Public finance
This article is part of the series: Finance and Taxation
Taxation
Income tax  ·  Payroll tax CGT ·  Stamp duty  ·  LVT Sales tax  ·  VAT  ·  Flat tax Tax, tariff and trade Tax haven
Tax incidence
Tax rate  ·   Proportional tax Progressive tax  ·   Regressive tax Tax advantage
Taxation by country Australia • British Virgin Islands Canada • China • Colombia France • Germany • Hong Kong India • Indonesia • Ireland Netherlands • New Zealand Peru • Russia • Singapore Tanzania • United Kingdom United States • European Union  v • d • e  Tax rates around the world Tax revenue as % of GDP
Economic policy
Monetary policy Central bank  ·   Money supply Gold standard
Fiscal policy Spending  ·   Deficit  ·   Debt
Policy-mix
Trade policy Tariff  ·   Trade agreement
Finance
Financial market Financial market participants Corporate  ·   Personal Public  ·   Regulation
Banking
Fractional-reserve Full-reserve  ·   Free banking Islamic
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Stereotypical images of tax havens usually revolve around tropical island locales. Public finance is a field of economics concerned with paying for collective or governmental activities and with the administration and design of those activities The field of finance refers to the concepts of Time, Money and Risk and how they are interrelated Payroll tax generally refers to two kinds of taxes: Taxes which Employers are required to withhold from Employees Pay, also known as Withholding A capital gains tax (abbreviated CGT) is a Tax charged on Capital gains the profit realized on the sale of a non-inventory Asset that was purchased Stamp duty is a form of Tax that is levied on documents Historically a physical stamp (a Tax stamp) had to be attached to or impressed upon the document to denote Land value taxation (LVT (or site value taxation) is an Ad valorem tax where only the value of land itself is taxed A sales tax is a Consumption tax charged at the Point of purchase for certain goods and services Value added tax ( VAT) or goods and services tax ( GST) is a consumption Tax levied on value added. A flat tax (short for flat rate tax is a Tax system with a constant tax rate The tax tariff and trade laws of a political region State or Trade bloc determine which forms of consumption and production tend to be encouraged In Economics, tax incidence is the analysis of the effect of a particular Tax on the distribution of economic welfare. In a Tax system and in Economics, the tax rate describes the burden Ratio (usually expressed as a Percentage) at which a business or person is A proportional tax is a Tax imposed so that the Tax rate is fixed as the amount subject to taxation increases A progressive tax is a Tax imposed so that the Tax rate increases as the amount subject to taxation increases A regressive tax is a Tax imposed in such a manner that the Tax rate decreases as the amount subject to taxation increases Tax advantage refers to the economic bonus which applies to certain accounts or Investments that are by Statute, tax-reduced tax-deferred or tax-free Personal income taxes See also Income tax in Australia Only the federal government imposes income taxes on individuals and this is the most significant source of Taxation in the British Virgin Islands is relatively simple by comparative standards photocopies of all of the tax laws of the British Virgin Islands would together amount to about 200 The level of Taxation in Canada is average among Organisation for Economic Co-operation and Development (OECD countries Taxes provide the most important revenue source for the Government of the People's Republic of China. See Government of Colombia for a wider perspective of Colombian government See Government of France for a wider perspective of French government Taxes in Germany —being a Federal Republic —are levied by the federation ( Bund) the States ( Länder) as well as the HK Inland Revenue Ordinance Cap112 is one of Hong Kong's Ordinances Taxes in India are levied by the Central Government and the State Governments This article ls with Taxation in Indonesia or pajak. Definitions "Pajak" in Indonesian for Tax and taxes whereas " Perpajakan The system of Taxation in Ireland is broadly similar to the system of Taxation in the United Kingdom. The Netherlands has a rich history dealing with taxation predating the Romanic period. Taxation in New Zealand is collected at a national level by the Inland Revenue Department (IRD on behalf of the Government of New Zealand. The Income tax in Peru is collected by the Superintendencia Nacional de Administración Tributaria, best known as SUNAT. The Russian Tax Code is the primary tax law for the Russian Federation. Individual income tax in Singapore forms part of two main sources of Income tax, the other being Corporate taxes on companies In Tanzania the Income Tax Act 2004 came into effect in July 2004 Taxation in the United Kingdom may involve payments to a minimum of two different levels of government The central government ( Her Majesty's Revenue and Customs) Taxation in the United States is a complex system which may involve payment to at least four different levels of government and many methods of taxation Value added tax ( VAT) or goods and services tax ( GST) is a consumption Tax levied on value added. Comparison of Tax Rates around the world is a difficult and somewhat subjective enterprise This table lists countries by total 2005 Tax revenues (federal state and local as a percentage of GDP (Gross Domestic Product Economic policy refers to the actions that Governments take in the economic field. Monetary policy is the process by which the Government, Central bank, or monetary authority of a country controls (i the Supply of Money, A central bank, reserve bank, or monetary authority is the entity responsible for the Monetary policy of a country or of a group of member states In Economics, money supply, or money stock, is the total amount of money available in an Economy at a particular point in time The gold standard is a monetary system in which a region's common media of exchange are paper notes that are normally freely convertible into pre-set fixed quantities of Gold Fiscal policy, taking the scope of Budgetary policy, refers to government policy that attempts to influence the direction of the economy through changes in government taxes Government spending or government expenditure is classified by economists into three main types A budget deficit occurs when an Entity (often a Government) spends more Money than it takes in Government debt (also known as public debt or national debt) is Money (or credit) owed by any level of government either Central government Trade is the willing exchange of goods, services, or both Trade is also called Commerce. For other uses of this word see Tariff (disambiguation. A tariff is a tax imposed on goods when they are moved across a political boundary A trade pact is a wide ranging Tax tariff and trade pact that often includes Investment guarantees The field of finance refers to the concepts of Time, Money and Risk and how they are interrelated In Economics, a financial market is a mechanism that allows people to easily buy and sell ( Trade) financial Securities (such as stocks and bonds There are two basic financial market participant categories Investor vs Corporate finance is an area of Finance dealing with the financial decisions Corporations make and the tools and analysis used to make these decisions Personal finance is the application of the principles of Finance to the monetary decisions of an individual or family unit Public finance is a field of economics concerned with paying for collective or governmental activities and with the administration and design of those activities Financial regulations are a form of Regulation or supervision which subjects Financial institutions to certain requirements restrictions and guidelines aiming to A banker or bank is a Financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money Fractional-reserve banking is the banking practice in which Banks keep only a fraction of the value of their Bank notes and demand deposits in reserve Full-reserve banking is the Banking practice in which the full amount of each depositor's funds are available in reserve at the bank when each depositor Free banking is a theory of Banking in which commercial banks and market forces control the provision of banking services Islamic banking refers to a system of banking or banking activity that is consistent with Islamic law ( Sharia) principles and guided by Islamic economics

