Studies in Business and Economics [600062]

Studies in Business and Economics

WHAT TAX HAVENS ARE?

BUNESCU Liliana

Abstract:
Everyone has heard about countries such as Antigua and Barbuda, Bahamas, Costa
Rica, Guernsey, Cayman, Isle of Man, Vanuat u, Liechtenstein, Switzerland being tax heavens.
Who would not want to pay lower taxes, if not at all? Probably it’s a dream for any person or
company to take part from a jurisdiction which does not impose taxes or impose it low. They are
not a recent invention of globalization, tax fr ee zones appeared in the same time as commerce,
but nowadays they play a much more important role than in the past for finance and commerce
worldwide. Tax havens are not necessarily island territories. While many tax paradises are
situated in the tiny islands spr ead in the Caribbean or Pacific, ot hers are in the middle of or near
the richest regions of the world, in Europe or Asia.

Keywords: tax, tax haven, fiscal paradise, offshore companies

Tax is the foundation of good government and a key to the wealth or poverty of
nations (http://www.taxj ustice.net/cms/front_content.php?idc atart=2). It is under attack.
Tax havens, which offer secrecy, low or zero taxation, and lax regulation allow big
companies and wealthy individuals to benefit from the onshore benefits of tax – like good infrastructure, education and the rule of law – while using the offshore world to escape their responsi bilities to pay for it. Tax havens take many forms. Some have
appeared in post-war period, others were born in the last two decades. All have
advantages and disadvantages. Some of them meet high ethical standards, others
have hosted fragrant scams.
There does not is a single, unambiguous definition of a tax haven. Some
regulatory criteria, such as secrecy and low or zero taxes, appear in one form or
another in each definition. Tax havens give opportunities to taxpayers to avoid or evade tax in their home countries.
A financial dictionary defines a tax haven as a country or other political entity
that offers outside businesses and individuals a climate of minimal or nonexistent taxation. In some cases, the low taxes appl y not only to those levied by the tax haven
itself but also to the possibility of reducing or avoiding taxes levied in the investor's
home country. Gheorghe Bistricean u (Lexicon de finante, banci si asigurari, Vol. III,
Editura Economica, Bucuresti, 2001) defines a tax heaven as a country or an area that
– 10 – Studies in Business and Economics

Studies in Business and Economics
Studies in Business and Economics – 11 – provides to non-residents a tax environment more favorable than that applicable to the
territory of residence. In the last time the term of “fiscal paradise” turned into “offshore
center”. Business field uses the term "offshor e" for locations with such a tax system.
Richard Murphy shows, in a report for the Tax Justice Network, that “tax havens and
offshore financial centres are not the same thing. Tax havens are the countries that
create the laws designed to undermine ot her states. Offshore financial centres are
made up of the lawyers, accountants and bankers who sell the resulting products to
people from other countries who want to abuse the law of the place in which they live.
However we define them, tax havens are characterized by low or zero
taxation, a lack of transparency and a refusal to provide information to foreign tax authorities. The main listings of tax havens have been developed by OECD. A 1998 publication entitled
Harmful Tax Competition – An Emerging Global Issue , set out a
series of criteria on which it based its subsequent work: “The absence of tax or a low effective tax rate on the relevant income is the starting point of any evaluation. No or
only nominal taxation combined with the fact that a country offers itself as a place to be
used by non-residents to escape tax in their country of residence may be sufficient to
classify that jurisdiction as a tax haven.” The OECD 1998 Report defined a tax heaven
as a jurisdiction which has:
(a) no or only nominal taxes (generally or in special circumstances) and offers
itself, or is perceived to offer itself, as a place to be used by non-residents to escape tax in their country of residence;
(b) laws or administrative practices which prevent the effective exchange of relevant information with other governments on taxpayers benefiting from the low or no tax jurisdiction;
(c) lack of transparency, and
(d) the absence of a requirement that the activity be substantial, since it would
suggest that a jurisdiction may be atte mpting to attract investment or
transactions that are purely tax driven.
However, the fourth criterion of “no subs tantial activities” was rejected in July
2001, and it was formally withdrawn in t he OECD’s 2002 Progress report. The OECD
recognizes that every jurisdiction has a right to determine whether to impose direct
taxes and, if so, to determine the appropriate tax rate.
No or only nominal taxation combined with serious limitations on the ability of
other countries to obtain information from t hat country for tax purposes would typically
identify a tax haven. They offer a way to minimize taxes and to obtain financial confidentiality.
Tax havens serve three main purposes: they provide a location for holding
passive investments, they provide a loca tion where “paper” profits can be booked and
they enable the affairs of tax payers, particularly their bank accounts, to be effectively
shielded from scrutiny by tax authorities of other countries (OECD Report, Harmful Tax
Competition – An Emerging Global Issue , OECD Publications, Paris, 1998). Low or
zero taxation allows investors to avoid thei r taxes but also facilitate illegal activities,
such as tax evasion and money laundering. The lack of effective exchange of

