Memoire Final

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The Future of Tax Havens As financial regulations tend to be more and more restricted,

What is the future of tax havens?

Mémoire de fin d’études

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Table of Contents

Introduction........................................................................................................................5

I. What is a tax haven?.....................................................................................................7 A. Some history.....................................................................................................7 B. Definition..........................................................................................................9 C. Criteria to recognize a tax haven......................................................................9

1. Ten general criteria...............................................................................9 2. The OECD criteria................................................................................11

D. Where are the tax havens...............................................................................12 1. Tax havens seeking niche strategies...................................................12 2. Different offshore entities that can be found in tax havens…………….14

II. How do tax havens impact finance globally?..............................................................15 A. Difference between tax compliance, tax evasion and tax avoidance…………..15

1. Tax compliance...................................................................................15 2. Tax avoidance......................................................................................15 3. Tax evasion..........................................................................................15

B. Users of tax havens.........................................................................................16 1. Wealthy people...................................................................................16 2. Corporations.......................................................................................17

a. Why multinational corporations use tax havens?.............17 b. Tax avoidance methods.....................................................18 c. Transfer pricing more in depth..........................................19

3. Banks and consulting firms.................................................................20 4. Governments......................................................................................21 5. Criminals.............................................................................................21

III. Tax havens: good or bad?...........................................................................................22 A. Tax havens and the developed world.............................................................22

1. Global tax competition........................................................................22 a. Tax havens are symbiotic..................................................23 b. Tax havens are parasitic....................................................23

2. Tax havens and financial stability........................................................24 B. Tax havens and the developing world............................................................25

a. Capital flight........................................................................................25 b. Illicit capital flows................................................................................26

C. The world’s money in tax havens....................................................................27 a. Money sheltered in tax havens...........................................................27 b. Money lost because of tax havens......................................................28

IV. How are tax havens regulated?..................................................................................29 A. The OECD……………………..................................................................................29

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1. The lists published right after the G-‐20 summit in London in April 2009....................................................................................................29

a. The white list........................................................................29 b. The grey list….......................................................................30 c. The black list.........................................................................31

2. The current lists..................................................................................31 a. The white list........................................................................31 b. The grey list..........................................................................32 c. The black list no longer exists...............................................33

3. The tax treaties...................................................................................33 B. The Financial Stability Forum (FSF).................................................................34 C. The Financial Action Task Force on Money Laundering (FATF)……….……………35

1. The forty recommendations on money laundering………………………….35 2. The nine special recommendations on terrorist financing……………….36

D. The governments............................................................................................37 1. France..................................................................................................37

a. Tracfin……………………………………………………………………………37 b. The regularization unit at the Ministry of Budget……..……37 c. France’s blacklist of tax havens………………………………………38

2. Italy.....................................................................................................39 3. The United States................................................................................40

a. The IRS voluntary disclosure…………………………………………..40 b. Bills from the US Senate………………………………….……………..40

V. What will be the future of tax havens?.......................................................................43 A. Current context...............................................................................................43 B. Could the world live without tax havens?.......................................................43 C. Taking down offshore finance……………………………………………………………………..44 D. What is left for tax havens after they collapse?..............................................45 E. Conclusion on the future of tax havens……………………………………………………….45

Conclusion…………………………………………..…………………………………………..………………..…………46

Exhibits • Number of offshore entities in tax havens………………………………………………………..48 • Tax Information Exchange Agreements: list of bilateral agreements signed by

individual jurisdiction (February 2nd 2010)………………………………………………………..50

Glossary…………………………………………..…………………………………………………………………………..53

Bibliography…………………………………………..…………………………………………………………………….54

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Introduction

The rapid rise of offshore-‐related issues such as global tax competition, corporate

scandals, money laundering and terrorist financing has increased the demand for a close

study of the offshore world, and never the international community had been so

determined on the tax havens issue. The recent interest about the subject was born

from two tax evasion scandals and an unprecedented financial crisis since WWII. Mid-‐

February 2008 was revealed that a computer scientist who was working at the

Liechtenstein Global Trust (LCT) – the major bank in Vaduz, Liechtenstein – had sold

confidential information to the German secret services about 1,400 foundations opened

by the bank for the count of hundreds of foreign individuals whose money was

sheltered in the trust. At the very same moment, Switzerland was being trapped

because the revelations of a former UBS wealth manager; Bradley Birkenfield, who

declared that UBS deliberately kept the existence of thousands of offshore accounts

held by American residents from the US Internal Revenue Service (IRS). Maybe both

cases could have been covered up if the timing had not been so bad; if they had not

coincided with the beginning of the 2007-‐10 financial downturn. Following those events,

debates on tax havens’ responsibility in terms of financial stability were revived, and

since then countries have been trying to recover the income tax losses due to tax

evasion.

