Global Financial Integrity


Tax Havens

If you live in the United States, the phrase ‘tax haven’ likely brings to mind tropical palm varieties, sand lodged in toe crevices, and small countries brimming with peculiar corporate offices. If you live in Europe, you may think of Luxembourg’s wealth management industry, Switzerland’s infamous banking system, or Jersey’s castle-studded and not-so-sandy shores. If you live in sub-Saharan Africa, you might think of how over $1 trillion in illicit financial flows has been siphoned from the continent in recent decades in a process largely facilitated by tax havens.

Of the financial secrecy-related terms explored on this website, ‘tax haven’ is the most well known and widely-used. When punched into Google Scholar’s search function, the term yields 725,000 hits, while others, such as ‘secrecy jurisdiction,’ produce only 114,000 results. The well-traveled nature of the term is understandable: the concept is accessible and seemingly self-explanatory, used by economists and novelists alike.*

At its simplest, the term denotes a jurisdiction that has intentionally enacted policies which enable it to tax individuals’ or businesses’ income or wealth at lower rates than other jurisdictions. But because users of tax havens typically don’t want to physically move themselves (in the case of an individual) or their economic activity (in the case of a business) to low- (or zero-) tax jurisdictions, tax havens must also provide secrecy to hide non-residents’ incoming wealth from governments. In other words, not only do tax havens offer lower tax rates, they also offer regulatory environments that ensure secrecy for non-residents, allowing users to geographically relocate profits and income-generating assets without creating a publicly-accessible paper trail.

This secrecy, which is usually provided by legal and quasi-legal structures available in tax havens, like trusts, anonymous companies, or opaque banks, makes it impossible for tax officials at home to track untaxed wealth sitting in tax havens abroad (or, ‘offshore’). One of the problems with the term ‘tax haven,’ then, is that it underemphasizes the integral ‘secrecy’ component of tax havens, and overemphasizes the importance of low tax rates. Another problem with the term is that it advances the idea of a dichotomous world of tax havens and non-tax havens. As scholars have pointed out, this dichotomous portrait is not reflective of reality: most countries, including countries not conventionally considered to be tax havens, contain varying levels of financial secrecy. Jurisdictions, then, vary in their degree of tax haven-ness in quantifiable ways. The world is full of different kinds of tax havens that operate under different levels of financial secrecy, and because of its broadness, the term ‘tax haven’ fails to capture effective complexity.

The secrecy of tax havens facilitates both tax avoidance and tax evasion. These terms appear prima facie similar, but they have legally important, albeit occasionally hazy, differences. Tax avoidance is commonly described as a “legal reduction in taxes,” whereas tax evasion implies using illegal–and therefore adjudicable–means to reduce taxes. When individuals use tax haven secrecy to reduce taxes on assets and income, they are typically engaging in ‘tax evasion,’ since most countries require citizens to report any interest-generating assets held abroad. If individuals don’t report this form of income, they are illegally dodging taxation. When corporations use tax havens to reduce taxable income, however, the legal status of their actions are less clear. Some experts argue that profit shifting–a practice whereby corporations shift taxable profits from high-tax jurisdictions to low-tax jurisdictions and costs from low-tax jurisdictions to high-tax jurisdictions–is a form of tax evasion, while others argue that it is a form of legal avoidance.

*See Don DeLillo’s usage of tax havens in his uber-classic postmodern tract, White Noise.