settlements' offshore centers in 2006; 15 other jurisdictions accounted for the rest. The Cayman Islands had a per capita income of about $45,000 in 2006 while Vanuatu in the South Pacific had $3,900.

Although many jurisdictions draw real activity across their borders with favorable taxation, other states' complaints about the tax havens focus mainly on their role in shifting or hiding financial claims. Sham havens typically use the absence of corporate taxation to lure financial intermediaries into establishing a presence that may be little more than an address for activity directed from elsewhere. Nearly all of the Caribbean and Pacific tax havens fall into this category; they can be called switching havens because they claim profits shunted to them from elsewhere and switch those [Page 1620]funds to other non-haven uses. Many switching havens also serve as headquarters havens when a foreign firm presents its haven activity not as a subsidiary but as the firm's central location. This avoids corporate taxation at the core of the firm despite negligible local ownership. Secrecy havens allow tax evasion by persons and corporations by reinvesting funds that have been provided without the knowledge of tax authorities at home.

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