The recent financial crisis emphasized the noxiousness of too opaque financial markets,

and increased concerns about tax evasion, money laundering, and – even more after

September 2001 – the financing of terrorism have created an unprecedented pressure

on tax havens to give up their traditional selling points such as bank secrecy.

As governments loose both individual and corporate income tax revenue from the

shifting of profits and income into low-‐tax or no-‐tax jurisdictions – more commonly

known as tax havens – during the G-‐20 summit in London in April 2009, developed

countries, in cooperation with international institutions such as the Organization for

Economic Cooperation and Development (OECD) decided to launch a crackdown on tax

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havens, and since then, they have been multiplying the issuance of new regulations

regarding global offshore finance.

Tax havens are not only conduits for tax avoidance and tax evasion anymore, but are

today completely integrated in the international financial system. They have become a

very powerful instrument of today’s globalized financial system, and also one of the

prime causes of financial instability. Tax havens are places where taxes can be avoided

or evaded; therefore, they leave a gaping hole in most state finances and they are in the

center of a globalization that tends to widen the gap between the extremely rich and

everyone else.1 That is why, undoubtedly, the regulation of tax havens is the key to any

future plan to stabilize financial markets.

After all those regulations are finally implemented, we can ask ourselves what will be

the future of tax havens? To address this question, we will first try to define what a tax

haven is and where they can be found. Second, we will assess how offshore finance

impacts global finance and whether tax havens are good or bad. Then we will review the

regulatory institutions and the means implemented to control tax havens. Finally, I will

give my personal assessment about the future of tax havens.

1 Chavagneux, Christian, Richard Murphy, and Ronen Palan. 2010. Tax Havens: How Globalization Really Works. Cornell University Press.

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I. What is a tax haven?

A. Some history2

The concept of tax haven emerged as an economic response to the principle of taxation

as developed in the book entitled Tax Havens: How Globalization Really Works. Indeed,

ever since the existed, men have been looking for means, legal or illegal, to evade taxes.

The origin and the development of modern tax havens took place during two main

periods of the development of economic globalization; in the end of the nineteenth

century, and in the end of the twentieth century.

The rise of tax havens in the US and in Europe

The earliest examples of modern tax havens emerged in the United States in the 1880s,

in the states of New Jersey and Delaware, and then Vermont, Rhode Island and Nevada.

The reason why tax havens came out there is the more permissive tax environment for

corporations. As capitalism was reaching out to Europe, so was the concept of tax

havens. In the aftermath of World War I, when many European governments sharply

raised their taxes to help pay for reconstruction efforts, when Switzerland – which was

neutral during WWI – could avoid reconstruction costs and therefore, keep its taxes low.

Moreover, as Switzerland was the European country that had the closest model of

governance to the US – federal – it arose as the first offshore center in Europe, closely

followed by Liechtenstein and Luxembourg.

The British Empire

Starting in the early 1930s, the British Empire was starting to emerge, which played an

extremely important role in the development of tax havens. Indeed, until World War II,

a significant part of the world’s economy was handled by the British Empire. First,

Bermuda arose as a tax haven, then The Bahamas, The Channel Islands (Jersey,

Guernsey), and Gibraltar.

2 Ibid. Chavagneux, Christian, and Ronen Palan. 2006. Les Paradis Fiscaux. La Découverte.

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The appearance of the Euromarket (aka the “offshore financial market”) and the

Eurodollars3 highly contributed to the City of London becoming the world’s premier

financial center and to the discovery of other offshore financial centers (OFCs) such as

the Isle of Man, the Cayman Islands, Panama etc.

“The Golden Years”, 1960s-‐1990s

This period sets the appearance of new tax havens thanks to the tremendous advances

made in terms of communication and transportation, and to the decolonization. Indeed,

the breakdowns of the British, Dutch, and French empires had a huge impact on the

economic world map and the freshly sovereign states were ready to do whatever it took

to survive on their own.

At that time, the Caribbean, the Pacific atolls, Singapore, Hong Kong, Brunei, Bahrain,

Dubai, the Netherland Antilles, Ireland etc. developed as tax havens.