Studies in Business and Economics
– 12 – Studies in Business and Economics information is one of the key factors in identifying a tax haven, it does not allow tax
administrations access to bank information for the critical purposes of detecting and
preventing tax avoidance. Lack of transparency means that banking secrecy is strictly
enforced. No bank can say what they ar e doing for anyone without severe penalties
applying. If a register of companies exists it does not require the names of the
beneficial owners to be published, the names of the people who really control the
company to be published, accounts to be put on public record. In other words, it‘s
almost impossible to find out who is doing what in a tax haven.
What are the reasons for using a tax haven? There are three reasons why
anyone would ever use a tax haven (Murphy Richard, Fiscal Paradise or Tax on
Development, Tax Research Paper, 2005):
1. they want to avoid tax;
2. they don’t want people to know what they are doing;
3. they want to avoid regulation.
Tax havens and offshore financial centre have created an interface between
the illicit and licit economies, corrupting nat ional tax regimes and onshore regulation.
The result is a shift of the tax burden away from capital and onto labour, and a
dramatic rise in income and wealth inequality, as well as the corruption of democracies around the world as élites escape from thei r responsibilities (http:// www.taxjustice.net).
Tax havens are used to attack the soverei gnty of nation states and they harm the
efficiency of globalized markets.
Oxfam, an international organization which fights for ending poverty and
injustice between people, advises that “urgent action is also needed to crackdown on tax havens, which deprive developing countries of hundreds of millions of pounds of
tax revenue every year – much more th an they receive in development aid.”
(http://www.oxfam.org/en/pre ssroom/pressrelease/2009-04- 01/bank-bailout-could-end-
poverty) Oxfam is calling for new rules requiring tax havens to disclose information on money entering their jurisdiction and for multinational companies to report the taxes they pay in each country in which they operate. This woul d allow countries to identify
individuals and organizations that illegally avoiding tax and take action to recover it.
Many specialists tried to quantify how much money is held in tax heavens. It is difficult
to give any reliable figure since timely information is not widely available An analysis conducted for Oxfam by James Henry, former Chief economist at McKinsey & Co, found that at least $6.2 trillion of developing country wealth is held offshore by individuals, depriving developing countries of annual tax receipts of between $64-124bn”
(http://www.oxfam.org/en/pr essroom/pressrelease/2009-03-13/tax-ha ven-could-
deliver-120bn-year-f ight-poverty).
Tax is the link between state and citizen, and tax revenues are the lifeblood of
the social contract (http://www.taxjustice .net/cms/front_content.php?idcatart=2). Tax
havens are heightening inequality and pover ty, corroding democracy, distorting
markets, undermining regulation and curbing economic growth, accelerating capital flight from poor countries, and promoting corruption and crime around the world. So far
the developed countries tolerate the exis tence of tax heavens, even if there are

Studies in Business and Economics
Studies in Business and Economics – 13 – countries that punish the jurisdictions which are considered as non-cooperative tax
havens. We have to keep in mind that many of these countries would not be able to
survive and provide for their citizens without t heir current offshore legislation and it is a
know fact that more instances of tax evasion occur onshore than offshore.

References:
™ Bistriceanu Gheorghe, Lexicon de finanț e, bănci și asigurări, Vol. III, Editura
Economic ă, București, 2001
™ OECD Report, Harmful Tax Competition – An Emerging Global Issue , OECD
Publications, Paris, 1998.
™ Murphy Richard, Fiscal Paradise or Tax on Development , Tax Research Paper,
2005
™ http://www.taxjustice.net
™ http://www.oxfam.org