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 competition among governments. Tax competition exists when governments are encouraged to lower fiscal burdens to either encourage the inflow of productive resources or discourage the exodus of those resources Different jurisdictions tend to be havens for different types of taxes, and for different categories of people and/or companies. In Law, jurisdiction (from the Latin ius iuris meaning "law" and dicere meaning "to speak" is the practical Authority

There are several definitions of tax havens. The Economist has tentatively adopted the description by Geoffrey Colin Powell (former Economic Adviser to Jersey): "What . The Economist is an English-language weekly news and International affairs publication owned by The Economist Newspaper Ltd and edited in London The Bailiwick of Jersey ( Jèrriais: Jèrri) is a British Crown dependency off the coast of Normandy, France. . . 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. Tax avoidance is the legal utilization of the Tax regime to one's own advantage in order to reduce the amount of tax that is payable by means that are within the law " The Economist points out that this definition would still exclude a number of jurisdictions traditionally thought of as tax havens. ^[1] Similarly, others have suggested that any country which modifies its tax laws to attract foreign capital could be considered a tax haven^[2]. According to other definitions,^[3] 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.

Tax havens are often also characterised by what some call secrecy, but is better defined as privacy.

Origins

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 Islands were 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-state of Athens on imported goods. The term ancient Greece refers to the period of Greek history lasting from the Greek Dark Ages ca The Greek Islands are a collection of over 6000 Islands and Islets that belong to Greece. A city-state is a Region controlled exclusively by a City, usually having Sovereignty. Athens (ˈæθənz Αθήνα Athina,) the Capital and largest city of Greece, dominates the Attica periphery as one of the world's In the Middle Ages, traders who set business in London City where exempt of tax. The U. S. is not new to tax haven users. In 1721, American colonies traded from Latin America to avoid English taxes.