Tax havens today

Nowadays, tax havens serve all the major financial and commercial centers around the

world and are divided into three groups:

Group UK-‐based tax havens European tax havens Disparate groups

Characteristics

Centered on the City of London and fed by the Euromarket

Specializing in headquarter centers, financial affiliates, and private banking.

Emulators New havens from transition economies and Africa

Locations

Crown Dependencies Overseas Territories Pacific atolls Singapore Hong Kong…

Switzerland Luxembourg Ireland The Netherlands…

Panama Uruguay Dubai…

Source: Chavagneux, Christian, and Ronen Palan. 2006. Les Paradis Fiscaux. La Découverte.

3 Deposits denominated in US Dollars at banks outside of the US, and thus, not under the jurisdiction of the Federal Reserve. Therefore, such deposits are subject to much less regulations than similar deposits within the US, allowing for higher margins.

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B. Definition

There is no definitive or unquestionable definition of the notion of a tax haven.

A broad definition of tax haven would be: any country that has low or non-‐existent taxes

on capital income.

To be more specific, we can say that tax havens are countries or entities that, in addition

to having low or non-‐existent tax rates on some types of income are also characterized

by a lack of transparency and information sharing, allow for bank secrecy, and require

little or no economic activity for an entity to obtain legal status.4 That is why individuals

and corporations find it attractive to move to areas with reduced or nil taxation levels,

which can create a situation of tax competition among governments.

The IRS definition of a tax haven:

“A tax haven is a country which provides a no-‐tax or a low-‐tax environment. In some

offshore jurisdictions the reduced tax regime is aimed towards entities organized in the

country with all operations occurring outside the country. These countries seek to

encourage investment and make up revenue losses by charging a variety of fees for the

start up of the entity and on an annual basis.”5

C. How to recognize a tax haven

1. Ten general criteria

Generally, tax havens can be identified according to the ten following criteria6:

No-‐tax or low-‐tax for the non-‐residents

Only very few tax havens have no income tax or corporate tax; they essentially get

revenues from commissions. Most of them have a very complex fiscal system that

principally aims to minimize taxation on the non-‐residents’ international fiscal activities. 4 The Organization for Economic Cooperation and Development (OECD) definition of a tax haven 5 Abusive Offshore Tax Avoidance Schemes -‐ Glossary of Offshore Terms. www.irs.gov 6Chavagneux, Christian, and Ronen Palan. 2006. Les Paradis Fiscaux. La Découverte.

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A very strong bank secrecy

Confidentiality about financial operations is common implied everywhere, but in tax

havens it is a very special matter specified by the laws. Indeed, their financial

institutions cannot reveal their clients’ origin, nature or name to their own

governments. This characteristic obviously attracts tax evaders and criminal money

laundering.

Professional secrecy

Lawyers, accountants etc… must respect the confidentiality agreements concerning

their clients and their operations, even if they are illegal regarding foreign laws.

A loose registration procedure

To register a company on those territories you do not need very much information.

Open market

Offers a total liberty towards the flows of international funds.

A quick settlement procedure

A company can be implanted in a tax haven promptly. In some territories, companies

can be bought and become active in less than twenty-‐four hours.

The support of a big financial center

Money generally does not stay in tax havens; it is in transit. That is why tax havens need

to be constantly related to the main financial centers.

Economic and political stability are essential for the kind of activities tax havens do

The name of the tax haven should not be (too) associated with corruption or money

laundering operations.

A strong network of bilateral exchange arrangements

Tax havens have generally signed agreements with bigger countries in order to avoid a

double taxation for the companies’ subsidiaries.

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2. The OECD criteria

More specifically, the OECD focuses on four criteria to determine whether a jurisdiction

is a tax haven7:

Whether a jurisdiction imposes no or only nominal taxes

The no or nominal tax criterion is not sufficient by itself to result in characterization as a

tax haven. Indeed, the OECD recognizes that every jurisdiction has a right to determine

if they want to impose direct taxes, and if so, they are free to determine the appropriate

tax rate.

Whether there is a lack of transparency

Transparency ensures that there is an open and consistent application of tax laws

among similarly situated taxpayers and that information needed by tax authorities to

determine a taxpayer’s correct tax liability is available.

