Tax Havens: International Tax Avoidance and Evasion

Tax Havens: International Tax. Avoidance and Evasion. Jane G. Gravelle. Abstract - The federal government loses both individual and cor- porate income tax.
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Numerous legislative proposals to address both individual tax evasion and corporate tax avoidance have been advanced. Multinational firms can artificially shift profits from high-tax to low-tax jurisdictions using a variety of techniques, such as shifting debt to high-tax jurisdictions. Because tax on the income of foreign subsidiaries except for certain passive income is deferred until income is repatriated paid to the U. The taxation of passive income called Subpart F income has been reduced, perhaps significantly, through the use of hybrid entities that are treated differently in different jurisdictions.

The use of hybrid entities was greatly expanded by a new regulation termed check-the-box introduced in the late s that had unintended consequences for foreign firms. In addition, earnings from income that is taxed often can be shielded by foreign tax credits on other income. On average, very little tax is paid on the foreign source income of U. Ample evidence of a significant amount of profit shifting exists, but the revenue cost estimates vary substantially.

Publisher Library of Congress. About Browse this Partner. What Descriptive information to help identify this report. Identifier Unique identifying numbers for this report in the Digital Library or other systems. Collections This report is part of the following collection of related materials. About Browse this Collection. Digital Files 1 file. When Dates and time periods associated with this report.


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Creation Date January 16, Usage Statistics When was this report last used? Where Geographical information about where this report originated or about its content. Place Name United States. Bush Administration in , [26] and in the OECD's report the definition became "two of three criteria". Thus, the evidence limited though it undoubtedly is does not suggest any impact of the OECD initiative on tax-haven activity. In December , Dharmapala wrote that the OECD process had removed much of the need to include "bank secrecy" in any definition of a tax haven and that it was now "first and foremost, low or zero corporate tax rates", [34] and this has become the general "financial dictionary" definition of a tax haven.

In October , the Tax Justice Network introduced the Financial Secrecy Index "FSI" and the term "secrecy jurisdiction", [30] to highlight issues in regard to OECD-compliant countries who have high tax rates and do not appear on academic lists of tax havens, but have transparency issues. The FSI does not assess tax rates or BEPS flows in its calculation; but it is often misinterpreted as a tax haven definition in the financial media, [c] particularly when it lists the USA and Germany as major "secrecy jurisdictions".

In October , Hines published a list of 52 tax havens , scaled by analysing corporate investment flows. In July , the University of Amsterdam 's CORPNET group ignored any definition of a tax haven and focused on a purely quantitive approach, analysing 98 million global corporate connections on the Orbis database. In June , tax academic Gabriel Zucman et alia published research that also ignored any definition of a tax haven, but estimated the corporate "profit shifting" i.

Three main types of tax haven lists have been produced to date: Research also highlights proxy indicators , of which the two most prominent are:. The post rise in quantitative techniques of identifying tax havens has seen a consistency amongst the ten largest tax havens. Dharmapala notes that as corporate BEPS flows dominate tax haven activity, these are mostly corporate tax havens. Four of the top five Conduit OFCs are represented; however, the United Kingdom only transformed its tax code in The strongest consensus amongst academics regarding the world's largest tax havens is therefore: Of these ten major havens, all except the United Kingdom and the Netherlands featured on the original Hines-Rice list.

In terms of proxy indicators , this list, excluding Canada, contains all seven of the countries that received more than one US tax inversion since see here [69]. Sovereign states that feature as both major corporate tax havens and major traditional tax havens, include:. Sovereign or semi-sovereign states that feature mainly as traditional tax havens but have non-zero tax rates , include:.

Sub-national states that are very traditional tax havens i. Post research on tax havens is focused on quantitative analysis which can be ranked , and tends to ignore very small tax havens where data is limited as the haven is used for individual tax avoidance rather than corporate tax avoidance.

