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Pressure to level playing fields shows resultsTax havens are under threat not as a result of the global economic crisis, but rather as a result of increasing pressure to conform to globally accepted tax practices, writes Liesl Kruger.
A so-called “tax haven” is generally defined as a place where certain taxes are levied at a low rate or not at all. Individuals or firms can find it attractive to move themselves to areas with lower tax rates, which creates a situation of ‘tax competition’ among governments.
Different jurisdictions tend to be havens for different types of taxes, and for different categories of people and/or companies.
There are several definitions of tax havens. The Economist has tentatively adopted the description by Geoffrey Colin Powell (former economic adviser to Jersey): “What… identifies an area as a tax haven is the existence of a composite tax structure established deliberately to take advantage of, and exploit, a worldwide demand for opportunities to engage in tax avoidance.”
The Economist points out that this definition would still exclude a number of jurisdictions traditionally thought of as tax havens.
Similarly, others have suggested that any country which modifies its tax laws to attract foreign capital could be considered a tax haven.
According to other definitions, the central feature of a haven is that its laws and other measures can be used to evade or avoid the tax laws or regulations of other jurisdictions.
In its December 2008 report on the use of tax havens by American corporations, the Government Accountability Office of the United States of America was unable to find a satisfactory definition of a tax haven, but regarded the following characteristics as indicative of a tax haven:
• No or nominal taxes;
• Lack of effective exchange of tax information with foreign tax authorities;
• Lack of transparency in the operation of legislative, legal or administrative provisions;
• No requirement for a substantive local presence and self-promotion as an “offshore financial centre”. An offshore financial centre, although not precisely defined, is usually a low-tax, lightly regulated jurisdiction that specialises in providing the corporate and commercial infrastructure to facilitate the use of that jurisdiction for the formation of offshore companies and for the investment of offshore funds.
Tax havens are met with resistance from governments and the private sector alike, as they generally allow big corporates and wealthy individuals to benefit from the onshore benefits of tax (e.g. infrastructure, education, etc), while using the offshore network to escape their fiscal responsibilities.
This corrupted international infrastructure thus allow the elites to escape tax and regulation.
It is also believed that this international infrastructure is widely used by criminals and terrorists. As a result, tax havens may be seen as heightening inequality and poverty, corroding democracy, distorting markets, undermining regulation and curbing economic growth and promoting corruption and crime on a global scale.
The offshore system has multi-faceted issues, and tax havens are often steeped in secrecy and complexity.
Assets held offshore, beyond the reach of effective taxation, are estimated to be as much as a third of total global assets.
Over half of all world trade passes through tax havens.
However, tax havens came under pressure from the Organisation for Economic Co-operation and Development (OECD) from as early as 2000.
The OECD is an international organisation that brings together the governments of countries committed to democracy and the global market economy to support sustainable economic growth, boost employment, raise living standards, maintain financial stability, and contribute to growth in world trade.
The organisation provides a setting where governments compare policy experiences, seek solutions to common problems, identify good practice and co-ordinate domestic and international policies.
In a report issued in 2000, the OECD identified a number of jurisdictions as tax havens according to criteria it had established. Between 2000 and April 2002, 31 jurisdictions made formal commitments to implement the OECD’s standard of transparency and exchange of information for tax purposes, resulting in these jurisdictions being removed from the list of uncooperative tax havens as and when they subscribed to the principles established by the OECD.
In May 2009, the OECD Committee on Fiscal Affairs decided to remove, at that time, the remaining three jurisdictions from the list of uncooperative tax havens in the light of their commitments to implement the OECD standards of transparency and exchange of information and the timetable they set for the implementation. As a result, no jurisdiction is currently listed as an uncooperative tax haven by the OECD.
All the jurisdictions on the OECD’s “white list” have thus substantially implemented internationally agreed standards as continuously monitored by the OECD and have signed bilateral tax-information exchange agreements. The purpose of this Bilateral Agreement (“the Agreement”) is to promote international co-operation in tax matters through exchange of information.
It was developed and grew from the work undertaken by the OECD to address harmful tax practices. The lack of effective exchange of information is one of the key criteria in determining harmful practices.
The mandate of the relevant OECD Working Group was to develop a legal instrument that could be used to establish effective exchange of information.
The Agreement represents the standard of effective exchange of information for the purposes of the OECD’s initiative on harmful tax practices.
It is not only pressure from the OECD that may impact on the business of tax havens.
At the beginning of May 2009, President Barack Obama vowed to “detect and pursue” US tax evaders and go after their offshore tax shelters.
The president said he wants to prevent US companies from deferring tax payments by keeping profits in foreign countries (i.e. tax havens) rather than recording them at home and called for more transparency in back accounts held by Americans in notorious tax havens such as the Cayman Islands.
Governments and tax-paying corporates and individuals oppose secrecy and promote transparency in international finance. A level playing field in tax matters is desired as opposed to loopholes and distortions in tax and regulation, and the abuses that flow from these practices.
Tax compliance is promoted over tax evasion, tax avoidance and the various mechanisms that enable owners and controllers of wealth to escape their responsibilities to the societies on which they and their wealth depend. Tax havens lie at the centre of these concerns.
As a result of actions taken and increased pressure to conform from governments and organisations such as the OECD, any of these havens have come to accept that transparency is coming and that they will lose business as a result. They are the first places foreign governments or corporates look when they are tracking down tax evasion or ill-gotten gains.
As a result, some companies have decided to quit tax havens altogether, stating among the reasons the “continued criticism of companies incorporated in these jurisdictions”.
Tax havens are therefore under threat, however, not as a result of the global economic crisis, but rather as a result of increasing pressure to conform to globally accepted tax practices.
Failure do so would no doubt taint their reputations and jeopardise business, as an increasing number of corporates and individuals may withdraw from these jurisdictions.
