Defining a tax haven is hard. The Chancellor of the Exchequer has sought to deny the UK is a haven, but offered no justification for his argument. The Tax Justice Network has issued a paper summarising attempts to date to define what a haven might be, which succeeds in showing how confusing this issue is. I'm working on a book (with others) on the subject right now. Addressing this one issue is taking up considerable space, and effort.
I think the problem is in seeking to nail this thing down. That's what the OECD tried to do in 1998, and what others have also sought to achieve. But what people did not realise when they began to do so was that as soon as a definition of a haven was published people would change their behaviour to try to avoid the label. So, and for example, if light regulation was an identifying feature they would introduce impressive (if largely unused) rule books to make it look like they are heavily regulated. And if information exchange was a definition then they'd offer some. And so on. People don't want the label and seek to avoid it.
But that hasn't meant tax havens have gone away. Far from it. The amount of money offshore is rising. The reason is simple. the havens are innovating faster at this moment than those who are trying to nail them down, as my recent paper on Jersey submitted to the US Senate showed. So we have to come up with a definition of a tax haven that does not just reflect current fact, but the fact that the behaviour of the haven will change. This means, inevitably, that some degree of subjectivity enters int the test. So be it. If objectivity is not possible, either due to lack of data (as the IMF has found) or because taking a measure changes the behaviour measured then subjective judgement is valid.
My suggestion for what a haven is right now is as follows:
1. The location says it is a tax haven;
2. The location promotes the facilities that it provides that have tax haven characteristics e.g.:a. Secrecy whether it be with regard to banking information, tax data, financial information or ownership and management information and whether it be from public or official enquiry;
b. Low taxes, often ring fenced (even if by subterfuge) from those charged to those resident in the jurisdiction;
c. Ease of initial regulatory compliance (there being no location which does not have such regulation now);
d. Limited or no regulatory filing required e.g. the absence of tax returns and other forms of data supply to any official body;
e. The failure to enquire as to where an entity registered in the jurisdiction might be located if not considered resident within it;
f. Rapid relocation of activities is allowed at the whim of the owner of the offshore structure e.g. by trust relocation or company redomiciliation;
g. Flexible trust arrangements that do not meet the standards required by onshore jurisdictions and the Hague convention on trusts;
h. Limited information exchange;
i. The presence of major banking, accounting and legal entities disproportionate to any identifiable local need;3. A commitment to innovate to ensure that these advantages are retained despite change in international regulation and attitudes;
4. Significant notional flows of funds through the location unjustified by any apparent economic activity undertaken there or the registered ownership of assets in the location in excess of any obvious need inherent in the local economy.
These definitions are fundamentally behavioural. The intent is to provide a pathway for developing new tests of tax haven activity in the future which will allow for better recognition of have activity and better targeting of measures designed to counter the harm they cause.
I'm not saying they're right. What I am suggesting is that this approach is more likely to be useful in the long term than any current definition can be. And I reserve the right to come back to this and have another go. In the meantime, comments are welcome.
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[…] Richard Murphy has a good definition of a tax haven, but I disagree with his idea that having a large financial services sector is an important characteristic, although I do agree with his view that the UK and Ireland are both tax havens. […]
This seems very reasonable Richard. I suppose the issue for me – as an economist – is that a subjective definition is ultimately rather unsatisfying.
There is growing support for the view that the ‘typical’ havens (generally small islands in the sun with little political power) have been harshly treated compared to the richer ones like Switzerland and new centres like Ireland and the Netherlands. (Note that deployment of this argument also allows those in between, like the Channel Islands more wriggle room – rightly or wrongly, so dealing with it is important for this reason also.)
To ensure fair treatment by international financial regulation would require, it seems to me, an objective definition that could be applied without bias to all jurisdictions. The IMF attempt is far from perfect – but it is an interesting attempt nevertheless. I think that what’s needed is a definition that allows an objective measurement of observable characteristics (including legislation, regulation and financial flow data).
I agree with your initial approach, insofar as I would be inclined to start not with a definition of a haven, but the behaviour that characterises one. A haven is after all not a place, but a pattern of behaviour – Jersey could choose not to be a haven, it’s not a historical inevitability like being an island. That behaviour could be defined as
‘behaviour that deliberately reduces the transparency of international financial flows to the detriment of other jurisdictions’
where such detriment would include the harm done by tax evasion, money laundering and terrorist financing, and the impact on international financial stability. This seems to me fairly pithy and clear, and encapsulates the damage that havens do.
The definition of abusive behaviour implied by this would currently, I agree, look more or less identical to your definition. It would have to be updated periodically as different patterns of abuse emerged – in response both to the desire of havens to escape naming, as you say, and also to financial innovation. In the same way that short-term capital controls have to be updated something like every 18 months (according to a Chilean regulator) to remain effective, it wouldn’t be out of the question to update the scope of abusive behaviour.
What would remain constant at the core would be the definition of abuse that defines a haven. A researcher could then at a given point apply a transparent methodology to create a measurement (and then a ranking) of how far each jurisdiction is from being ‘perfectly’ non-abusive. With the evolution of new abuses the behaviour in question would change to some extent, but that core, capturing the damage havens do, would remain the defining factor. Some subjectivity would enter the step of moving from this core to defining abusive behaviour at any given moment, but this does at least offer a transparent basis for this.
Alex
As a normative economist I don’t believe objectiv tests exist. Thereafter I’m 100% in agreement with you -and think that the test you suggest is possible.
Richard
Is it possible to turn the whole thing on its head and define a tax haven by reference to the customers’ behaviour, and not the haven’s?
A tax haven is a location which is used as a haven for avoiding tax, which has nothing to do with genuine economic activity.
Interesting; but I wonder if that would really rule anywhere out, Trevor?
My father had his own definition of a tax haven, best illustrated with a (true) story. In the 1920’s, when Guernsey and Jersey income tax was 6p in the pound, Guernsey sought to increase revenue by increasing their rate to 9p. Overnight, huge amounts of capital on deposit from outside the island moved across the water to Jersey. And of course Guernsey reversed the tax increase.
At that moment, my father said, Guernsey became a tax haven, having set a tax rate on criteria other than the amount of money it needed to raise from its citizens.
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[…] What is a tax haven? […]