One of the major ways to evade taxes is through the use of tax havens. When most people think of a tax haven, a tropical island where corporations and the rich hide their money from the government is typically what comes to mind, but that isn’t always the case. There are many separate definitions and lists of what constitutes a tax haven, but perhaps the most widely accepted is the criteria put forth by the Organization for Economic Co-Operation and Development. The OECD focused on “factors that could cause harm by undermining the integrity and fairness of tax systems” (OECD, 2001), resulting in four criteria in particular: No or nominal taxes, lack of effective exchange of information, lack of transparency, and no substantial activities (OECD, 2001). The first factor of no or nominal taxes basically acts as a classification device determining which areas require an analysis of the other criteria (OECD. 2001). The second criterion, lack of effective exchange of information, is important because “Effective exchange of information enables governments to ensure that their own tax laws are being complied with, particularly where cross-border transactions are involved. Globalisation of the economy has had the side effect of opening up new ways in which companies and individuals can avoid taxes that are legally due. As the level of taxpayers’ activities outside national borders expands, governments cannot always rely on domestic sources of information to enforce their tax laws.” (OECD, 2001). So if a jurisdiction in question has the tendency to withhold their financial institutions’ information from other countries, investigation into exactly why would be recommended. The third criteria based on transparency is concerned with “ensuring that 1) laws are applied on an open and consistent basis among similarly situated taxpayers, and 2) information needed by tax authorities to determine a taxpayer's situation is in place. Lack of transparency can make it difficult, if not impossible, for tax authorities to apply their laws effectively and fairly... Lack of transparency is also present if there is inadequate regulatory supervision or if the government does not have legal access to financial records” (OECD, 2001). Lastly, the no substantial activities criterion is important in determining if somewhere is a tax haven because “the lack of such activities suggests that a jurisdiction may be attempting to attract investment and transactions that are purely tax driven. It may also indicate that a jurisdiction does not (or cannot) provide a legal or commercial environment that would attract substantive business activities in the absence of the tax minimising opportunities it provides” (OECD, 2001). Typically when these four criteria are occurring simultaneously in one area, it is safe to say the region is acting as a tax haven ion some shape or form. We’ll discuss a few examples of tax havens around the world and what in particular they do, starting with your stereotypical tropical banking paradise, the Caymand Islands, followed by the long time preferred banking spot of the wealthy since World War I, Switzerland, and finishing with an example that typically doesn’t make most lists of tax havens, perhaps more for political reasons rather than based on the criteria, the American State of Deleware. The Cayman Islands
One of the most well known and publicized tax havens is the Cayman Islands, home to hundereds of banks and financial service firms, famous for offshore banking and the incorporating of offshore companies, due to the fact there are no income, capital gains, or inheritance taxes (Roberts, 1995). For a long while the Cayman Islands have been the typical point of reference whenever tax havens come up, but recently it has been coming under international scrutiny because of its tax laws, or lack thereof. “In June 2000 the government made an advance commitment to the OECD just before the Caymans would have been included...
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