What are Tax Havens? Part I

By | October 21, 2021

The ongoing financial crisis – both the euro crisis and the more global one – and the associated real economic crisis are recurring in the media worldwide. Regardless of the causes of today’s major problems, it is clear that very many states in the north are now unable to finance important public tasks. With huge debt already, states also do not see themselves able to take on more debt. They are therefore forced to cut spending. And not unexpectedly, social and political unrest is rising in many countries – not least in southern and eastern Europe.

  • What is a tax haven; where are they located?
  • Is tax haven the same as a small, peripheral and “lugubrious” island state?
  • How much money is invested in tax havens?
  • What is the relationship between “onshore” and “offshore”?

In this situation, states, both individually and through intergovernmental organizations, are looking for ways to expand the income base – because there are limits to how much more states can demand from most people of increased taxes and wage cuts. Then someone has started to put the spotlight on tax havens and the opportunities the huge sums of money there represent.

According to bittranslators, tax havens are usually seen as a phenomenon we find in the fringes of the law. That’s wrong . Tax havens have become part of the way companies and financial units do business today. The financial industry – banks, hedge funds, investment funds, auditing companies, law firms , insurance companies and virtually the entire business world down to small agencies and local service providers – has daily and routine contact with tax havens . The scope has become so large that an attack on tax havens for them appears to be an attack on the business, at least as they know it from the last four − five decades.

2: Tax havens – part of the system

We find tax havens at the heart of globalization . And the reasons are pretty obvious. Out of old habit, many economists will probably say that capitalists are constantly looking for maximum profits, but these economists forget to ask whether business people seek to maximize before or after taxation.

This question is important as corporate taxation in many OECD countries (Organization for Economic Co-operation and Development) can reach up to 30 and even 40 per cent of the amounts declared for taxation. In order to make a higher profit after tax, the companies therefore make extensive use of tax havens.

In addition, following financial regulations means increased costs or reduced profits. Therefore, the financial industry has moved in the direction of what tax havens can legally offer. The result has been some very startling figures associated with the business of tax havens.

3: Tax haven – difficult to define

It is difficult to define what a tax haven is. The complexity of modern tax systems makes virtually any country a potential tax haven for individuals and companies from other countries. Tax havens are sometimes described as “offshore financial centers” – a term that has proved just as difficult to define. In any case, some countries are widely known as tax havens, and the list of such countries has changed little since the 1980s.

The typical tax haven often has these characteristics:

  • It is a country with zero or near zero tax for people and companies that do not belong to the country ( non-residents) . Many famous tax havens – such as Jersey, Guernsey, the Isle of Man, Switzerland and Liechtenstein tax their own nationals worldwide. Tax refugees from other countries, on the other hand, escape this tax in whole or in part. Other tax havens use other methods to collect taxes from their own citizens.
  • It is easy and cheap for entities from outside to establish themselves in tax havens and easy to ensure anonymity both in terms of the establishment and the subsequent business from there. Tax havens make it easy and cheap to set up companies, foundations and even banks there. They are almost in line to establish themselves.
  • Tax havens are characterized by strict secrecy – opacity – when it comes to disclosing financial and commercial information, e.g. to tax authorities from other countries. Some therefore prefer to refer to tax havens as “paradises of secrecy”. The lack of transparency is achieved in three ways – both actively and passively.
    • Perhaps the most common form is bank secrecy – banks’ secrecy of information that is protected by law. Switzerland is seen as the country that created legal banking secrecy, something the country did in 1934.
    • Another widely used method of creating opacity is to allow the creation of entities where both ownership and purpose are very difficult to establish such as foundations (trusts). These entities involve secrecy as they do not require any registration in most jurisdictions (area with their own authority – often a state, but not necessarily). And even where registration is required, the registration will not be publicly available information.
    • 3c. A third way of creating opacity is more passive and is characterized by inactivity or conscious indifference . Many tax havens look through their fingers with filth and deliberately slack regulations. In addition, they often have underfunded supervisory authorities, who hardly ask questions.

What are Tax Havens 1