Characteristics of Tax Havens

Some of the features include:

Low or No Taxes:

Tax haven offers low or no taxes on the company income, capital gains, inheritance, and other financial transactions to attract MNEs and individuals seeking to reduce their tax burdens.

Secrecy and Confidentiality

Businesses done in tax haven countries are shrouded in secrecy to protect the privacy of the financial information. Usually, there are strict confidentiality laws in place to protect and ensure non-disclosure of the identities of the companies’ owners, and their bank accounts. Thereby making it difficult for foreign tax authorities to obtain relevant information.

Ease of Business Formation

Tax haven ensures that the formation and registration of businesses, associations, trusts, and other legal entities is seamless. This minimal statutory requirements and administrative costs, facilitate ease of business formation.

Political and Economic Stability

Tax haven jurisdictions often provide a politically and economically stable environment to foreign investors to ensure businesses and their assets are safe from political upheaval and confiscation. This usually serves as a side attraction to foreign investments.

Lack of Transparency

There is usually lack of financial transparency in tax havens since they do not participate in international information exchange agreements and no detailed financial reporting is required.

Advanced Financial Infrastructure

Tax haven countries have sophisticated financial system with a robust banking sector, legal frameworks, and sound professional services, including tax, accounting, and legal expertise tailored to assist foreign investors.

Common Tax Haven Countries

The list of countries involving in tax haven practices are numerous. Below are some of them:

Africa

• Mauritius
• Mozambique
• Seychelles

Asia Pacific

• Hong Kong
• Singapore
• United Arab Emirates

Caribbean and Central America

• Bahamas
• Bermuda
• British Virgin Islands
• Cayman Islands

Europe

• Cyprus
• Luxembourg
• Malta
• Switzerland

Uses of Tax Havens

Tax havens are use for several purposes by MNEs and wealthy individuals, including:

Tax Avoidance

Companies and individuals use tax havens to minimize their tax burden through base erosion and profit shifting.

Assets Protection

Tax havens are used by wealthy individuals and companies to protect their assets against economic upheaval, political instability, and expropriation from home country.

Confidentiality

Tax haven jurisdictions have strict confidentiality laws in place to protect and ensure non-disclosure of the identities of the investors, including their bank accounts details. This protects the investors from scrutiny by the home country.

Portfolio Diversification

MNEs and wealthy individuals use tax havens as special purpose vehicle to diversify their investments to take advantage of favourable regulatory environments.

Ethical and Economic Implications of Tax Havens

Some of the key ethical and economic consequences in tax havens include:

1. Revenue Loss
2. Economic Inequality
3. Fair Competition
4. Transparency and Accountability

Revenue Loss

The use of tax havens contribute significantly to revenue losses for high-tax countries through tax base erosion and profit shifting. This has impaired the ability of the home country to finance public infrastructure.

Economic Inequality

Shifting profits from countries with higher tax rates to tax havens can aggravate economic inequality of the home country. MNEs and high net worth individuals benefit disproportionately from tax avoidance strategies, while the ordinary taxpayers suffer the larger tax burden.

Fair Competition

The use of tax havens by MNEs provide undue advantage to them over the local businesses that cannot exploit the opportunities offer by tax havens. This potentially undermines fair competition and distort the markets.

Transparency and Accountability

The global financial integrity is at risk due to lack of transparency in tax havens. The tax haven practices is shrouded in secrecy and serve as a special purpose vehicle to facilitate illicit activities, including tax evasion, money laundering, etc., by the MNEs and wealthy individuals. The non-disclosure of financial information, generally incapacitate the tax authorities to hold MNEs accountable for their tax haven activities.

Global Efforts to Address Tax Havens

Organization for Economic Co-operation and Development (OECD) Initiatives

To improve transparency and combat tax avoidance, the OECD has launched several initiatives, including Base Erosion and Profit Shifting (BEPS) project and the Global Forum on Transparency and Exchange of Information for Tax Purposes.

Automatic Exchange of Information (AEOI)

As provided under the OECD’s common reporting standard (CRS), member countries agree to automatically exchange financial information to limit the ability of wealthy individuals and MNEs to hide assets in offshore accounts.

Country-by-Country Reporting (CbCR)

Under the OECD Initiatives, MNEs are required to present their financial reporting information on a country-by-country basis. This provides tax authorities with a better understanding of MNEs’ global operations and profit allocation.

Blacklisting and Sanctions

International organizations, including some other countries, compile the list of non-cooperative countries or jurisdictions with the aims of imposing sanctions and thoroughly scrutinize their financial transactions.

Some Nigerian Elites Previously Connected With Tax Havens

Recent investigations on offshore entities by Panama papers of 2016 revealed some notable Nigerians, including David Mark, Bukola Saraki, Wale Tinubu, Dangote, TY Danjuma, Hakeem Bello-Osagie, Mike Adenuga, James Ibori, Andy Uba, etc., in the Panama leak. In addition, in 2021, Peter Obi,  Stella Oduah, Mohammed Bello-Koko, and others, were fingered in the Pandora papers in relation to tax havens.