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. Cinque Ports is also the name of a 1703 Galleon (ship The Confederation of Cinque Ports (sɪŋk pɔrts is a historic series of coastal A staple port is a port designated by a government or monarch as a place where specific goods may be exported or imported Others suggest that the Hanseatic League first embraced the concept of tax competition as early as 1241, while others argue that the tax status of the Vatican City was the earliest example of a tax haven (the first Papal States being recognised in 756). The Hanseatic League (also known as the Hansa) was an alliance of trading cities and their Guilds that established and maintained trade Tax competition exists when governments are encouraged to lower fiscal burdens to either encourage the inflow of productive resources or discourage the exodus of those resources Vatican City, officially the State of the Vatican City (Stato della Città del Vaticano is a Landlocked sovereign City-state whose territory The Papal States, State(s of the Church or Pontifical States (in Italian Stato Ecclesiastico, Stato della Chiesa, Stati della Chiesa

Various countries claim to be the oldest tax haven in the world. For example, the Channel Islands claim their tax independence dating as far back as Norman Conquest, while the Isle of Man claims to trace its fiscal independence to even earlier times. The Channel Islands ( Norman: Îles d'la Manche, French: Îles Anglo-Normandes or Îles de la Manche) are a group of Islands The Isle of Man (Ellan Vannin ˈɛlʲən ˈvanɪn or Mann (Mannin) is a self-governing Crown dependency, located in the Irish Sea at the geographical 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. World War I (abbreviated WWI; also known as the First World War, the Great War, and the War to End All ^[4] Bermuda sometimes 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. Ba (officially The Bermuda Islands or The Somers Isles) is a British overseas territory in the North Atlantic Ocean. An offshore company is a company which does not conduct substantial business in its country of incorporation. Conyers Dill & Pearman is an offshore law firm Founded in Bermuda in 1928 (although it can trace its roots back to 1903 the firm has subsequently opened legal practices ^[5] However, the Bermudian claim is debatable when compared against the enactment of a Trust Law by Liechtenstein in 1926 to attract offshore capital. In Common law legal systems a trust is an arrangement whereby Property (including real tangible and intangible is managed by one person (or persons or organizations The Principality of Liechtenstein (Fürstentum Liechtenstein) is a tiny doubly landlocked Alpine country in Western Europe, bordered by Switzerland ^[6]

Most economic commentators suggest that the first "true" tax haven was Switzerland, followed closely by Liechtenstein. Switzerland (English pronunciation; Schweiz Swiss German: Schwyz or Schwiiz Suisse Svizzera Svizra officially the Swiss Confederation ^[7] 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. Banking in Switzerland is characterized by stability privacy and protection of clients' assets and information 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. World War I (abbreviated WWI; also known as the First World War, the Great War, and the War to End All 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. Switzerland (English pronunciation; Schweiz Swiss German: Schwyz or Schwiiz Suisse Svizzera Svizra officially the Swiss Confederation World War I (abbreviated WWI; also known as the First World War, the Great War, and the War to End All 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.

Developments

Presently, the growth of tax havens is primarily due to the considerable growth of offshore banking. This expansion is also due to the globalisation of the world's businesses. Globalization (or globalisation) in its literal sense is the process of transformation of local or regional phenomena into global ones 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. The twentieth century of the Common Era began on

Such disparities, however, are not enough for a nation to qualify itself as a tax haven. In brief, a favourable, overall natioanl 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. ^[8] However, from the 1950s onwards, there was significant growth in the use of tax havens by corporate groups to mitigate their global tax burden. In Economics, tax incidence is the analysis of the effect of a particular Tax on the distribution of economic welfare. This strategy generally relied upon there being a double taxation treaty 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. Double taxation is the imposition of two or more Taxes on the same income (in the case of income taxes) Asset (in the case of capital taxes) Tax treaties exist between many countries on a bilateral basis to prevent Double taxation ( Taxes levied twice on the same Income, Profit, 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,^[9] in the 1970s, most major countries began repealing their double taxation treaties with micro-states to prevent corporate tax leakage in this manner. A microstate or ministate is a sovereign state having a very small population or very small land area but usually both Corporate tax refers to a Tax levied by various jurisdictions on the Profits made by companies or associations.

