This fundamental question is difficult to answer succinctly because there is no legal definition nor a universally agreed-upon definition. The Organisation for Economic Co-operation and Development (OECD), an international organization created to promote trade and economic progress between democratic governments, has identified several key features which make a country a tax haven: “no or low taxes, lack of effective exchange of information, lack of transparency, and no requirement of substantial activity.”
While the OECD’s definition is useful, it is inherently a bit pejorative, and critics have claimed that some of the tax havens identified by the OECD are singled out for political reasons. In addition, some critics have pointed out that some OECD members themselves, especially the US and UK, have laws that accommodate certain kinds of foreign investment. Taking into account the critics of the OECD’s definition and identification of tax havens, let us consider a more basic definition. At its core, a tax haven is simply a country (or territory) whose laws make the country attractive as a tax shelter for foreign money.
What is a tax shelter, though? Fortunately, this term can be more easily defined. A tax shelter is simply a method, legal or illegal, that exists solely to avoid or reduce paying taxes. A 401K retirement account is a tax shelter- it (legally) allows you to defer paying taxes on the income you place in your account until you withdraw it years or decades later. By deferring the payment of taxes, you can make a considerable amount of money in compounded interest that would have been lost had you paid the taxes up front. The 401K incentivizes citizens to save for their retirement, and therefore it is a perfectly legal tax shelter.
In the same way, tax havens can provide numerous methods which allow foreigners to avoid or reduce the taxes they pay to the government of the country in which they reside or do business. Often the label of “tax haven” is applied to countries whose laws are designed specifically to help foreigners avoid paying taxes. Very often these are small and/or remote countries with small populations and little in the way of industry or natural resources. Their best and most exploitable resource is their sovereignty, which allows them to create legal and tax systems that will attract huge amounts of foreign money, some of which will trickle down into the country’s economy by way of a disproportionately large financial services and banking sector.
The OECD’s definition identifies four different features of tax havens, but they essentially boil down to two things: low taxes (at least on foreign money) and secrecy. By having little or no taxes (especially corporate taxes), the tax haven encourages foreign individuals and businesses to move their money to the haven and conduct their financial transactions in a country that will not take a sizable cut from the proceeds. However, foreign businesses and individuals are still bound by the tax laws of their home country.
The problem with tax havens arises when a country combines low internal taxes with a veil of secrecy over its financial system. Most developed nations that adhere to OECD guidance on good financial regulation have comprehensive reporting systems for banking, securities, and other financial transactions. (If you’d like to learn more, make large cash deposits into your bank account with no explanation to the IRS.) These controls make it difficult to hide the source or destination of money from the tax man, which encourages citizens to be honest and accurate when paying taxes. However, when money is moved to a tax haven whose financial system is completely cloaked in secrecy, it is impossible for the governments from which the money originated to monitor. They wind up essentially relying on their citizens to honestly report their overseas financial transactions. As one can imagine, this is a system ripe for abuse.
Freed from oversight and reporting requirements, there are endless ways to game the system. Even if the money simply sits and collects unreported interest (rather than being put to more profitable ends), it can add up. Estimates on the amount of money held offshore vary wildly, but is likely in the tens of trillions of dollars. If this money managed just a 3% annual return on investment, and this profit was taxed at 30%, this could easily amount to 200-300 billion dollars annually in lost tax revenue around the globe.
So even in the most simplistic and benign of scenarios, the scope of the problem is massive. But the issue quickly becomes more complicated and the amount of money grows as ownership of assets is disguised by shell corporations and trusts, and when tax havens are used for far more sophisticated transactions. The possibilities are endless.
Whistleblower Justice Network Can Help You
Whistleblower Justice Network partners with whistleblowers worldwide to expose large, institutionalized tax fraud. Utilizing whistleblower programs, including the IRS Whistleblower Program, the SEC Whistleblower Program, and the False Claims Act, we aid whistleblowers in bringing tax cheats to justice.
If you have meaningful information regarding a tax haven or related tax scheme that you believe is illegal, robbing the United Country of America of taxes it is owed, Whistleblower Justice Network can help. Working alongside world-class legal counsel, we will ensure you are protected to the fullest extent of the law and that you receive credit for the information you bring to the U.S. government. Partnering with whistleblowers is all we do. Visit us at www.whistleblowerjustice.net, or call us at 844-WJN-4ALL, to learn if we can help you.