What are Tax Havens? Part II

By | October 21, 2021

4: Capital flows through subsidiaries

It is therefore difficult to define what a tax haven is. Therefore, the number of tax havens is also controversial. Some (Palan et al., 2010) have estimated that there are between 45 and 60 active tax havens . Here we find more than 2 million financial companies, offshore companies, foundations and the like. The vast majority of well-known multinational (transnational) companies and banks have at least one subsidiary in well-known tax havens. Most of them have many, although we do not know the exact number.

The Enron scandal revealed that the American energy company Enron had more than 900 subsidiaries – most of them in Caribbean tax havens. The use of such subsidiaries explains another astonishing statistic: about half of all international lending activities go through companies registered in tax havens.

And a third of all foreign investment (long-term investment) goes through tax havens. In other words, tax havens are both recipients and alleged origins of about a third of all foreign investment in the world. Recent estimates suggest that in 2010, between $ 21,000 and $ 32 trillion – invested and invested virtually tax-free in tax havens (Henry 2012) – was largely “unreported.” The figure corresponds to the total gross domestic product of the United States and Japan. That is, at least 18 percent of the total financial capital in the world. The estimate is low; it includes only capital, not real estate such as house, apartment, boat…

According to deluxesurveillance, the most commonly used tax havens are located in small jurisdictions near the major trading centers in the world:

  • Caribbean- these serve mainly Americans
  • Europe- serving people and companies from the EU area
  • Singapore and Mauritius- with Asian customers
  • Some small islands in the Pacific- from here Russian customers are helped to capital flight and money laundering.

5: Huge amounts of tax evasion

Tax havens are mainly used to cheat or evade taxes. Cheating money away from taxation is criminal in most countries, while tax planning – organizing costs and profits in a way that reduces taxes as little as possible – is seen as legal . However, taxation is so complex that the two strategies can be difficult to distinguish.

It is estimated that super-rich individuals ( fewer than 100,000 ) have “parked” about 10,000 billion (10 trillion) dollars in tax havens. The tax evasion of rich individuals is estimated at around $ 1,000 billion annually.

There are no reliable estimates of how much tax companies avoid on tax, but the figure certainly exceeds $ 1,000 billion (Ronen). There is little doubt that tax havens play an important negative role in the global and national distribution of income and wealth.

6: Helpers for the major financial centers

The tax havens have also developed specific niche strategies – focused on and specialized in a smaller field. British jurisdictions such as the Channel Islands, the Cayman Islands and Bermuda have gradually grown to become financial aid engines with close ties to the money markets in (City of) London (see facts), but they actually serve all the major international financial centers in the world – New York, Paris, Frankfurt and Tokyo.

On paper, the Cayman Islands (see facts) are the fourth largest international financial center in the world (the ranking changes from year to year), while Bermuda is the largest center for self-insurance in the world (many large companies have self-insured through subsidiaries – several of these are registered in tax havens ).

In reality , complex financial transactions are organized in, managed and operated from the major financial centers ; they are only directed or “booked” through offshore centers. But there are also signs that some such centers, Cayman and Jersey, have built up some capacity to carry out complex financial transactions themselves.

There are many benefits to letting complex financial transactions go through tax havens: financial transactions that are registered there avoid no or very low fees. Banks and other financiers may have their offices “onshore” (eg head office) and apparently pay their taxes there. But the financial transactions can be registered in “offshore” subsidiaries.

In this sense, tax havens function as the financial parallel to transfer pricing (within the same group). This means that banks and companies deduct costs “onshore” in high-tax countries, while profits are taken “offshore” where taxes are low. This increases the total profit of a company.

7: Skin and reality

Tax havens are among the least regulated financial centers in the world. On paper , it may look like they are regulated. However, the lack of transparency, secrecy surrounding ownership, the minimum requirements for bookkeeping and / or lack of supervision together constitute a regime with almost zero regulations. Admittedly, tax havens can show that they have complied with requirements for financial regulation from the OECD and the Monetary Fund (IMF) and that they are no longer blacklisted.

Furthermore, they say – quite rightly – that they are not the only offenders and that Delaware (the US state) and London are worse offenders than they are. However, most tax havens only seem to comply with a minimum of the regulatory requirements imposed on them by OECD countries. And they have done so very reluctantly. They seem to have introduced the letter of the law, but not its spirit . At the same time, they often create new parallel opportunities (in many cases written by the financial industry in the tax haven itself), which create new loopholes in the regulations. The goal is then to avoid the same rules that have just been agreed upon.

What are Tax Havens 2