Tax Havens: International Tax Avoidance and Evasion
Where Are the Tax Havens?
There is no precise definition of a tax haven. The OECD initially defined the following features of tax havens: no or low taxes, lack of effective exchange of information, lack of transparency, and no requirement of substantial activity.10 Other lists have been developed in legislative proposals and by researchers. Also, a number of other jurisdictions have been identified as having tax haven characteristics.
Formal Lists of Tax Havens
The OECD created an initial list of tax havens in 2000. A similar list was used in S. 396, introduced in the 110th Congress, which would have treated firms incorporated in certain tax havens as domestic companies; the only difference between this list and the OECD list was the exclusion of the U.S. Virgin Islands from the list in S. 396. Legislation introduced in the 111th Congress to address tax haven abuse (S. 506, H.R. 1265) used a different list taken from Internal Revenue Service (IRS) court filings but had many countries in common. The definition by the OECD excluded low-tax jurisdictions, some of which are OECD members that were thought by many to be tax havens, such as Ireland and Switzerland. These countries were included in an important study of tax havens by Hines and Rice.11 The Government Accountability Office (GAO) also provided a list.12
Developments in the OECD Tax Haven List
The OECD list, the most prominent list, has changed over time. Nine of the countries in Table 1 did not appear on the earliest OECD list. These countries not appearing on the original list tend to be more developed larger countries and include some that are members of the OECD (e.g., Switzerland and Luxembourg).
It is also important to distinguish between OECD’s original list and its blacklist. OECD subsequently focused on information exchange and removed countries from a blacklist if they agree to cooperate. OECD initially examined 47 jurisdictions and identified a number as not meeting the criteria for a tax haven; it also initially excluded six countries with advance agreements to share information (Bermuda, the Cayman Islands, Cyprus, Malta, Mauritius, and San Marino). The 2000 OECD blacklist included 35 countries; this list did not include the six countries eliminated due to advance agreement. The OECD had also subsequently determined that three countries should not be included in the list of tax havens (Barbados, the Maldives, and Tonga). Over time, as more tax havens made agreements to share information, the blacklist dwindled until it included only three countries: Andorra, Liechtenstein, and Monaco.
A study of the OECD initiative on global tax coordination by Sharman, also discussed in a book review by Sullivan, argues that the reduction in the OECD list was not because of actual progress towards cooperation so much as due to the withdrawal of U.S. support in 2001, which resulted in the OECD focusing on information on request and not requiring reforms until all parties had signed on.13 This analysis suggests that the large countries were not successful in this initiative to rein in on tax havens. A similar analysis by Spencer and Sharman suggests little real progress has been made in reducing tax haven practices.14
Interest in tax haven actions has increased recently. The scandals surrounding the Swiss bank UBS AG (UBS) and the Liechtenstein Global Trust Group (LGT), which led to legal actions by the United States and other countries, focused greater attention on international tax issues, primarily information reporting and individual evasion.15 The credit crunch and provision of public funds to banks has also heightened public interest. The tax haven issue was revived recently with a meeting of the G20 industrialized and developing countries that proposed sanctions, and a number of countries began to indicate commitments to information sharing agreements.16
The OECD currently has three lists: a white list of countries implementing an agreed-upon standard, a gray list of countries that have committed to such a standard, and a black list of countries that have not committed. On April 7, 2009, the last four countries on the black list, which were countries not included on the original OECD list—Costa Rica, Malaysia, the Philippines, and Uruguay—were moved to the gray list.17 The gray list includes countries not identified as tax havens but as “other financial centers.” According to news reports, Hong Kong and Macau were omitted from the OECD’s list because of objections from China, but are mentioned in a footnote as having committed to the standards; they also noted that a “recent flurry of commitments brought 11 jurisdictions, including Austria, Liechtenstein, Luxembourg, Singapore, and Switzerland into the committed category.” 18 As of May 18, 2012, only one country (Nauru) appeared on the gray list for tax havens and one (Guatemala) appeared on the gray list for financial centers.19
Many countries that were listed on the OECD’s original blacklist protested because of the negative publicity and many now point to having signed agreements to negotiate tax information exchange agreements (TIEA) and some have negotiated agreements. The identification of tax havens can have legal ramifications if laws and sanctions are contingent on that identification, as is the case of some current proposals in the United States and of potential sanctions by international bodies.
More recently, the OECD has focused attention on its Base Erosion and Profit Shifting (BEPS) initiative. Among the elements of this initiative is the Global Forum on Transparency and Exchange of Information for Tax Purposes, which has begun rating countries on various criteria. As of October 2014, it had under way 105 reviews of countries based on various standards.20 The countries are rated as compliant, largely compliant, partially compliant, or noncompliant. As of 2014, 71 jurisdictions had received a full review, with 42 of those rated as noncompliant. Of 34 countries that had undergone only a phase 1 review, which examines the legal and regulatory framework, 12 were not able to advance to the final (phase 2) review, which looks into the implementation of the regulatory framework in practice. As with the evolution of the OECD list, these evaluations focus on one aspect of the characteristics of tax havens.
The Global Forum on Transparency and Exchange of Information for Tax Purposes
Since 2000, the Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum) has been the multilateral framework within which work in the area of tax transparency has been carried out by both OECD and non-OECD economies. From 2006, the Global Forum has published annual assessments of the legal and administrative framework for transparency and exchange of information in over 80 countries.
The OECD’s Harmful Tax Practices Project
The Global Forum’s work is derived from the OECD’s harmful tax practices project, which was launched in 1996 at the direction of the G7.17 As part of this initiative, the OECD has attempted to curtail the use of what it termed “harmful tax competition,”18 which it defined as attempts by some countries to attract capital by offering tax-benefit inducements with the sole purpose of attracting foreign investment.
- Tax Havens: International Tax Avoidanceand Evasion
- The OECD Initiative on Tax Havens
- "HARMFUL TAX COMPETITION - An Emerging Global Issue" published by OECD
- Tackling Tax Heavens, Finance and Development, September 2019, IMF
- International Taxation by OECD
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