Overview

A "tax haven" is a region that offers minimal tax obligations for non-resident investors, often viewed negatively. While traditional definitions highlighted financial secrecy, modern views emphasize low effective tax rates. Some countries, like the U.S. and Germany, are occasionally mentioned in tax haven discussions due to high secrecy levels but are often excluded due to political factors. Alternatively, nations like Ireland, known for low effective tax rates and less secrecy, are typically included in these lists.

Evolution and Impact

The recent abolishment of banking secrecy in areas like Switzerland, driven by the U.S. FATCA and the OECD's Common Reporting Standard (CRS), has reduced the use of tax havens for unlawful tax evasion. The CRS requires financial bodies to disclose account details to tax authorities, increasing tax compliance. Nevertheless, large companies use intricate methods to shift profits to tax havens, maintaining nearly zero effective tax rates.

Traditional tax havens like Jersey boast zero tax rates but fewer tax treaties, while modern corporate tax havens, despite higher nominal rates and extensive OECD agreements, employ BEPS strategies to achieve low tax rates. Nations such as the Netherlands, Singapore, Ireland, and the U.K. serve as corporate tax havens, whereas Luxembourg, Hong Kong, Cayman Islands, Bermuda, British Virgin Islands, and Switzerland are noted for both traditional and corporate haven characteristics, often acting as conduits to other havens.

Economic Impact

The use of tax havens causes significant revenue losses for non-haven countries, with tax evasion estimates ranging from $100 billion to $250 billion annually. Assets held in tax havens, estimated at $7 trillion to $10 trillion, represent about 10% of global assets, with severe implications for developing nations reliant on tax income for infrastructure.

Prevalence and Characteristics

Roughly 15% of nations are deemed tax havens, thriving via this status. The top 10-15 GDP per capita countries, excluding oil exporters, are often tax havens, leading to inflated GDP-per-capita due to BEPS flows and potential economic crises when global capital movements change. Notable examples include Ireland's Celtic Tiger era and Jersey's financial challenges.

Historical Development

The evolution of tax havens spans several stages:

• 19th Century: U.S. states like New Jersey and Delaware, known for lenient corporate laws, inspired other regions.
• Post World War I: Bermuda and the Zurich-Zug-Liechtenstein region emerged as early tax havens. Liechtenstein’s 1924 Civil Code and the establishment of the Anstalt corporate vehicle were pivotal developments.
• Post World War II: Offshore Financial Centers (OFCs) arose, expanding traditional havens like Cayman Islands and Bermuda, along with new ones like Hong Kong and Singapore.
• Emerging Economies: From the late 1960s, places like Norfolk Island, Vanuatu, and Nauru appeared in developing markets, following legislation patterns of past British Empire and European havens.
• Corporate Tax Havens: In the 1980s, focus shifted to corporate-compliant havens like Ireland and Netherlands, prominent on tax haven lists, utilizing advanced BEPS tools.

Tax havens have been central in international tax reform, prioritizing transparency and data sharing. Despite compliance with OECD norms, enhanced scrutiny led to anti-BEPS measures in high-tax jurisdictions.