Paper Review

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SFClub Statale
November 18, 2024

Hello,

Welcome to “Paper Review”, the official newsletter of the Starting Finance Club Statale. This sharing and in-depth space is dedicated to all those who are passionate about economic and financial issues. With this newsletter, we aim to bring you detailed analysis, exclusive insights and a fresh perspective on the economic and financial dynamics that are shaping our world.

Tax havens classification and spread around the world

Historically, tax havens emerged as early as the 20th century, often in the form of small, geographically remote territories with lax regulatory environments and low or nonexistent tax rates. These jurisdictions attracted individuals and businesses seeking to evade high taxes or conceal wealth from authorities. Famous examples include the Cayman Islands, Bermuda, Luxembourg, and Switzerland, among others. These traditional tax havens provided secrecy through banking secrecy laws and offered a range of financial services, including offshore banking, trust formation, and shell company registration.

As is well-known, havens are small in population size, and more likely to be islands (and, partly consequently, have a larger fraction of their population located within 100 km of the coast) relative to non-havens. Tax havens’ geographical characteristics tend to cause them to be exogenously more open economically, as compared to non-havens. For example, they tend to be located in closer proximity to major capital exporters (measured as the distance by air from the closest of New York, Tokyo or Rotterdam). Havens also have a relatively sophisticated communications infrastructure, as measured, for instance, by the number of telephone lines per capita. On the other hand, their jurisdictions are poorly endowed with natural resources: the value of their subsoil assets per capita, as estimated by the World Bank, is substantially smaller than for the typical non-haven country.

Tax havens differ substantially from non-havens in their legal origins and political institutions: in particular, havens are more likely to have British legal origins and less likely to have French legal origins than are non-havens. They are also more likely to use English as an official language than are non-havens. The former have a greater propensity to be governed by parliamentary rather than Presidential political systems. As suggested by some of the recent literature on colonialism and tax havens, havens are somewhat more likely to be dependent territories rather than sovereign states. They thus have a lower rate of membership in the United Nations (UN) compared to non-havens (however, UN membership is slightly higher for small havens than for small non-havens).

Introduced to develop the broken economy of countries after World War II, the tax haven system now plays a prominent role in the world's financial system given that is it has now become a vital tool for big corporations and wealthy individuals to evade taxes.

In 2016, a report by Citizen for Tax Justice, a US-based think-tank and advocacy group, stated that more than 370 companies out of 500 largest companies in the U.S., known as the Fortune 500, operate subsidiaries in such countries.

Criteria for tax havens

In 1998, the Organization for Economic Cooperation and Development (OECD) gave a list of factors that can determine the process of identifying tax havens:

Nominal tax on relevant income

For any earnings made under the authority of a tax haven nation, which could vary in different territories, a minimal amount of fee which could be smaller than true cost of service is taken, as for it to be accessible to citizens and visitors.

Secrecy of information

Tax haven nations, as one of their most special features, apply measures to protect their client's info that information could be financial or personal to them. And even more importantly such information is not shared with any foreign tax authority without permission.

Lack of transparency

Offshore financial center's functioning is strictly kept opaque, not fully transparent, in order to maintain secrecy of information (in addition to not disclosing financial details to national governments); here lays the reason why these systems are so widely used to exploit money laundering and tax fraud.

No substantial activities

To benefit from tax haven nations, institutions are not bound to produce goods and services within the territory of tax havens, they can redirect their earnings generated in tax-paying countries to be taxed under their own jurisdiction by establishing headquarters in tax havens or by shifting substantial financial transactions to shell companies based in these low-tax countries.

What Tax havens offer?

Tax havens are countries or territories that offer attractive tax conditions for companies and entrepreneurs. These involve:

  • Low or zero tax rates;

  • Tax immunity;

  • Lack or limited tax transparency regulations;

  • Lack of information flow between the tax haven and OECD member countries;

  • Independence of the national economy from the adopted taxation system;

  • The possibility of taxing income without actual business activity.

Tax haven countries attract capital from diverse sources: it may come from business activities, dividends, interest or capital gains. They’re used to transfer funds and avoid or minimise tax obligations in the home country.