Whether there are laws or administrative practice that prevent the effective exchange

of information for tax purposes with other governments on taxpayers benefiting from

the no or nominal taxation

The OECD encourages countries to adopt information exchange on an “upon request”

basis, which describes a situation where a competent authority of one country asks the

competent authority of another country for specific information in connection with a

specific tax inquiry, generally under the authority of a bilateral information exchange

agreement between the two countries. One essential element of exchange of

information is the implementation of appropriate safeguards to ensure adequate

protection of taxpayers’ rights and the confidentiality of their tax affairs.

Whether there is an absence of a requirement that the activity be substantial

This criterion was included because the lack of substantial activities would suggest that

a jurisdiction might be attempting to attract investment and transactions that are purely

7 The Organization for Economic Cooperation and Development website http://www.oecd.org/document/23/0,3343,en_2649_33745_30575447_1_1_1_1,00.html

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tax driven. Although, this criterion is not relevant determining whether a tax haven is

co-‐operative or not.

We can also talk about offshore territories to mention tax havens. This generally refers

to a territory whose financial center is used by the non-‐residents as a investment or

savings platform. From this side, a tax haven can be considered an offshore place,

whereas an offshore territory is not necessarily defined as a tax haven.

D. Where are the tax havens

According to estimations, there are currently between forty-‐six and sixty active tax

havens in the world, which is a lot compared to the one hundred and ninety-‐two nations

registered at the United Nations. Those tax havens shelter an estimated two million

international business companies (IBCs). About 50% of all international banking lending

and 30% of the world’s stock of foreign direct investment are registered in these

jurisdictions.8

1. Tax havens are seeking niche strategies

All the territories do not offer the same services. Along the way, they specialized

themselves, looking to develop niches offering specific privileges to their clients

(individuals as well as corporations). These offshore financial centers can be classified

into seven categories9:

Territories specialized in shell corporations

Montserrat and Anguilla are good examples of this kind of jurisdictions. These financial

centers are used to register offshore companies or carry out transactions registered in

other tax havens. We can recognize them thanks to their weak regulation and

transparency.

8 Chavagneux, Christian, Richard Murphy, and Ronen Palan. 2010. Tax Havens: How Globalization Really Works. Cornell University Press. 9 Ibid. Harel, Xavier. 2010. La Grande Evasion – Le Vrai Scandale des Paradis Fiscaux. LLL.

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The “secret” territories

Such as Liechtenstein, Turks and Caicos, Singapore or Dubai. Secrecy is their main asset

and is considered absolutely paramount and is heavily protected.

Territories offering services related to their geographic location

The British Virgin Islands (BVI) for example, are very appreciated by China, whose many

offshore companies are associated to round-‐tripping10. Americans uses Panama, the

British use Jersey, Australians use Vanuatu…

Territories specialized in any specific financial service

Bermuda or Guernsey are specialized in reassurance, whereas the Cayman Islands are

the most famous destination for hedge funds, and the Isle of Man has set out to secure

a market in companies floating on the United Kingdom’s Alternative Investment Market

(AIM).

Territories used as market entry conduits

Those tax havens seek to earn a margin by attracting transactions thanks to their low

taxes and from the routing of transactions through their domain. Most of those

jurisdictions are not considered as full-‐fledged tax havens. For example, developing

countries use Malta and Cyprus to make their assets enter the European Union.

Mauritius works with India. The Netherlands, Belgium, and Luxembourg act as a location

for holding companies for investment throughout Europe.

Territories specialized in wealth management

Switzerland, London, or New York possess the necessary financial stability and

infrastructures (banks) to attract the wealthiest people, to manage their funds, and to

ensure that those people can interact with their fund manager relatively easily.

10 When an investor will use an offshore company to invest in his country instead of directly investing himself from his own country.

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Territories specialized in relocation for tax purposes

Ireland and Delaware are the best examples. Theses countries seek the relocation of

profits to their domains. Indeed, there, profits would be taxes at a lower rate than

elsewhere, but where a high level of financial security and limited risk are offered.

2. Different offshore entities that can be found in tax havens

See Exhibit #1

• International Business Corporations (IBCs): most of these entities are found in the

British Virgin Islands which are the largest supplier of IBCs, reaching 800,000 in 2007.

• Banks

• Trusts

• Insurance Companies

• Mutual Funds

• Hedge Funds: the size of this industry was believed to be approximately %1.5 trillion

in 200611.

• Internet gaming companies

11 Chavagneux, Christian, Richard Murphy, and Ronen Palan. 2010. Tax Havens: How Globalization Really Works. Cornell University Press.