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). Ring fence means the isolation of an amount of money from any outside risk These vehicles were usually called "exempt companies" or "International Business Corporations". An international business company or international business corporation ( IBC) is an Offshore company formed under the laws of some jurisdictions as a tax-free 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". Tax competition exists when governments are encouraged to lower fiscal burdens to either encourage the inflow of productive resources or discourage the exodus of those resources 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. ^[10]

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, Bermudas, 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.

Failures

Although tax havens are traditionally linked with images of prosperity,^[11] there have also been notable failures.

• Beirut formerly enjoyed a reputation as the only tax haven in the Middle East. Beirut (بيروت Bayrūt) is the Capital and Largest city of Lebanon with a population of over 2 However, its reputation took a severe dent after the Intra Bank crash of 1966,^[12] and the subsequent political and military deterioration of Lebanon destroyed any notion of the necessary stability for a successful tax haven.
• Liberia enjoyed a prosperous ship registration industry. Liberia, officially the Republic of Liberia, is a country on the west coast of Africa, bordered by Sierra Leone, Guinea, Côte d'Ivoire A flag of convenience (FOC vessel or ship is one where the nationality of the owner is different from the country of registration 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. A civil war is a War between a State and domestic political actors that are in control of some part of the territory claimed by the state
• Tangier enjoyed 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 Morocco in 1956. Tangier or Tangiers ]] ( Tanja طنجة in Berber and Arabic, Tánger in Spanish Morocco (المغرب "al-Maghrib" officially the Kingdom of Morocco (المملكة المغربية is a country located in North Africa
• 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 euro is used in Monaco. Please update other articles as well to avoid contradiction within Wikipedia e For other uses see Monaco (disambiguation Monaco, officially the Principality of Monaco ( French: Principauté de Monaco; Monégasque

Methodology

At the risk of gross oversimplification, it can be said that the advantages of tax havens are viewed in four principal contexts:^[13]

• 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. A capital gains tax (abbreviated CGT) is a Tax charged on Capital gains the profit realized on the sale of a non-inventory Asset that was purchased 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. A tax exile is one who chooses to leave a country and instead to reside in a foreign nation or jurisdiction because personal Taxes there are appreciably lower or even nil
• Asset holding. Asset holding involves utilising a trust or a company, or a trust owning a company. An offshore trust is simply a conventional trust that is formed under the Laws of an offshore jurisdiction. An offshore company is a company which does not conduct substantial business in its country of incorporation. 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 estate or valuable chattels. Real estate is a legal term (in some jurisdictions notably in the USA, United Kingdom 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. ^[14]
• 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 reinsurance companies which have migrated to Bermuda over the years. Reinsurance is a means by which an Insurance company can protect itself against the risk of losses with other insurance companies 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 pricing scams of this nature. Transfer pricing refers to the Pricing of contributions (assets tangible and intangible services and funds transferred within an organization
• Financial intermediaries. Much of the economic activity in tax havens today consists of professional financial services such as mutual funds, banking, life insurance and pensions. A mutual fund is a professionally managed type of collective investments that pools money from many investors and Invests it in Stocks bonds, Life insurance or life assurance is a contract between the policy owner and the insurer, where the insurer agrees to pay a sum of money upon the occurrence of the A pension is a steady income given to a person upon Retirement, typically in the form of a guaranteed annuity. 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. An offshore fund is a Collective investment scheme Domiciled in an Offshore Financial Centre, for example British Virgin Islands, Luxembourg ^[15]

The OECD and tax havens

The Organisation for Economic Co-operation and Development (OECD) identifies three key factors in considering whether a jurisdiction is a tax haven:^[16].

1. 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.
   
