Source: Composite by G_marius based on a Vladimir Yaitskiy's image
Tax avoidance and tax evasion are big problems and are blamed for aggravating the financial crisis. Should there be more restrictions with offshore centers and tax haven countries? Vote and tell us why (below)
Tax haven definition
The Panama Leak scandal has brought back to the center of the public debate the problem of tax havens and offshore centers. Tax havens are used by multinational companies, powerful financial institutions, very wealthy individuals and transnational criminal organizations to avoid regulation, evade taxes, and reduce tax liabilities through transfer pricing, and to launder money.
According to the OECD, three key factors or criteria must be investigated in order to consider a jurisdiction as a tax haven:
- If there is a lack of transparency. Transparency is necessary to ensure fairness and that the authorities can assess properly tax liabilities.
- If there are laws or administrative procedures obstructing the necessary exchange of information, for tax purposes, with other governments on taxpayers. Bilateral exchanges of information about taxpayers are necessary and also serve to implement safeguards conducive to protect taxpayers' rights.
- If there is an absence of a requirement that the activity be substantial. This criterion was included in 1998 to indentify jurisdictions that are attempting to attract purely tax driven transactions and investments.
List of tax havens
According to Tax Justice Network, a Financial Secrecy Index (FSI) can be calculated for each country. The higher the value in the index, the larger influence on world economy in terms of economical secrecy or tax avoidance. The top 10 tax havens ranked by FSI (data 2015):
- Switzerland (FSI 1765,2)
- Luxembourg (FSI 1454,4)
- Hong Kong (FSI 1283,4)
- Cayman Islands (FSI 1233,5)
- Singapore (FSI 1216,8)
- United States (Mainland) (FSI 1212,9)
- Lebanon (FSI 747,8)
- Germany (FSI 738,3)
- Jersey (FSI 591,2)
- Japan (FSI 513,1)
It may be a surprise to find big economies such as the USA in the top 10, but some areas of these countries can be considered as tax havens (for example Delaware).
The European Commision is highly concerned with tax evasion. As as part of its campaign against multinational companies trying to dodge taxes, it has defined a black list of tax havens (countries and territories). The European Commission is trying to persuade these jurisdictions to adopt international standards and protocols for knowledge exchange and transparency. The blacklisted tax havens by the European Union in 2015 were: Andorra, Liechtenstein, Guernsey, Monaco, Mauritius, Liberia, Seychelles, Brunei, Hong Kong, Maldives, Cook Islands, Nauru, Niue, Marshall Islands, Vanuatu, Anguilla, Antigua and Barbuda, Bahamas, Barbados, Belize, Bermuda, British Virgin Islands, Cayman Islands, Grenada, Montserrat, Panama, St Vincent and the Grenadines, St Kitts and Nevis, Turks and Caicos and US Virgin Islands.
What is an offshore center?
An offshore center, or offshore financial center (OFC) is a low tax jurisdiction which is usually specialized in providing commercial and corporate services to non-resident individuals or offshore companies. Usually the scale of these services provided is incommensurate with the size the OFC's domestic economy.
Difference between a tax haven and an OFC
Some experts equate offshore centers and tax havens and claim that OFC is the politically correct way of referring to tax havens. However, historically the two concepts were different. There are tax havens since the beginning of the twentieth century, while offshore financial centers have existed for only about four decades. The latter were basically used as financial markets were non-residents could lend money to other non-residents free from taxes and regulatory restrictions. The designation of OFCs is commonly used when one is referring to the Eurodollar market or the wholesale international financial market.
Some offshore financial centers may not have statutory banking secrecy and have often adopted tax exchange standards and protocols to allow other countries to investigate and fight tax evasion.
Offshore structures, including offshore companies, partnerships, trust and private foundations, are created for a variety of reasons such as asset holding vehicles, avoidance of heirship provisions, collective investment (mutual funds, hedge funds, SICAVs) and other financial vehicles (exchange control, joint venture, stock market listing), trading of securities and derivatives, as well as for highly questionable purposes such as market manipulation, creditor avoidance and tax evasion.
List of offshore centers
According to the International Monetary Fund this is th list of OFCs:
- Anguilla (United Kingdom)
- Aruba (Netherlands)
- British Virgin Islands (UK)
- Cayman Islands
- Cook Islands
- Gibraltar (UK)
- Guernsey (UK)
- Isle of Man (UK)
- Jersey (UK)
- Macao (China)
- Monserrat (UK)
- Netherlands Antilles (Netherlands)
- Turks and Caicos Islands
Should transactions with tax havens and offshore centers be restricted?
In a global economy, some countries use very low tax rates and the secrecy of the banking sector to attract economic activity, an option for local economic development among others like tourism or industry. They expect that some companies and individuals will invest their money in local banks and services to avoid tax in their country of origin. They offer very important tax exemptions.
Governments of these tax havens and offshore centers argue that tax regulation and bank secrecy are expressions of freedom and are coherent with the logic of capitalism. Those often small countries use this tax difference as a comparative advantage to compete with big economies.
On the other hand, these practices facilitate tax evasion and money laundering. In addition, many observers criticize that using an offshore centre is only possible for big companies and wealthy individuals, because of the legal costs, and therefore small companies and middle class citizens are the only one to pay full taxes in their country of origin. If more and more big companies avoid tax, there is less budget for public services, especially in times of economic crisis. Tax avoidance has become an important problems of our capitalist societies.
What do you think? Are tax havens economic dynamizers for the global economy or pernicious for other countries?
If you change your mind, you can change your vote simply by clicking on another option.
Should transactions with tax haven countries and offshore centers be restricted?
New to netivist?
Join with confidence, netivist is completely advertisement free. You will not receive any promotional materials from third parties.