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II. How do tax havens impact finance globally

A. Difference between tax compliance, tax avoidance and tax evasion

Dennis Healey, former UK chancellor of the exchequer, once described the difference

between tax avoidance and tax evasion as being «the thickness of a prison wall».

The main purpose of using tax havens is to avoid and evade taxes. It is important to note

the difference between tax optimization and tax evasion.

1. Tax compliance

Tax compliance occurs when an individual or a company seeks to comply with tax laws

in the countries in which they operate, and thus, pay the right amount of tax required

by the law, when and where it is due.

2. Tax avoidance

Tax avoidance or tax optimization is between tax compliance and tax evasion. Tax

optimization results from the taxpayer’s ability to manage its fiscal affairs in his best

interest but in a legal way. That is to say that individuals or companies will pay taxes, but

less than they should, they will seek to pay taxes on profits declared in a country other

than the one they were really earned in, and finally, they will manage to pay those taxes

later than when the profits were earned.

3. Tax evasion

Tax evasion, on the other hand, goes beyond simple optimization, covers real

dishonesty, and is generally a problem of lack of information. Tax evasion occurs when

an individual or a company seek to consequently reduce its tax bill and thus, fail to

declare all or part of their income. Tax evasion is considered a crime in most countries

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but in countries such as Liechtenstein or Switzerland it is only considered a civil

offence12.

To combat it, several measures such as resources for enforcement, increased

information sharing, and withholding can be put in place. Whereas avoidance is more

likely to be taken care of by changes in tax codes13. Unfortunately, tax fraud and even

more tax evasion are very difficult to estimate. Indeed, it is complicated to determine

the share of money passing through tax havens in a world that has no international tax

regulations.

B. Users of tax havens

1. Wealthy people

In 2007, the “global rich” held around $12 trillion of their wealth in tax haven

jurisdictions14. In the first place these people seek to avoid taxation, but they also seek

to avoid regulations such as the financial and business rules and norms that states

introduced to maintain order and stability. The global tax competition led to a

significant decrease on the income tax rate over the past 25 years, in order for countries

to be able to compete with tax havens in terms of attracting or keeping their residents’

assets onshore.

Evolution of the income tax rate (percentages)

1986 2008 United States 50 35 United Kingdom 60 40 Germany 56 42 Italy 50 43 France 57 40 Netherlands 72 52

Source: French Ministry of Economic Affaires, 2008.

12 Chavagneux, Christian, Richard Murphy, and Ronen Palan. 2010. Tax Havens: How Globalization Really Works. Cornell University Press. 13 Gravelle, Jane G. 2009. Tax Havens: International Tax Avoidance and Evasion. National Tax Journal Vol. 62 Issue 4. 14 Chavagneux, Christian, Richard Murphy, and Ronen Palan. Op. cit.

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2. Corporations

If a firm is able to shift its profits to a low-‐tax jurisdiction from a high-‐tax one, its taxes

will be reduced without affecting the company’s economic activity.

In 2007, the head of the OECD offshore unit, Jeffrey Owens, declared, “between five and

seven trillion US dollars are located in tax havens”.

a. Why multinational corporations (MNCs) use tax havens

It is obvious that MNCs use tax havens because they offer lower nominal corporate tax

rates. As for tax on income for individuals, we can see in the following table that

wherever it is in the world, the global tax competition led to a significant cut in nominal

tax corporate tax rates over the past 25 years, in order for onshore territories to be able

to compete with tax havens in terms of attracting or keeping MNCs implanted in their

jurisdictions.

Evolution of the nominal tax rates of corporate tax (percentages)

* The tax rate depends on the profits being reinvested or not ** The rate is of 15% for the small and medium-‐sized enterprises (SMEs) *** Progressive scale

Source: ATTAC Report. September 2009.

1986 2006 Gap Germany 56 26,37 -‐29.63 Austria 50 25 -‐25 Belgium 45 33,99 -‐11.01 Denmark 50 28 -‐22 Spain 35 35 0 Finland 33 26 -‐7 France 45 33,3** -‐9.6 Greece 49 29 -‐20 Ireland 50 12.5 -‐37.5 Italy 36 33 -‐3 Luxembourg 40 22 -‐28 Netherlands 42 25.5/29.6*** -‐7.5 Portugal 42/47* 27.5 -‐14.5/-‐19.5 UK 35 0/30*** -‐5 Sweden 52 28 -‐24 European Union 44.3 29.8 -‐14.5 USA 46 15/38*** -‐31/-‐8 Japan 50 30 -‐20

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b. Tax Avoidance Methods

The multinational corporations can lower their taxes completely legally by15:

Deferring the payment of its taxes

For example, in the US, as long as the profits generated abroad are not repatriated on

the US territory, they are not subject to taxation.