2. 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.
3. 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. ^[17]

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. The term direct tax has more than one meaning a colloquial meaning and in the United States a constitutional law meaning

Anti-avoidance

To avoid tax competition, many high tax jurisdictions have enacted legislation to counter the tax sheltering potential of tax havens. Tax competition exists when governments are encouraged to lower fiscal burdens to either encourage the inflow of productive resources or discourage the exodus of those resources Generally, such legislation tends to operate in one of five ways:

1. 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 Corporation legislation is probably the best example of this. Controlled Foreign Corporations ( CFC s are a legal construction of the Tax authorities around the world
2. transfer pricing rules, standardisation of which has been greatly helped by the promulgation of OECD guidelines. Transfer pricing refers to the Pricing of contributions (assets tangible and intangible services and funds transferred within an organization
3. restrictions on deductibility, or imposition of a withholding tax when payments are made to offshore recipients.
4. 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. The so-called European Union withholding tax is a Withholding tax which is deducted from interest earned by European Union residents on their investments made in another
5. exit charges, or taxing of unrealised capital gains when an individual, trust or company emigrates.

However, many jurisdictions employ blunter rules. For example, in France securities regulations are such that it is not possible to have a public bond issue through a company incorporated in a tax haven. This article is about the country For a topic outline on this subject see List of basic France topics. Government debt (also known as public debt or national debt) is Money (or credit) owed by any level of government either Central government ^[18]

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. A tax advisor is a financial expert especially trained in Tax law. A fiscal year (or financial year, or sometimes budget year) is a period used for calculating annual ("yearly" Financial statements in Businesses ^[19] 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. ^[20]

Incentives

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. A holding company is a company that owns part all or a majority of other companies' outstanding Stock. 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 revenue which would otherwise be theirs. Tax revenue is the Income that is gained by Governments because of Taxation of the people Various pressure groups also claim that money launderers also use tax havens extensively,^[21] although extensive financial and KYC regulations 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. An interest group (also advocacy group, lobby group, pressure group or special interest group) is an organized collection of people who seek Money laundering is the practice of engaging in financial Transactions in order to conceal the Identity, source and/or destination of Money, Know your customer ( KYC) is the Due diligence and Bank regulation that Financial institutions and other regulated companies must perform ^[22] In 2000 the Financial Action Task Force published 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. The Financial Action Task Force on Money Laundering (FATF also known by its French name Groupe d'action financière sur le blanchiment de capitaux (GAFI is an The FATF Blacklist is the common shorthand description for the Financial Action Task Force list of "Non-Cooperative Countries or Territories" (NCCTs that is countries

Examples

See also: List of offshore financial centres, Tax rates around the world

The U. The following are designated as Offshore financial centres by the IMF or the FSF: Andorra Anguilla Comparison of Tax Rates around the world is a difficult and somewhat subjective enterprise S. National Bureau of Economic Reseach 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. ^[23]

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.

Amounts

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 sheet OFC cross-border assets reached a level of US$4. The International Monetary Fund ( IMF) is an International organization that oversees the Global financial system by following the Macroeconomic The Bank for International Settlements (or BIS) is an International organization of Central banks which "fosters international monetary and An offshore financial centre (or OFC) although not precisely defined is usually a low- Tax, lightly Regulated jurisdiction which specializes in providing In Financial accounting, a balance sheet or statement of financial position is a summary of a person's or organization's balances 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. An international financial centre is a non-specific term of reference usually meant to designate a City as a major participant in international financial markets for the trading S. IBFs, and the JOM (Japanese Offshore Market). ^[31]

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. The Tax Justice Network (TJN is a coalition of researchers and activists with a shared concern about what they argue are the harmful impacts of Tax avoidance, Tax competition 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. ^[32]

The Center for Freedom and Prosperity disputes claims about foregone tax revenue. The Center for Freedom and Prosperity (or CF&P) is a non-profit organisation created to lobby legislators in favour of market liberalisation particularly 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. In Economics, elasticity is the ratio of the percent change in one variable to the percent change in another variable 6. ^[33]

A 2006 academic paper indicated that: "in 1999, 59% of U. S. firms with significant foreign operations had affiliates in tax haven countries",^[34] although they did not define "significant" for this purpose.

