Tax haven

Types of lists

Three main types of tax haven lists have been produced to date:^[32]

Research also highlights proxy indicators, of which the two most prominent are:

Top 10 tax havens

The post-2010 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.^[56] Nine of the top ten tax havens in Gabriel Zucman's June 2018 study appear in the top ten lists of the two other quantitative studies since 2010. Four of the top five Conduit OFCs are represented; however, the United Kingdom only transformed its tax code in 2009-2012. All five of the top 5 Sink OFCs are represented, although Jersey only appears in the Hines 2010 list.

The studies capture the rise of Ireland and Singapore, both major regional headquarters for some of the largest BEPS tool users, Apple, Google and Facebook.^[70][71][72]

In Q1 2015, Apple completed the largest BEPS action in history, when it shifted USD 300 billion of IP to Ireland, which Nobel-prize economist Paul Krugman called "leprechaun economics".

In September 2018, using TCJA repatriation tax data, the NBER listed the key tax havens as: "Ireland, Luxembourg, Netherlands, Switzerland, Singapore, Bermuda and [the] Caribbean havens".^[73][74]

(*) Appears as a top ten tax haven in all three lists; 9 major tax havens meet this criterion, Ireland, Singapore, Switzerland and the Netherlands (the Conduit OFCs), and the Cayman Islands, British Virgin Islands, Luxembourg, Hong Kong and Bermuda (the Sink OFCs).
(†) Also appears as one of 5 Conduit OFC (Ireland, Singapore, Switzerland, the Netherlands, and the United Kingdom), in CORPNET's 2017 research; or
(‡) Also appears as a Top 5 Sink OFC (British Virgin Islands, Luxemburg, Hong Kong, Jersey, Bermuda), in CORPNET's 2017 research.
(Δ) Identified on the first, and largest, OECD 2000 list of 35 tax havens (the OECD list only contained Trinidad & Tobago by 2017).^[19]

The strongest consensus amongst academics regarding the world's largest tax havens is therefore: Ireland, Singapore, Switzerland and the Netherlands (the major Conduit OFCs), and the Cayman Islands, British Virgin Islands, Luxembourg, Hong Kong and Bermuda (the major Sink OFCs), with the United Kingdom (a major Conduit OFC) still in transformation.

Of these ten major havens, all except the United Kingdom and the Netherlands featured on the original Hines-Rice 1994 list. The United Kingdom was not a tax haven in 1994, and Hines estimated the Netherlands's effective tax rate in 1994 at over 20% (he estimated Ireland’s at 4%). Four of them, Ireland, Singapore, Switzerland (3 of the 5 top Conduit OFCs), and Hong Kong (a top 5 Sink OFC), featured in the Hines-Rice 1994 list's 7 major tax havens sub-category; highlighting a lack of progress in curtailing tax havens.^[38]

In terms of proxy indicators, this list, excluding Canada, contains all seven of the countries that received more than one US tax inversion since 1982 (see here)^[69]. In addition, six of these major tax havens are in the top 15 GDP-per-capita, and of the four others, three of them, the Caribbean locations, are not included in IMF-World Bank GDP-per-capita tables.

In a June 2018 joint IMF report into the effect of BEPS flows on global economic data, eight of the above (excluding Switzerland and the United Kingdon) were cited as the world’s leading tax havens.^[75]

Top 20 tax havens

The longest list from Non-governmental, Quantitative research on tax havens is the University of Amsterdam CORPNET July 2017 Conduit and Sink OFCs study, at 29 (5 Conduit OFCs and 25 Sink OFCs). The following are the 20 largest (5 Conduit OFCs and 15 Sink OFCs), which reconcile with other main lists as follows:

(*) Appears in as a § Top 10 tax haven in all three quantitative lists, Hines 2010, ITEP 2017 and Zucman 2018 (above); all nine such § Top 10 tax havens are listed below.
(♣) Appears on the James Hines 2010 list of 52 tax havens; seventeen of the twenty locations below, are on the James Hines 2010 list.
(Δ) Identified on the largest OECD 2000 list of 35 tax havens (the OECD list only contained Trinidad & Tobago by 2017); only four locations below were ever on an OECD list.^[19]
(↕) Identified on the European Union's first 2017 list of 17 tax havens;^[62] only one location below is on the EU 2017 list.