Allocating debt

One of the commons profit-‐shifting practices is to borrow more in high-‐tax jurisdictions

and less in low-‐tax ones. For example, a subsidiary located in a tax haven, lends money

to the parent company that will deduct the interests from borrowing off its taxes.

Locating the intellectual property (patents, brands, licenses…) in an offshore

jurisdiction

A subsidiary located in an offshore jurisdiction will earn the royalties generated by the

use of the patents, brands or licenses by the parent company or by the other

subsidiaries of the group.

Manipulating transfer pricing between multinational corporations’ related affiliates

Around 60% of the world trade consists of transfers internal to multinational

corporations16 who determine transfer prices to their goods and services, theoretically

according to the market price. Indeed, prices of goods and services sold by related

companies should normally be the same as prices that unrelated parties would pay, in

order to reflect income properly. Though, as the choice of the transfer price will affect

the allocation of the total profit among the parts of the company, those prices can

obviously be manipulated in order to locate the profits in low-‐tax environment countries

and the costs in countries where taxes are high.

Relocating the headquarters in tax haven territories

15 Harel, Xavier. 2010. La Grande Evasion – Le Vrai Scandale des Paradis Fiscaux. LLL. 16 Chavagneux, Christian, Richard Murphy, and Ronen Palan. 2010. Tax Havens: How Globalization Really Works. Cornell University Press.

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c. Transfer pricing more in depth

Transfer pricing is the price charged by corporations for intra-‐group cross-‐border sales

of goods and services. Transfer pricing is not just used to shift profitable business to

low-‐tax jurisdictions, but also to generate costs in countries that offer financial support.

As mentioned above, more than 60% of all international trade is made intra-‐company,

which makes abusive transfer pricing very popular. Those 60-‐65% represent an annual

flow of between $600 and $1 trillion17. Transfer pricing is a legitimate practice when

using an “arm’s length principle” which consists in companies charging for their goods

and services at prices equivalent to those that unrelated entities would charge in an

open market18. Though, the techniques used to manipulate them are abusive. The

manipulation of transfer pricing happens during transactions made between

multinational corporations related affiliates. Those techniques basically consist in “mis-‐

invoicing” for trade transactions and can be done in four ways by19:

Under-‐invoicing the value of exports to a tax haven from the country from which cash

is to be expatriated

Then, the goods are sold from the tax haven at full value, the excess earned on onward

sale being the value of the flight capital. 17 Estimate made by Raymond Baker in Capitalism’s Achilles Heel. 2005. 18 OECD, 2001. 19 Chavagneux, Christian, Richard Murphy, and Ronen Palan. 2010. Tax Havens: How Globalization Really Works. Cornell University Press.

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Over-‐invoicing the value of imports into the country from which cash is to be

expatriated

The excess part constitutes capital flight and is generally deposited in the importer’s

offshore bank account.

Misreporting the quality of imported products in order to justify the value of the over-‐

or under-‐statement

Misreporting quantities in order to justify the value of the over-‐ or under-‐statement

Creating fictitious transactions for which payment is made

For example, paying for imported goods or services that never materialize.

3. Banks and consulting firms

Banks are significantly implanted in tax haven territories and often help their wealthy

clients to escape from their tax duties.

Consulting firms also play a major role in the use of tax havens by multinational

corporations. Those financial packages (generally illegal) offered by big consulting firms

to their clients allow them to transfer their money to offshore locations.

Michigan Senator Carl Levin has been investigating on the consulting firms’ role for a

long time, regarding individuals’ and corporations’ tax evasion in the United States, and

more particularly on KPMG. In February 2004, during an interview he gave to the

newspaper Front Line, he stated «We know [the IRS] KPMG did telemarketing, where

they would have lists of people who made a lot of money the previous year, and they are

getting cold calls from telemarketing people saying ‘We know you made a lot of income.

Do you want to pay less tax on that income?’ And the people who are supposed to pay

taxes would say ‘Well, is it legal? Is it proper?’ And KPMG people would say ‘Yes, we got

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a legal opinion saying it is proper’.»20.