Modern developments

Proposed U. S. legislation

Tax havens as identified in the proposed Stop Tax Haven Abuse Act, 2007

On 25 January 2007 Senator Byron Dorgan (for himself and on behalf of Carl Levin and Russ Feingold) presented a bill to the U.S. Senate to amend the U. Events 41 - After a night of negotiation Claudius is accepted as Roman Emperor by the Senate Year 2007 ( MMVII) was a Common year starting on Monday of the Gregorian calendar in the 21st century. Byron Leslie Dorgan (born May 14 1942) is the junior United States Senator from North Dakota. Carl Milton Levin (born June 28, 1934) is a Democratic United States Senator from Michigan and is the Chairman of the Senate Russell Dana "Russ" Feingold (born March 2, 1953) is an American politician from the U The United States Senate is the Upper house of the bicameral United States Congress, the Lower house being the House of Representatives 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. The Internal Revenue Code (or IRC; more formally the Internal Revenue Code of 1986 as amended) is the main body of domestic statutory Tax law Controlled Foreign Corporations ( CFC s are a legal construction of the Tax authorities around the world S. ^[35]

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,^[36] 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,^[37] 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 Obama and Senator Norm Coleman. Norman Bertram "Norm" Coleman Jr (born August 17, 1949) is an American politician who has served as a U ^[38] 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 company or offshore trust is controlled by the U. An offshore company is a company which does not conduct substantial business in its country of incorporation. An offshore trust is simply a conventional trust that is formed under the Laws of an offshore jurisdiction. S. taxpayer who formed it.

• empowering the U.S. Treasury to take special measures against foreign jurisdictions which "impede" U. The United States Department of the Treasury is a Cabinet department and the Treasury of the United States government. 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. The

• 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". The United States Patent and Trademark Office ( PTO or USPTO) is an agency in the United States Department of Commerce that issues Patents to A patent is a set of Exclusive rights granted by a State to an inventor or his assignee for a fixed period of time in exchange for a disclosure of an

• requiring hedge funds and company formation agents to establish anti-money laundering programmes equivalent to those which apply to banks and other financial institutions. A hedge fund is a private Investment fund open to a limited range of investors which is permitted by regulators to undertake a wider range of activities than other investment Anti-money laundering (AML is a term mainly used in the Financial and Legal industries to describe the legal controls that require Financial institutions

Many of the intiatives appear politically populist rather than a serious attempt to curb tax mitigation schemes. ^[39] 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,^[40] and bear little relationship to modern commercial practice. Know your customer ( KYC) is the Due diligence and Bank regulation that Financial institutions and other regulated companies must perform ^[41] The fact that the bill is expressed to designate four European Union countries (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. The European Union ( EU) is a political and economic union of twenty-seven member states, located primarily in

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 Center for Freedom and Prosperity (or CF&P) is a non-profit organisation created to lobby legislators in favour of market liberalisation particularly The Cato Institute has been particularly scathing in its commentary on the draft legislation. The Cato Institute is a Libertarian Think tank headquartered in Washington D ^[42]

Liechtenstein banking scandal

Main article: 2008 Liechtenstein tax affair

In February 2008 Germany announced that it had paid €4. The 2008 Liechtenstein tax affair is a series of tax investigations in numerous countries whose governments suspect that some of their citizens may have evaded tax obligations by using 2 million to Heinrich Kieber,^[43] a former data archivist of LGT Treuhand, a Liechtenstein bank, for a list of 1,250 customers of the bank and their accounts details. LGT (Liechtenstein Global Trust is the Private banking group of the princely House of Liechtenstein. 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. ^[44] Other governments, notably Denmark and Sweden, refused to pay for the information regarding it as stolen property. ^[45] The Liechtenstein authorities subsequently accused the Germans authorities of espionage. ^[46]

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. ^[47] 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 Union or governments of the member states. The European Union ( EU) is a political and economic union of twenty-seven member states, located primarily in

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.

See also

• Anarcho-capitalism
• Asset protection
• ATTAC NGO's criticism of tax haven and underground economy
• Corporate haven
• Free port
• Free economic zone
• International Business Corporation
• List of offshore financial centres
• Offshore bank
• Offshore company
• Offshore Financial Centres
• Offshore trust
• Tax avoidance and tax evasion
• Tax resistance
• Tax exile

Notes

Further reading

• 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)

External links

• Offshore Banking and Financial Centers
• Offshore Financial Centers -- IMF Background Paper
• Congressional Research Service (CRS) Reports regarding tax havens
• Tax Justice Network
• An OECD Proposal To Eliminate Tax Competition Would Mean Higher Taxes and Less Privacy - Heritage Foundation: Washington D. C.
• The Moral Case for tax Havens
• The Economics of Tax Competition: Harmonization vs. Liberalization
• "Why tax havens are a blessing" - the Cato Institute