Sovereign states that feature mainly as major corporate tax havens are:

• *♣Ireland – a major corporate tax haven, and ranked by tax academics as the largest;^{[74][15][76][68]} leader in IP-based BEPS tools (e.g. double Irish), but also Debt-based BEPS tools.^[77][69]
• *♣Singapore – the major corporate tax haven for Asia (APAC headquarters for most US technology firms), and key conduit to core Asian Sink OFCs, Hong Kong and Taiwan.^[78]
• *♣Netherlands – a major corporate tax haven,^[11] and the largest Conduit OFC via its IP-based BEPS tools (e.g. Dutch Sandwich); traditional leader in Debt-based BEPS tools.^[79][80]
• United Kingdom – rising corporate tax haven after restructuring tax code in 2009–12; 17 of the 24 Sink OFCs are former, or current, dependencies of the U.K. (see Sink OFC table)^[12][69]

Sovereign states that feature as both major corporate tax havens and major traditional tax havens, include:

• *♣Switzerland – both a major traditional tax haven (or Sink OFC), and a major corporate tax haven (or Conduit OFC), and strongly linked to major Sink OFC, Jersey.
• *♣Luxembourg – one of the largest Sink OFCs in the world (a terminus for many corporate tax havens, especially Ireland and the Netherlands).^[81]
• *♣Hong Kong – the "Luxembourg of Asia", and almost as large a Sink OFC as Luxembourg; tied to APAC's largest corporate tax haven, Singapore.

"Uncovering Offshore Financial Centers": List of Sink OFCs ordered by value (U.K. dependencies in blue)

British Overseas Territories (same geographic scale) includes leading traditional and corporate tax global tax havens, including the U.K. itself.

Sovereign or semi-sovereign states that feature mainly as traditional tax havens (but have non-zero tax rates), include:

• ♣Cyprus – damaged its reputation during the financial crisis when the Cypriot banking system nearly collapsed, however reappearing in top 10 lists.^[65]
• Taiwan – major traditional tax haven for APAC, and described by the Tax Justice Network as the "Switzerland of Asia".^[82]
• ♣Malta – an emerging tax haven inside the EU,^[83][84] which has been a target of wider media scrutiny.^[85]

Sub-national states that are very traditional tax havens (i.e. explicit 0% rate of tax) include (fuller list in table opposite):

• ♣ΔJersey (United Kingdom dependency),^[86] still a major traditional tax haven; the CORPNET research identifies a very strong connection with Conduit OFC Switzerland (e.g. Switzerland is increasingly relying on Jersey as a traditional tax haven); issues of financial stability.^[24]
• (♣ΔIsle of Man (United Kingdom dependency), the "failing tax haven",^[87] not in the CORPNET study (discussed here), but included for completeness.)
• Current British Overseas Territories, see table opposite, where 17 of the 24 Sink OFCs, are current or past, U.K. dependencies:
  • *♣ΔBritish Virgin Islands, largest Sink OFC in the world and regularly appears alongside the Caymans and Bermuda (the Caribbean "triad") as a group.^[88][89]
  • *♣Bermuda,^[90] does feature as a U.S. corporate tax haven; only 2nd to Ireland as a destination for U.S. tax inversions.^[69]
  • *♣Cayman Islands,^[91] also features as a major U.S. corporate tax haven; 6th most popular destination for U.S. corporate tax inversions.^[69]
  • ♣ΔGibraltar – like the Isle of Man, has declined due to concerns, even by the U.K., over its practices.^[92]
• ♣Mauritius – has become a major tax haven for both SE Asia (especially India) and African economies, and now ranking 8th overall.^[93][94]
• Curacao – the Dutch dependency ranked 8th on the Oxfam's tax haven list, and the 12th largest Sink OFC, and recently made the EU's greylist.^[95]
• ♣ΔLiechtenstein – long-established very traditional European tax haven and just outside of the top 10 global Sink OFCs.^[96]
• ♣ΔBahamas – acts as both a traditional tax haven (ranked 12th Sink OFC), and ranks 8th on the ITEP profits list (figure 4, page 16)^[67] of corporate havens; 3rd highest secrecy score on the FSI.
• ♣Δ↕Samoa – a traditional tax haven (ranked 14th Sink OFC), used to have one of the highest secrecy scores on the FSI, since reduced moderately.^[97]

Broad lists of tax havens

Post-2010 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 2010 list of 52 tax havens. It is shown below but expanded to 55 to include havens identified in the July 2017 Conduit and Sink OFCs study that were not considered havens in 2010, namely the United Kingdom, Taiwan, and Curaçao. The James Hines 2010 list contains 34 of the original 35 OCED tax havens;^[19] and compared with the § Top 10 tax havens and § Top 20 tax havens above, show OECD processes focus on the compliance of tiny havens.