The last credible broad unranked list of global tax havens is the James Hines list of 52 tax havens. Major sovereign States which feature on financial secrecy lists e. There are no known cases of foreign firms executing tax inversions to the U.


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While incomplete, and with the limitations discussed below, the available statistics nonetheless indicate that offshore banking is a very sizable activity. IBFs, and the Japanese offshore market.

Tax Havens: International Tax Avoidance and Evasion

The Wall Street Journal in a study of 60 large U. The GAO did not review the companies' transactions to independently verify that the subsidiaries helped the companies reduce their tax burden, but said only that historically the purpose of such subsidiaries is to cut tax costs. The report's author indicated that this hidden money results in a "huge" lost tax revenue—a "black hole" in the economy—and many countries would become creditors instead of being debtors if the money of their tax evaders would be taxed. In a massive data leak known as the " Panama Papers " cast some doubt on the size of previous estimates of lost revenue.

However, the tax policy director of the Chartered Institute of Taxation expressed skepticism over the accuracy of the figures. In October , research commissioned from Deloitte for the Foot Review of British Offshore Financial Centres said that much less tax had been lost to tax havens than previously had been thought. The amount of money hidden away has significantly increased since , sharpening the divide between the super-rich and the rest of the world.

Tax havens, traditional and corporate, have high GDP-per-capita rankings, because the haven's national economic statistics are artificially inflated by the BEPS accounting flows that add to the haven's GDP and even GNP , but are not taxable in the haven. Research into tax havens suggest a high GDP-per-capita score, in the absence of material natural resources, as an important proxy indicator of a tax haven. This artificial inflation of GDP can attract excess foreign capital, who misprice their capital by using a Debt-to-GDP metric for the haven, thus producing phases of stronger economic growth.

In several research papers, James R. There are roughly 40 major tax havens in the world today, but the sizable apparent economic returns to becoming a tax haven raise the question of why there are not more. Hines and Dharmapala concluded that governance was a major issue for smaller countries in trying to become tax havens. Only countries with strong governance and legislation which was trusted by foreign corporates and investors, would become tax havens. An unexpected conclusion of the original Hines-Rice paper , and re-affirmed by others, [] was that: Lower foreign tax rates entail smaller credits for foreign taxes and greater ultimate U.

Research in June-September , confirmed U. Tax justice groups interpreted Hines' research as the U. Academics who study tax havens, attribute Washington's support of U. In , Hines, with German tax academics, showed that German multinationals make little use of tax havens because their tax regime, a "territorial" system, removes any need for it.

Hines' research was cited by the by the Council of Economic Advisors "CEA" in drafting the TCJA legislation in , and advocating for moving to a hybrid "territorial" tax system framework. A controversial area of research into tax havens is the suggestion that tax havens actually promote global economic growth by solving perceived issues in the tax regimes of higher-taxed nations e.

Important academic leaders in tax haven research, such as Hines, [] Dharmapala, [34] and others, [] cite evidence that, in certain cases, tax havens appear to promote economic growth in higher-tax countries, and can support beneficial hybrid tax regimes of higher taxes on domestic activity, but lower taxes on international sourced capital or income:. The effect of tax havens on economic welfare in high tax countries is unclear, though the availability of tax havens appears to stimulate economic activity in nearby high-tax countries.

Tax havens change the nature of tax competition among other countries, very possibly permitting them to sustain high domestic tax rates that are effectively mitigated for mobile international investors whose transactions are routed through tax havens. The most cited paper on research into offshore financial centres "OFCs" , [] a closely related term to tax havens, noted the positive and negative aspects of OFCs on neighbouring high-tax, or source, economies, and marginally came out in favour of OFCs.

Using both bilateral and multilateral samples, we find empirically that successful offshore financial centers encourage bad behavior in source countries since they facilitate tax evasion and money laundering [ The boundaries with wider contested economic theories on the effects of corporate taxation on economic growth, and whether there should be corporate taxes, are easy to blur. Other major academic leaders in tax haven research, such as Zucman , highlight the injustice of tax havens and see the effects as lost income for the development of society.

