What are tax havens? The answer explains why the G-7 effort to end it is unlikely to succeed
Close your eyes and imagine a tax haven. Does an island in the Caribbean come to mind? Sand, surf and thousands of PO boxes housing front companies?
Some tax havens, such as the Cayman Islands or Bermuda, fit this description. Many others do not.
The key to a tax haven is taxes, not tanning. Any place that allows a taxpayer – whether an individual or a business – to get a lower tax bill abroad than at home is a tax haven. Thus, depending on the jurisdiction and activity of the taxpayer, many places turn out to be tax havens, even the United States.
A recent agreement by the Group of Seven Rich Nations aims to eliminate corporate tax havens by imposing a global minimum tax rate of 15%. However, as a tax expert, I find the effort difficult to take seriously.
3 things that make a tax haven a tax haven
Simply put, tax havens are jurisdictions that offer low or even no taxes in an attempt to attract foreign investment.
From a taxpayer’s perspective, the first sign of a good tax haven is that it is completely legal. While it may seem like people who use tax havens to reduce their taxes are breaking the law, this is rarely the case.
A taxpayer who is comfortable doing this does not need a tax haven. Instead, a dishonest accountant and a less honest banker are all that is required.
The second sign of a good tax haven is transparency, political stability and the rule of law. If it costs more in lawyers, accountants and bribes to avoid taxes abroad than to pay taxes at home, there is no point in creating a tax haven.
The third sign is privacy. For many years, Swiss banks have provided the gold standard in this regard by refusing to reveal anything about their depositors to anyone. That changed in 2008, when Swiss banks agreed to report on their depositors in 43 European countries.
The loss of absolute secrecy that Switzerland once offered has made front companies – and the countries that make them easy to set up – much more attractive. Shell companies are essentially companies with no active business activities or significant assets that are stacked on top of each other to make it more difficult to track ownership.
In the eyes of the beholder
Identifying a tax haven is not as easy for governments concerned with controlling them as it is for the taxpayers who seek them. This is mainly due to the fact that governments and international organizations tend to think of a tax haven as being somewhere other than where they live.
For example, the European Union produces an annual list of tax havens that does not contain any EU member countries, although many other lists identify Ireland, Luxembourg and a host of other European countries as tax havens. .
And while several groups have described the United States as a tax haven – Forbes even calls it the best in the world – the US government would never do it, even if it meets all the key criteria, such as providing legal means. to avoid virtually all taxation and high confidentiality of taxpayers.
The race to the bottom
This is why the overall G-7 corporate tax agreement on a minimum of 15% is unlikely to work.
Of course, I applaud the effort. Without a minimum tax, countries are caught in a never-ending race to the bottom, where every time one government cuts corporate tax rates another quickly follows with even lower rates.
The problem is, the G-7 must convince more than 130 other countries to adhere to its minimum tax rate. Many countries, including Ireland and China, seem unlikely to give up on something that has brought them so much economic benefit.
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