(†) Identified as one of the 5 Conduits by CORPNET in 2017; the above list has 5 of the 5.
(‡) Identified as one of the largest 24 Sinks by CORPNET in 2017; the above list has 23 of the 24 (Guyana missing).
(↕) Identified on the European Union's first 2017 list of 17 tax havens; the above list contains 8 of the 17.^[62]
(Δ) Identified on the first, and the largest, OECD 2000 list of 35 tax havens (the OECD list only contained Trinidad & Tobago by 2017); the above list contains 34 of the 35 (U.S. Virgin Islands missing).^[19]

Unusual cases

U.S. dedicated entities:

• Delaware (United States), a unique "onshore" specialised haven with very strong secrecy laws.^[98]
• Puerto Rico (United States), almost a corporate tax haven "concession" by the U.S.,^[99] but which the Tax Cuts and Jobs Act of 2017 mostly removes.^[100]

Major sovereign States which feature on financial secrecy lists (e.g. the Financial Secrecy Index), but not on corporate tax haven or traditional tax haven lists, are:

• United States – noted for secrecy, per the Financial Secrecy Index, (see United States as a tax haven); makes a "controversial" appearance on some lists.^[53]
• Germany – similar to the U.S., Germany can be included on lists for its tax secrecy, per the Financial Secrecy Index^[101]

Neither the U.S. or Germany have appeared on any tax haven lists by the main academic leaders in tax haven research, namely: James R. Hines Jr., Dhammika Dharmapala or Gabriel Zucman. There are no known cases of foreign firms executing tax inversions to the U.S. or Germany for tax purposes, a basic sense-check of a corporate tax haven.^[69]

Former tax havens

• Beirut, Lebanon formerly had a reputation as the only tax haven in the Middle East. However, this changed after the Intra Bank crash of 1966,^[102] and the subsequent political and military deterioration of Lebanon dissuaded foreign use of the country as a tax haven.
• Liberia had a prosperous ship registration industry. The series of violent and bloody civil wars in the 1990s and early 2000s severely damaged confidence in the country. 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, United States.
• Tangier had a short 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.
• Some Pacific islands were tax havens but were curtailed by OECD demands for regulation and transparency in the late 1990s, on the threat of blacklisting. Vanuatu's Financial Services commissioner said in May 2008 that his country would reform laws and cease being a tax haven. "We've been associated with this stigma for a long time and we now aim to get away from being a tax haven."^[103][104]

Capital held offshore

While incomplete, and with the limitations discussed below, the available statistics nonetheless indicate that offshore banking is a very sizable activity. The OECD estimated in 2007 that capital held offshore amounted to between $5 trillion and $7 trillion, making up approximately 6–8% of total global investments under management.^[106]

A more recent study by Gabriel Zucman of the London School of Economics estimated the amount of global cross-border wealth held in tax havens (including the Netherlands and Luxembourg as tax havens for this purpose) at US$7.6 trillion, of which US$2.46 trillion was held in Switzerland alone.^[17][18] The Tax Justice Network (an anti-tax haven pressure group) estimated in 2012 that capital held offshore amounted to between $21 trillion and $32 trillion (between 24–32% of total global investments),^{[107][108][109]} although those estimates have been challenged.^[110]

In 2000, the International Monetary Fund calculated based on Bank for International Settlements data that for selected offshore financial centres, on-balance sheet cross-border assets held in offshore financial centres reached a level of $4.6 trillion at the end of June 1999 (about 50 percent of total cross-border assets). Of that $4.6 trillion, $0.9 trillion was held in the Caribbean, $1 trillion in Asia, and most of the remaining $2.7 trillion accounted for by the major international finance centres (IFCs), namely London, the U.S. IBFs, and the Japanese offshore market.^[111] The U.S. Department of Treasury estimated that in 2011 the Caribbean Banking Centers, which include Bahamas, Bermuda, Cayman Islands, Netherlands Antilles and Panama, held almost $2 trillion in United States debt.^[112] Of this, approximately US$1.4 trillion is estimated to be held in the Cayman Islands alone.^[106]

