What is a tax haven?

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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.