A tax haven is a country or territory offering foreign businesses and individuals minimal or no tax liability for their bank deposits in a relatively politically and economically stable environment. Often, these countries or places have low or no corporate taxes and no residency requirements for foreign entities and individuals, which allows outsiders to easily set up their businesses or accounts in the place. Tax havens collectively cost governments around $500 to $600 billion a year in lost corporate tax revenue, through both legal and illegal means.
Corporations are not the only beneficiaries of tax havens around the globe. An economist at the University of California at Berkeley estimates that individuals have stashed at least $8.7 trillion in tax havens. The Tax Justice Network, a U.K. based independent international network, has created a Corporate Tax Haven Index (CTHI). It ranked the top 5 tax haven countries around the world, with the index rankings starting with the British Virgin Islands, Bermuda, the Cayman Islands, Netherlands, and Switzerland. The CTHI ranks jurisdictions that are most complicit in helping multinational corporations underpay corporate income taxes. The same organization’s Financial Secrecy Index ranks Switzerland, the United States, and the Cayman Island as the top three jurisdictions for storing private wealth.
Companies that transact business across borders are the ones that benefit the most from the massive tax savings tax havens offer by routing payments, profits, or investments through shell companies in offshore financial institutions. Even in the US, a country that is considered by most as the greatest economic force in the world, thousands of American companies exploit the existence of tax havens in order to remain viable against competitors. By transforming into offshore companies and relocating to these tax haven countries or territories, these companies gain advantage compared to companies that choose to fairly stay in the US. For instance, according to the Institute on Taxation and Economic Policy, in 2020, FedEx zeroed out its federal income tax on $1.2 billion of US pretax income and received a rebate of $230 million. Nike also paid zero tax on almost $2.9 billion of pre-tax income. These benefits are not only available to multinational companies. Smaller American businesses without international reach can also conveniently reduce their tax burdens using tax havens. Should they not want to take the risk of offshoring, they can establish their headquarters in a fiscally friendly state like Nevada or Delaware.
One of the biggest problems with tax havens is that much of what is done through them can be argued as legal, even though the practical effect is, really, tax evasion (though, critics call this tax avoidance, which is legal). The secrecy of tax havens creates opportunities for multiple crimes, such as fraud, political corruption, illicit arms dealing, tax cheating, insider dealing, bribery, and money laundering. Even when tax haven countries, such as Panama or the Cayman Islands, introduce anti-money laundering legislation, tax haven-created problems remain widespread. As the world has learned from the Panama Papers' revelations in 2016 or from the more recent FinCEN files, discovery of wealthy individuals and corporations using tax havens in abusive ways was only made possible because whistleblowers blew the whistle on these operations. Fighting against money laundering and dirty money is going to require much more effort by regulators, law enforcement, researchers, and whistleblowers.
Transparency regarding beneficial ownership of assets has become one of the leading tools to attack illicit financial flows linked to tax evasion, money laundering, corruption, and financing terrorism. Beneficial owners are the individuals or entities that ultimately own or control legal vehicles such as partnerships, companies, and trusts organized in off-shore tax havens. To increase transparency to these business transactions, governments around the world have begun to require corporations to disclose beneficial ownership information and in this way, prevent companies from operating in secrecy.
Around the world, increasing financial transparency has become increasingly important. For example, in April 2020, the United States' Financial Crimes Enforcement Network (FinCEN) solicited public comments on the inclusion of the beneficial ownership information reporting provisions to the US Corporate Transparency Act (CTA). This would require certain newly formed and existing corporations to disclose information about their beneficial owners to FinCEN. The European Commission also initiated requirements related to beneficial ownership transparency after the Panama Papers scandal hit the public eye. As of 2020, registering beneficial ownership was mandatory in at least 64 countries.
Countries have a powerful and relatively inexpensive instrument to prevent tax evasion, fraud, and other problems created by tax havens. Whistleblowing has proven to be one of the most effective ways to expose corruption. Thanks to whistleblowers' revelations in the Panama Papers, Luxleaks, and Bahama Papers, many public debates, regulations, and laws have been implemented or improved to fight against corruption, bribery, and money laundering.
If you have information regarding a tax haven or related tax scheme involving off-shore vehicles that you believe is illegal, Whistleblowers International can help you come forward. You might even be eligible for a reward if the information provided successfully contributes to the government's recovery of at least $2 million under the AML Whistleblower Program. The IRS Whistleblower Program also guarantees to the whistleblower at least 15% and up to 30% of government tax collections resulting from your information. If you would like to receive more information or confidentially speak with someone, please contact us at Whistleblowers International for a free consultation.