The Wall Street Journal in a study of 60 large U.S. companies found that they deposited $166 billion in offshore accounts in 2012, sheltering over 40% of their profits from U.S. taxes.^[113] Similarly, Desai, Foley and Hines found that: "in 1999, 59% of U.S. firms with significant foreign operations had affiliates in tax haven countries", although they did not define "significant" for this purpose.^[114] In 2009, the U.S. Government Accountability Office (GAO) reported that 83 of the 100 largest U.S. publicly traded corporations and 63 of the 100 largest contractors for the U.S. federal government were maintaining subsidiaries in countries generally considered havens for avoiding taxes. 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.^[115]

James Henry, former chief economist at consultants McKinsey & Company, in his report for the Tax Justice Network gives an indication of the amount of money that is sheltered by wealthy individuals in tax havens. The report estimated conservatively that a fortune of $21 trillion is stashed away in off-shore accounts with $9.8 trillion alone by the top tier—less than 100,000 people—who each own financial assets of $30 million or more. 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.^{[107][108][109]}

Lost tax revenue

Poster issued by the British tax authorities to counter illegal offshore tax evasion.

The Tax Justice Network estimated in 2012 that global tax revenue lost to tax havens was circa $190 to $255 billion per year (assuming a 3% capital gains rate, a 30% capital gains tax rate, and $21 to $32 trillion hidden in tax havens.^[116] The Zucman study uses different methodology, but also estimates $190 billion in lost revenue.^[17]

The UN Economic Commission for Africa estimates that illegal financial flows cost the continent around $50 billion per year. The OECD estimates that two-thirds ($30 billion) occur from tax avoidance and evasion from non-African firms.^[117] The avoidance of taxation by international corporations through legal and illegal methods stifles development in African countries. The Sustainable Development Goals (SDGs) will be difficult to obtain if these losses persist.^[118]

In 2016 a massive data leak known as the "Panama Papers" cast some doubt on the size of previous estimates of lost revenue.^[119]

However, the tax policy director of the Chartered Institute of Taxation expressed skepticism over the accuracy of the figures.^[120] If true, those sums would amount to approximately 5 to 8 times the total amount of currency presently in circulation in the world. Daniel J. Mitchell of the Cato Institute says that the report also assumes, when considering notional lost tax revenue, that 100% money deposited offshore is evading payment of tax.^[121]

In October 2009, 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 report indicated "We estimate the total UK corporation tax potentially lost to avoidance activities to be up to £2 billion per annum, although it could be much lower." An earlier report by the U.K. Trades Union Congress, concluded that tax avoidance by the 50 largest companies in the FTSE 100 was depriving the UK Treasury of approximately £11.8 billion.^[122] The report also stressed that British Crown Dependencies make a "significant contribution to the liquidity of the UK market". In the second quarter of 2009, they provided net funds to banks in the UK totaling $323 billion (£195 billion), of which $218 billion came from Jersey, $74 billion from Guernsey and $40 billion from the Isle of Man.^[122]

The Tax Justice Network reports that this system is "basically designed and operated" by a group of highly paid specialists from the world’s largest private banks (led by UBS, Credit Suisse, and Goldman Sachs), law offices, and accounting firms and tolerated by international organizations such as Bank for International Settlements, the International Monetary Fund, the World Bank, the OECD, and the G20. The amount of money hidden away has significantly increased since 2005, sharpening the divide between the super-rich and the rest of the world.^{[107][108][109]}

Inflated GDP-per-capita

Nobel Prize-winning economist Paul Krugman called the 2015 restatement of Ireland's national accounts, as a result of the Q1 2015 restructuring of Apple's BEPS tools in Ireland, "leprechaun economics", due to the extreme levels of distortion that BEPS tools were having on Irish GDP/GNP. In February 2017, Ireland replaced GDP/GNP with "Modified GNI".

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.^[75][123] As the largest facilitators of BEPS flows, corporate-focused tax havens, in particular, make up most of the top 10-15 GDP-per-capita tables, excluding oil and gas nations (see table below). 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.^[124] At the core of the FSF-IMF definition of an offshore financial centre is a country where the BEPS flows are out of proportion to the size of the indigenous economy. Apple's Q1 2015 "leprechaun economics" BEPS transaction in Ireland was a dramatic example, which caused Ireland to abandon its GDP and GNP metrics in February 2017, in favour of a new metric, modified gross national income, or GNI*.