The way tax havens operate can be viewed in the following principal contexts: Since the early 20th century, wealthy individuals from high-tax countries have sought to relocate themselves in low-tax countries. In most countries in the world, residence is the primary basis of taxation—see tax residence.

Tax Havens: International Tax Avoidance and Evasion - Digital Library

The low-tax country chosen may levy no, or only very low, income tax and may not levy capital gains tax , or inheritance tax. Individuals are normally unable to return to their previous higher-tax country for more than a few days a year without reverting their tax residence to their former country.

They are sometimes referred to as tax exiles. Where a corporate moves their legal headquarters to a haven, it is known as a corporate tax inversion. Asset holding involves utilizing an offshore trust or offshore company , or a trust owning a company. 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. The essence of such arrangements is that by changing the ownership of the assets into an entity which is not tax resident in the high-tax country, they cease to be taxable in that country. Often the mechanism is employed to avoid a specific tax.


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For example, a wealthy testator could transfer his house into an offshore company; he can then settle the shares of the company on trust with himself being a trustee with another trustee, whilst holding the beneficial life estate 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.

It is more likely to be done with intangible assets. Many businesses which do not require a specific geographical location or extensive labor are set up in a country to minimize tax exposure. Perhaps the best illustration of this is the number of reinsurance companies which have migrated to Bermuda over the years.

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Other examples include internet-based services and group finance companies. In the s and s 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 country, it allowed the group to "skim" profits from the high-tax country.

Most sophisticated tax codes now prevent transfer pricing schemes of this nature. Much of the economic activity in tax havens today consists of professional financial services such as mutual funds , banking, life insurance and pensions. Generally, the funds are deposited with the intermediary in the low-tax country, and the intermediary then on-lends or invests the money in another location. Although such systems do not normally avoid tax in the principal customer's country, it enables financial service providers to provide international products without adding another layer of taxation.

This has proved particularly successful in the area of offshore funds.

Tax Havens: The Great Scam

Bearer shares allow for anonymous ownership, and thus have been criticized for facilitating money laundering and tax evasion ; these shares are also available in some OECD countries as well as in the U. In the Guardian wrote that there are 28 persons as directors for 21, companies. Most tax havens have a double monetary control system, which distinguish residents from non-resident as well as foreign currency from the domestic, the local currency 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. Tax havens usually have currency easily convertible or linked to an easily convertible currency. Most are convertible to US dollars , euro or to pounds sterling.

This estimate included financial assets only: After all, high-net-worth individuals can stash works of art, jewelry, and gold in 'freeports,' warehouses that serve as repositories for valuables—Geneva, Luxembourg, and Singapore all have them. High-net-worth individuals also own real estate in foreign countries. Details of thousands of owners of offshore companies were published in April in a joint collaboration between The Guardian and the International Consortium of Investigative Journalists. Investigations and arrests followed relating to charges of illegal tax evasion.

The German authorities shared the data with U. However, regardless of whether unlawful tax evasion was being engaged in, the incident has fuelled the perception among European governments and the 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.

No definitive announcements or proposals have yet been made by the European Union or governments of the member states. New regulations would disallow that payments to companies in certain countries that shield money from disclosure rules to be declared as operational expenses. The effect of this would make banking in such states unattractive and expensive. The report also stressed the view that narrow tax bases presented long term strategic risks and that the economies should seek to diversify and broaden their tax bases.

It indicated that tax revenue lost by the UK government appeared to be much smaller than had previously been estimated see above under Lost tax revenue , and also stressed the importance of the liquidity provided by the territories to the United Kingdom. The Crown Dependencies and Overseas Territories broadly welcomed the report. At the London G20 summit on 2 April , G20 countries agreed to define a blacklist for tax havens, to be segmented according to a four-tier system, based on compliance with an "internationally agreed tax standard.

Those countries in the bottom tier were initially classified as being 'non-cooperative tax havens'.