Friday, 28 September 2012

A brief history of tax havens

 Seychelles, Bahama, The Cayman Islands - most readers have heard the name of at least one, and usually not due to their magnificent landscape. These territories are all tax havens, which have converted their entire legislation with the sole purpose of trying to attract investors wishing to evade - or as they call it, 'optimize' taxes of their home country. But what is their story? Why did tax havens form in the first place, how much money they house, and can they be stopped (or even should be stopped?) Read the article to discover the answers to all your evasion-related questions.

Click on the image to enlarge. Source: Visual.ly

Early history


Like many glorious and less glorious practices, tax evasion was started by the Ancient Greeks - certain Hellene sea traders starting from 600 BC used smaller islands of the Greek archipelago used the smaller islands to store their wares in transit. Their aim was to avoid the 2% import tax proposed on them by the Republic of Athens - and while the tax rate suggests that the merchant's move was more doctrinal than pragmatical, it nonetheless signalled the sign of something new in the world economy.
The other, more recent historic example of tax evasion comes from the 18th century - the self-registering American colonies used to trade through Latin American states in order to avoid taxes of the British Empire. A massive increase in the number of tax avoiders however only came after the end of the First World War.

20th century


When the World War ended in 1918, European countries all saw their economies devastated and in dire need of funds for reconstruction. Several of them choose the solution of excessive taxation - which the capitalist upper class, with financial mobility made easier earlier by the invention of the telephone, railways, etc. didn't like at all. Many of the bourgeoisie wished to take away their money to a country which the war has not devastated - and what could have been a better choice than neutral Switzerland?
The Swiss Confederacy has been a financial haven for investors before, but it only came after the World War that their authorities significantly lowered taxes. Several countries, like Lichtenstein, and gradually all around the world. Evaders tended to be individuals until the 1950's, when focus gradually shifted to companies.

Incentives for evaders


The reasons for tax haven users on their part is simple - they either wish to tax at a lower rate than in their country of origin, or hold their assets and capital in an environment which provides safer, and ironically, more transparent legislation than their home country. Money launderers - (While during tax evasion legally obtained money is taxed after semi-legally, in money laundering the money in case is illegal) - also favor to use such territories as bases of operation, due to these countries' general reluctance to share financial records with third-party, foreign tax agencies.

Incentives for tax havens


Several smaller countries choose to become offshore centres - the general principle in their argumentation is that less is more, meaning a large number of nominal taxes payed by foreign companies will add up to be a sizable income source. Regions of low competitiveness also use tax haven schemes to attract foreign investors besides bankers - for example, by making it obligatory for companies to have more than a nominal presence in the haven country, providing jobs for local residents.

Regulation


Countries suffering from evasion all around the world are constantly trying to create new legislative measures preventing their entrepreneurs and companies from taking their money off-shore. Examples include France, where securities regulation states that tax haven-registered companies may not buy French public bonds. International organisations, such as the OECD also aim to categorise and sanction countries acting as tax havens - but given that these efforts usually only treat the symptoms rather than the causes of general tax evasion, they often fall short of their proposed goals.

Check out the infographic above to gain useful information on contemporary tax evasion victims and tax havens - and feel free to ask any questions in comments.

2 comments:

  1. You ask "Why did tax havens form in the first place, how much money they house, and can they be stopped (or even should be stopped?)" but it would seem that there is hardly any social benefit to tax havens -- they are merely small countries siphoning of the production of large ones.

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    1. Hi Jason, thanks for the comment. I think there is a tax haven scenario where they ARE able to provide economic benefits - consider a country where financial authorities can't be trusted with or can't provide a satisfactory level of asset protection(Consider the Ivory Coast with it's recent civil war, Nigeria with the Boko Haram insurgency, or for a less radical example, Hungary's nationalization of private pension funds). I'd argue that in that case, a company which escapes local tax authorities and chooses a haven, where they ARE required to employ locals, can bring economic benefits which are not derived from 'siphoning', rather redirecting a production surplus capability which couldn't realise in the country of origin.

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