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.^[22] However, the increased leverage leads to more severe credit cycles, particularly where the artificial nature of the GDP is exposed to foreign investors.^[125] An example is the Irish financial crisis in 2009–2013.^[23]

International Monetary Fund (2017) GDP-per-capita[126]	World Bank (2016) GDP-per-capita[126][127]
Rank Country/Territory Type 1  Qatar Oil & Gas —  Macau Tax haven (Sink OFC) 2  Luxembourg Top 10 Tax haven (Sink OFC) 3  Singapore Top 10 Tax haven (Conduit OFC) 4  Brunei Oil & Gas 5  Ireland Top 10 Tax haven (Conduit OFC) 6  Norway Oil & Gas 7  Kuwait Oil & Gas 8  United Arab Emirates Oil & Gas 9   Switzerland Top 10 Tax Haven (Conduit OFC) —  Hong Kong Top 10 Tax Haven (Sink OFC) 10  San Marino Tax haven (Sink OFC) 11  United States 59,495‡ 12  Saudi Arabia Oil & Gas 13  Netherlands Top 10 Tax Haven (Conduit OFC) 14  Iceland 52,150‡ 15  Bahrain Oil & Gas	Rank Country/Territory Type 1  Qatar Oil & Gas 2  Luxembourg Top 10 Tax haven (Sink OFC) —  Macau Tax haven (Sink OFC) 3  Singapore Top 10 Tax haven (Conduit OFC) 4  Brunei Oil & Gas 5  United Arab Emirates Oil & Gas 6  Ireland Top 10 Tax haven (Conduit OFC) 7   Switzerland Top 10 Tax haven (Conduit OFC) 8  Norway Oil & Gas —  Hong Kong Top 10 Tax haven (Sink OFC) 9  United States 57,467‡ 10  Saudi Arabia Oil & Gas 11  Iceland 51,399‡ 12  Netherlands Top 10 Tax haven (Conduit OFC) 13  Austria 50,078‡ 14  Denmark 49,496‡ 15  Sweden 49,175‡

Notes:

Importance of governance

In several research papers, James R. Hines Jr. showed that tax havens were typically small but well-governed nations and that being a tax haven had brought significant prosperity.^[21][22] In 2009, Hines and Dharmapala suggested that roughly 15% of countries are tax havens, but they wondered why more countries had not become tax havens given the observable economic prosperity it could bring.^[4]

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.

— Dhammika Dharmapala, James R. Hines Jr., Which Countries Become Tax Havens? (2009)^[4]

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.^[4] Hines and Dharmapala's positive view on the financial benefits of becoming a tax haven, as well as being two of the major academic leaders into tax haven research, put them in sharp conflict with non-governmental organisations advocating tax justice, such as the Tax Justice Network, who accused them as promoting tax avoidance.^{[128][129][130]}

U.S. as the largest beneficiary

An unexpected conclusion of the original 1994 Hines-Rice paper, and re-affirmed by others,^[131] was that: low foreign tax rates [from tax havens] ultimately enhance U.S. tax collections.^[38] Hines noted that as a result of paying no foreign taxes by using tax havens, U.S. multinationals had avoided building up foreign tax credits that would reduce their ultimate U.S. tax liability. Hines returned to this finding several times, and in his 2010 § Important papers on tax havens, Treasure Islands, where he showed how U.S. multinationals used tax havens and BEPS tools to avoid Japanese taxes on their Japanese investments, noted that this was being confirmed by other empirical research at a company-level.^[25] Hines's observations would influence U.S. policy towards tax havens, including the 1996 "check-the-box"^{[lower-alpha 7]} rules, and U.S. hostility to OECD attempts in curbing Ireland's BEPS tools,^{[lower-alpha 8][26]} and why, in spite of public disclosure of tax avoidance by firms such as Google, Facebook, and Apple, with Irish BEPS tools, little has been done by the U.S. to stop them.^[131]

U.S. multinationals book over half of their non-U.S. profits in tax havens by using BEPS tools (2016 BEA).^[73][74]

Lower foreign tax rates entail smaller credits for foreign taxes and greater ultimate U.S. tax collections (Hines and Rice, 1994).^[38] Dyreng and Lindsey (2009),^[25] offer evidence that U.S. firms with foreign affiliates in certain tax havens pay lower pay lower foreign taxes and higher U.S. taxes than do otherwise-similar large U.S. companies.