Criteria for granting tax haven status (Poland as example)

The Minister of Public Finance of Poland provides a list of countries applying harmful tax competition, it is defined in the specific regulation: the procedure results from Art. 23 section 2 of the PIT Act. The Minister considers the following factors:

  • the agreements made in this regard by the OECD (Organization for Economic Co-operation and Development);

[The OECD produces internationally comparable tax data, analysis and policy advice with the aim of helping governments around the world to design and implement effective, fair and efficient tax systems to foster resilient, inclusive and sustainable growth over the long term];

  • the legal basis for tax information exchange between Poland and the specified jurisdiction;

  • the timeliness of fulfilling the obligation to exchange tax information;

  • the reliability, completeness, and clarity of the tax information provided;

  • the actual characteristics of the tax system of the given country or territory that may lead to harmful tax competition.

Top Tax Havens in the World

  • Bermuda – Declared the world’s worst (or best if you’re looking to avoid taxation) corporate tax haven in 2016 by Oxfam with a zero percent tax rate and no personal income tax.

  • Netherlands – Most popular tax haven among the world’s Fortune 500. The government uses tax incentives, costing an estimated 1.2 billion euros in 2016, to attract businesses to invest in the Netherlands. Also, according to the Tax Justice Network, the Netherlands is responsible for 17% of total worldwide tax avoidance by businesses. It inflicts an annual tax revenue loss of close to $ 51 billion on other countries (SOMO - Centre for Research on Multinational Corporations, June 2024).

  • Luxembourg – It gives benefits such as tax incentives and zero percent withholding taxes.

  • Cayman Islands – No personal income taxes, no capital gains taxes, no payroll taxes, no corporate taxes, and the country does not withhold taxes on foreign entities.

  • Singapore – Charges reasonable nominal corporate taxes provided through tax incentives, lack of withholding taxes, and what appears to be substantial profit shifting.

  • The Channel Islands – No capital gains taxes, no council taxes, and no value-added taxes.

  • Isle of Man – No capital gains tax, turnover tax, or capital transfer tax. It also imposes a low-income tax, with the highest rates at 20%.

  • Mauritius – Low corporate tax rate and no withholding tax.

  • Switzerland – Full or partial tax exemptions, depending on the bank used.

  • Ireland – Referred to as a tax haven despite officials asserting that it is not. Apple discovered that two of the company’s Irish subsidiaries were not classified as tax residents in the United States or Ireland, despite being incorporated in the latter country.

Top Companies That Benefit from Tax Havens

  1. Apple – The amount booked offshore is $214.9 billion, using Ireland as a tax haven. Apple would have owed tax amount of $65.4 billion to the U.S. government if tax haven benefits were not used.

  2. Nike – Holding $10.7 billion offshore in Bermuda as tax haven; it would have paid $3.6 billion for taxes if tax haven benefits were not used, this implies Nike pays a mere 1.4% tax rate to foreign governments on those offshore profits, indicating that nearly all the money is officially held by subsidiaries in tax havens.

  3. Goldman Sachs – It holds $28.6 billion offshore and uses Bermuda as a tax haven.

  4. Some of the 50 biggest U.S. companies that have stashed approximately $1.6 trillion offshore include Microsoft, IBM, General Electric, Pfizer, Exxon Mobil, Chevron, Walmart: these 50 companies earned over $4.2 trillion in profits globally, but they used offshore tax havens to lower their effective overall tax rate to just 25.9%, which was well below the U.S. statutory rate of 35% and even lower than the average levels paid in other developed countries.

Complete list of countries classified as tax havens:

There is a list of countries reluctant to cooperate on tax matters, known as the list of tax havens. The Council of the European Union prepares it starting from 2017 including 16 countries: Anguilla, Antigua and Barbuda, Bahamas, Belize, Fiji, Guam, Palau, Panama, Russia, Samoa, American Samoa, Seychelles, Trinidad and Tobago, Turks and Caicos Islands, Virgin Islands of the United States, Vanuatu.

Tax havens in Europe:

Tax havens in the world:

Official lists of the most popular tax havens indicate which countries support the policy of lowering tax obligations. The indexes are subject to systematic updates. Various global organisations, such as Oxfam, maintain their own listings: according to Oxfam data, tax havens worldwide include:

British Virgin Islands

Cayman Islands

Bermuda

Netherlands

Switzerland

Luxembourg

Hong Kong

Singapore

United Arab Emirates

Ireland

Bahamas

United Kingdom

Cyprus

Mauritius

Belgium

Guernsey

France

China

Isle of Man

Malta

Spain

Germany

Hungary

USA

Sweden

Italy

Panama

Curacao

Gibraltar

Mexico

Finland

Austria

Denmark

Liechtenstein

Turks and Caicos Islands

Czech Republic

Estonia

Anguilla

Costa Rica

Romania

Latvia

Lebanon

Monaco

South Africa

Liberia

Macau

Bulgaria

Seychelles

Portugal

Slovakia

Croatia

Lithuania

Taiwan

Aruba

Greece

Slovenia

Botswana

Peru

Ghana

Andorra

Kenya

Brazil

Tanzania

Ecuador

San Marino

Argentina

Gambia

Montserrat

User classification

Tax havens with preference for physical people:

Tax havens that are aimed at people and personal wealth are those that look for users to establish their fiscal residence in them, irrespective of whether they are living there or not. These tax havens demand a certain frequency of transfers, a characteristic that does not exist in other tax havens where it is not compulsory to be an active user in order to benefit from them. (Mario Alva, et al. 2010) These tax havens are centred in attracting personal wealth and relocation of personal assets: examples of these are Andorra and Monaco. It is widely known in Spain that individuals that have non-declared sources of income usually relocate and stash these away in these types of tax havens.

Tax havens with preference for corporations:

With respect to those described above, tax havens which aim to provide financial services to corporations are more abundant. It is not necessary for users to visit the tax havens for services to remain active. In some legislations it is usually a norm for a person to be named as a directing manager with full representing powers. Another factor to take into account is that, in these territories, large networks of bankers, lawyers and consultants exist; these are connected with international organisations that supervise their correct management of the operations and structures created. Moreover, certain tax havens develop their own economies by attracting numerous corporations, without the existence of intermediaries, in order to allow national agents benefit with the negotiations (Alva, et al. 2010); examples of these kind of tax havens are the Virgin Islands and Amsterdam, which attract most of the British and American corporations.

Mixed tax havens:

Mixed tax havens are those that would be beneficial for both individuals and corporations. These, like many others, offer banking secrecy together with very low or neutral tax rates. Their political and economic base is set upon these principles, examples of these are the Bahamas and the Cayman Islands.

Characteristics and advantages of tax havens

The following table groups the features that different tax havens have and what tax havens have which features. It is important to outline that not all tax havens are the same and not all of the tax havens fall into the same categories. Moreover, it would be interesting to point out that not all tax havens are on the same level and that ones can significantly differ from others; others share vast similarities with one another (S. Botis, et al. 2014).

Features

State

1

The income and capital gains are not taxed: they are known as “zero havens” or “pure havens”.

The islands of Bermuda, Bahamas, Bahrain, Nauru, Cayman,Turks, Caicos, Saint Vincent, The Republic of Vanuatu and Monaco;

2

The tax rates have a low value as they are approved by the state or as a result of the application of the quota reductions, due to the implementation of tax agreements between different states concerning double taxation;

The British Virgin Islands, Liechtenstein, Switzerland, Netherlands Antilles, Man Islands, Guernsey and Jersey Islands, The Republic of Ireland;

3

The taxation of income or benefits is determined locally base. The taxpayers from these states are exempt from taxation of profits made by trading across borders;

Liberia, Costa Rica, The Philippines, Venezuela, Malaysia, Panama;

4

Countries with preferential treatment for offshore and holding companies;

Hungary, Austria, Netherlands, Luxemburg, Thailand, Singapore;

5

Offers tax exemptions for industries that have been made for the development of exports;

Ireland for the companies created before 1 January 1981, Madeira;

6

Provides financial benefits for international business companies, that are focused on investment or not, but instead are classified as offshore finance companies with certain privileges;

The Islands of Bahamas, Antigua, Bermude, The British Virgin Islands, Montserrat and Nevis Islands in the Caribbean;

7

Provides specific tax advantages to other banking companies or other financial institutions with offshore activities;

Antigua, Island-British territory in the Caribbean,

Anguilla, Grenada, Barbados Islands and Jamaica;

Conclusion:

Companies with headquarters in the region of a tax haven oftentimes dramatically reduce their tax liability. By the same token, wealthy individuals, families, and foundations with a desire for privacy, wealth protection, and asset growth are great candidates for a tax haven strategy; the same goes for any company, startup, or individual looking to expand their interests and do so in an anonymous way.

As of now, the gap between the rich and the rest is growing and tax havens are at the heart of the inequality crisis, enabling corporations and wealthy people to avoid paying the full amount of taxes they owe. This prevents states from funding vital public services and combating poverty and inequality, with especially damaging effects for developing countries. Economic inequality damages us all: when we accept greater inequality, we are condemning ourselves to worse lives – and not only for those at the bottom of the distribution, but across our entire society. All in all, effective measures to address tax evasion are only in their infancy—more to follow.

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