— James R. Hines Jr., "Treasure Islands" p. 107 (2010)^[20]

Research in June-September 2018, confirmed U.S. multinationals as the largest global users of tax havens and BEPS tools.^[132][133]

U.S. multinationals use tax havens^{[lower-alpha 9]} more than multinationals from other countries which have kept their controlled foreign corporations regulations. No other non-haven OECD country records as high a share of foreign profits booked in tax havens as the United States. [...] This suggests that half of all the global profits shifted to tax havens are shifted by U.S. multinationals. By contrast, about 25% accrues to E.U. countries, 10% to the rest of the OECD, and 15% to developing countries (Tørsløv et al., 2018).

— Gabriel Zucman, Thomas Wright, "THE EXORBITANT TAX PRIVILEGE", NBER Working Papers (September 2018).^[73][74]

Tax justice groups interpreted Hines' research as the U.S. engaging in tax competition with higher-tax nations (i.e. the U.S. exchequer earning excess taxes at the expense of others). The 2017 TCJA seems to support this view with the U.S. exchequer being able to levy a 15.5% repatriation tax on over $1 trillion of untaxed offshore profits built up by U.S. multinationals with BEPS tools from non-U.S. revenues. Had these U.S. multinationals paid taxes on these non-U.S. profits in the countries in which they were earned, there would have been the little further liability to U.S. taxation. Research by Zucman and Wright (2018) estimated that most of the TCJA repatriation benefit went to the shareholders of U.S. multinationals, and not the U.S. exchequer.^{[73][lower-alpha 10]}

Academics who study tax havens, attribute Washington's support of U.S. multinational use of tax havens to a "political compromise" between Washington, and even other higher-tax OECD nations, to compensate for the shortcomings of the U.S. "worldwide" tax system.^[134][135] Hines had advocated for a switch to a "territorial" tax system, as most other nations use, which would remove U.S. multinational need for tax havens. In 2016, 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.^[136]

Hines' research was cited by the by the Council of Economic Advisors ("CEA") in drafting the TCJA legislation in 2017, and advocating for moving to a hybrid "territorial" tax system framework.^[137][138]

Promoters of global growth

Joel Slemrod testifying to the President's Advisory Panel for Federal Tax Reform (2005). Slemrod rejected Hines, Desai, and Dharmapala's observations, that tax havens might support global economic growth, instead calling tax havens parasitic.^[139]

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.g. the above discussion on the U.S. "worldwide" tax system as an example). Important academic leaders in tax haven research, such as Hines,^[140] Dharmapala,^[34] and others,^[131] 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.

— James R. Hines Jr., "Abstract: Tax Havens" (2007)^[21]

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. [..] In fact, countries that lie close to tax havens have exhibited more rapid real income growth than have those further away, possibly in part as a result of financial flows and their market effects.

— James R. Hines Jr., "Treasure Islands" p. 107 (2010)^[20]

The most cited paper on research into offshore financial centres ("OFCs"),^[141] 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.^[142]

CONCLUSION: 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 [...] Nevertheless, offshore financial centers created to facilitate undesirable activities can still have unintended positive consequences. [...] We tentatively conclude that OFCs are better characterized as "symbionts".

— Andrew K. Rose, Mark M. Spiegel, "Offshore Financial Centers: Parasites or Symbionts?", The Economic Journal, (September 2007)^[142]

However, other notable tax academics strongly dispute these views, such as work by Slemrod and Wilson, who in their § Important papers on tax havens, label tax havens as parasitic to jurisdictions with normal tax regimes, that can damage their economies.^[139] In addition, tax justice campaign groups have been equally critical of Hines, and others, in these views.^[129][130] Research in June 2018 by the IMF showed that much of the foreign direct investment ("FDI") that came from tax havens into higher-tax countries, had really originated from the higher-tax country,^[75] and for example, that the largest source of FDI into the United Kingdom, was actually from the United Kingdom, but invested via tax havens.^[143]

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.^[144] It remains a controversial area with advocates on both sides.^[145]

Personal residency

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. 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.^[146]

Corporate residency

Corporations can establish subsidiary corporations and/or regional headquarters in corporate tax havens for tax planning purposes. Where a corporate moves their legal headquarters to a haven, it is known as a corporate tax inversion.^[69][147] The rise of intellectual property, or IP, as a major BEPS tax tool, has meant that corporates can achieve much of the benefits of a tax inversion, without needing to move their headquarters. Apple's $300 billion quasi-inversion to Ireland in 2015 (see leprechaun economics) is a good example of this.

Asset holding

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.^[146]

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 (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.^[148] Most countries assess inheritance tax, and all other taxes, on real estate within their jurisdiction, regardless of the nationality of the owner, so this would not work with a house in most countries. It is more likely to be done with intangible assets.^[146]

Trading and other business activity

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. 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 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.^[146]

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. 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. It has been estimated over 75% of the world's hedge funds, probably the riskiest form of collective investment vehicle, are domiciled in the Cayman Islands, with nearly $1.1 trillion US Assets under management^[149] although statistics in the hedge fund industry are notoriously speculative.

Anonymity and bearer shares

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.S. state of Wyoming.^[150]:7 In a 2010 study in which the researcher attempted to set-up anonymous corporations found that 13 of the 17 attempts were successful in OECD countries, such as the United States and the United Kingdom, while only 4 of 28 attempts were successful in countries typically labeled tax havens.^[151] The last two states in America permitting bearer shares, Nevada and Delaware made them illegal in 2007. In 2011, an OECD peer review recommended that the United Kingdom improve its bearer share laws.^[152] The UK abolished the use of bearer shares in 2015.

In 2012 the Guardian wrote that there are 28 persons as directors for 21,500 companies.^[153][154]

Money and exchange control

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. It is possible for a foreigner to create a company in a tax haven to trade internationally; the company’s operations will not be subject to exchange controls as long as it uses foreign currency to trade outside the tax haven. 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.

U.S. Legislation

The Foreign Account Tax Compliance Act (FATCA) was passed by the US Congress to stop the outflow of money from the country into tax haven bank accounts. With the strong backing of the Obama Administration, Congress drafted the FATCA legislation and added it into the Hiring Incentives to Restore Employment Act (HIRE) signed into law by President Obama in March 2010.

FATCA requires foreign financial institutions (FFI) of broad scope – banks, stock brokers, hedge funds, pension funds, insurance companies, trusts – to report directly to the Internal Revenue Service (IRS) all clients who are U.S. persons. Starting January 2014, FATCA requires FFIs to provide annual reports to the IRS on the name and address of each U.S. client, as well as the largest account balance in the year and total debits and credits of any account owned by a U.S. person.^[155] If an institution does not comply, the U.S. will impose a 30% withholding tax on all its transactions concerning U.S. securities, including the proceeds of sale of securities.

In addition, FATCA requires any foreign company not listed on a stock exchange or any foreign partnership which has 10% U.S. ownership to report to the IRS the names and tax identification number (TIN) of any U.S. owner. FATCA also requires U.S. citizens and green card holders who have foreign financial assets in excess of $50,000 to complete a new Form 8938 to be filed with the 1040 tax return, starting with fiscal year 2010.^[156] The delay is indicative of a controversy over the feasibility of implementing the legislation as evidenced in this paper from the Peterson Institute for International Economics.^[157]

An unintended consequence of FATCA and its cost of compliance for non-US banks is that some non-US banks are refusing to serve American investors.^[158] Concerns have also been expressed that, because FATCA operates by imposing withholding taxes on U.S. investments, this will drive foreign financial institutions (particularly hedge funds) away from investing in the U.S. and thereby reduce liquidity and capital inflows into the US.^[159]

Tax Justice Network Report 2012

A 2012 report by the British Tax Justice Network estimated that between US$21 trillion and $32 trillion is sheltered from taxes in unreported tax havens worldwide.^[160] If such wealth earns 3% annually and such capital gains were taxed at 30%, it would generate between $190 billion and $280 billion in tax revenues, more than any other tax shelter.^[116] If such hidden offshore assets are considered, many countries with governments nominally in debt are shown to be net creditor nations.^[161] However, despite being widely quoted, the methodology used in the calculations has been questioned,^[110] and the tax policy director of the Chartered Institute of Taxation also expressed skepticism over the accuracy of the figures.^[120] Another recent study estimated the amount of global offshore wealth at the smaller—but still sizable—figure of US$7.6 trillion. This estimate included financial assets only: "My method probably delivers a lower bound, in part because it only captures financial wealth and disregards real assets. 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."^[17] A study of 60 large US companies found that they deposited $166 billion in offshore accounts during 2012, sheltering over 40% of their profits from U.S. taxes.^[113]

Bank data leak 2013

Details of thousands of owners of offshore companies were published in April 2013 in a joint collaboration between The Guardian and the International Consortium of Investigative Journalists.^[162] The data was later published on a publicly accessible website in an attempt to "crowd-source" the data.^[163] The publication of the list appeared to be timed to coincide with the 2013 G8 summit chaired by British Prime Minister David Cameron which emphasised tax evasion and transparency.

Liechtenstein banking scandal

Germany announced in February 2008 that it had paid €4.2 million to Heinrich Kieber,^[164] a former data archivist of LGT Treuhand, a Liechtenstein bank, for a list of 1,250 customers of the bank and their accounts' details. 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.^[165] Other governments, notably Denmark and Sweden, refused to pay for the information regarding it as stolen property.^[166] The Liechtenstein authorities subsequently accused the German authorities of espionage.^[167]

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.^[168] 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.

German legislation

Peer Steinbrück, the former German finance minister, announced in January 2009 a plan to amend fiscal laws. 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.^[169]

UK Foot report

In November 2009, Sir Michael Foot, a former Bank of England official and Bahamas bank inspector, delivered a report on the British Crown Dependencies and Overseas Territories for HM Treasury.^[170] The report indicated that while many of the territories "had a good story to tell", others needed to improve their abilities to detect and prevent financial crime. 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.^[171]

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.^[171] The pressure group Tax Justice Network, unhappy with the findings, commented that "[a] weak man, born to be an apologist, has delivered a weak report."^[172]

G20 tax haven blacklist

At the London G20 summit on 2 April 2009, 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."^[173] The list as per 2 April 2009 can be viewed on the OECD website.^[174] The four tiers were:

1. Those that have substantially implemented the standard (includes most countries but China still excludes Hong Kong and Macau).
2. Tax havens that have committed to – but not yet fully implemented – the standard (includes Montserrat, Nauru, Niue, Panama, and Vanuatu)
3. Financial centres that have committed to – but not yet fully implemented – the standard (includes Guatemala, Costa Rica and Uruguay).
4. Those that have not committed to the standard (an empty category)

Those countries in the bottom tier were initially classified as being 'non-cooperative tax havens'. Uruguay was initially classified as being uncooperative. However, upon appeal the OECD stated that it did meet tax transparency rules and thus moved it up. The Philippines took steps to remove itself from the blacklist and Malaysian Prime Minister Najib Razak had suggested earlier that Malaysia should not be in the bottom tier.^[175]

In April 2009 the OECD announced through its chief Angel Gurria that Costa Rica, Malaysia, the Philippines and Uruguay have been removed from the blacklist after they had made "a full commitment to exchange information to the OECD standards."^[176] Despite calls from the former French President Nicolas Sarkozy for Hong Kong and Macau to be included on the list separately from China, they are as yet not included independently, although it is expected that they will be added at a later date.^[173]

Government response to the crackdown has been broadly supportive, although not universal.^[177] Luxembourg Prime Minister Jean-Claude Juncker has criticised the list, stating that it has "no credibility", for failing to include various states of the USA which provide incorporation infrastructure which are indistinguishable from the aspects of pure tax havens to which the G20 object.^[178] As of 2012, 89 countries have implemented reforms sufficient to be listed on the OECD's white list.^[179] According to Transparency International half of the least corrupted countries were tax havens.^[180]

EU tax haven blacklist

In December 2017, European Union adopted blacklist of tax havens in a bid to discourage the most aggressive tax dodging practices. It also had a so-called gray list which includes those who have committed to change their rules on tax transparency and cooperation. The 17 blacklisted territories are: American Samoa, Bahrain, Barbados, Grenada, Guam, South Korea, Macau, The Marshall Islands, Mongolia, Namibia, Palau, Panama, Saint Lucia, Samoa, Trinidad and Tobago, Tunisia, United Arab Emirates.^[181] Some activists denounced the listing process as a whitewash and had called for the inclusion in the blacklist of some EU countries accused of facilitating tax avoidance, like Luxembourg, Malta, Ireland and the Netherlands.^[182]

Common Reporting Standard (CRS)

The Common Reporting Standard is an information standard for the automatic exchange of tax and financial information on a global level developed by the Organisation for Economic Co-operation and Development in 2014. Participating in the CRS from 1 January 2017 onwards are Australia, the Bahamas, Bahrain, Brazil, Brunei Darussalam, Canada, Chile, China, The Cook Islands, Hong Kong, Indonesia, Israel, Japan, Kuwait, Lebanon, Macau, Malaysia, Mauritius, Monaco, New Zealand, Panama, Qatar, Russia, Saudi Arabia, Singapore, Switzerland, Turkey, the United Arab Emirates, Uruguay.^[183]