More recently -‐ at the end of the year 2007 -‐ four partners from Ernst&Young were

judged guilty for offering illegal financial plans to their clients in order for them to evade

taxes21. This case took place four years after they promised they would not do it again,

following a similar case that occurred in 200322.

Senator Carl Levin estimated that so far approximately $15 billion have been transferred

to offshore centers thanks to consulting firms. Therefore, the IRS made consulting firms

pay several high fines for tax evasion cooperation. At the end of February 2005, about

ten KPMG partners and associates were charged for a several billion dollars tax evasion.

In order to stop the prosecution, KPMG agreed to pay $456 million23.

4. Governments

Besides corrupted country leaders who betray their countries in order to make

themselves richer, like former President of Gabon, Omar Bongo, who held an important

amount of assets offshore, governments often use tax havens in order to finance their

extraterritorial operations.

5. Criminals

Criminals use tax havens to launder their money, to finance terrorism or to hide

corruption because of the anonymity and the bank secrecy tax havens offer. Indeed, tax

havens have never paid much attention to the origin of the money they were sheltering

even since the appearance of the Financial Action Task Force on Money.

20 Frontline: Tax Me If You Can. Interview of Senator Carl Levin. 2004. http://www.pbs.org/wgbh/pages/frontline/shows/tax/interviews/levin.html 21 Chasan, Emily. 03.30.2007. Ernst&Young partners charged in tax fraud case. Reuters. http://www.reuters.com/article/idUSN3041538520070530 22 Kansas City Business Journal. 06.02.2003. Ernst&Young IRS tax shelter issue for $15 million. http://kansascity.bizjournals.com/kansascity/stories/2003/06/30/daily28.html 23 IRS website. 08.29.2005. KPMG to Pay $456 Million for Criminal Violations. http://www.irs.gov/newsroom/article/0,,id=146999,00.html

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IV. Tax havens: good or bad?

Tax havens developed in a context of financial globalization, of which one of the main

characteristics is the existence of a strong tax competition among countries; countries

that implement policies in order to strengthen their fiscal attractiveness.

A. Tax havens and the developed world

1. Global tax competition

As tax havens offer low or zero tax rates to nonresident corporations and residents, they

obviously encourage tax competition between states. Indeed, in order to attract

economic activity and businesses implantations, states have been developing strategies

such as targeted industrial policies, the provision of cheap R&D funds, infrastructural

support, state subsidies etc. (Palan, 1998). In addition to that, tax havens have been

emerging with their low or nil taxes, and therefore governments have been pressured to

lower their proper taxes in order to stay competitive. That is why the rate for corporate

taxation has been declining world widely. For example, in the European Union the

average nominal corporate taxation dropped from 35% in 1995 to 25% in 2007. Not only

the tax competition developed among states, but also within states in countries with

federal systems, such as Switzerland or the United States24.

There are two different points of view about tax havens and global tax competition.

Those who support international tax competition tend to consider tax havens as adding

a competitive edge, and those who are not in favor of international tax competition

tend to consider tax havens as harmful and parasitic for the global economy25.

24 Chavagneux, Christian, Richard Murphy, and Ronen Palan. 2010. Tax Havens: How Globalization Really Works. Cornell University Press. 25 Ibid.

22

a. Tax havens are symbiotic

From the states points of view, especially very small states, implanting an offshore

financial center promoting the easy establishment of a corporation on their territories is

a way to diversify and boost the local economy. Indeed, profits they might earn are

numerous, in terms of tourism for example. In addition to that it allows those

jurisdictions to benefit from a real financial expertise.

From another point of view, people who think that global tax competition is positive

support the neoclassical idea that tax competition increases efficiency. Indeed,

according to Hong and Smart (2006)26, “While income transfer to tax havens may reduce

revenues of high-‐tax jurisdictions, it tends to make the location of real investment less

responsive to tax rate disparities. Therefore, in principle, the presence of international

tax planning opportunities allows countries to maintain and even raise high corporate

tax rates, while preventing an outflow of FDI”. Their conclusion here is that tax havens

are nothing more than “pipes” for capital flows.

b. Tax havens are parasitic

Being used by only a small amount of economic agents – the wealthy and the

multinational corporations – global tax competition contributes to a distributional shift.

Indeed, since corporations and wealthy people are sending their money offshore, the

governments have to raise the tax rates in order to fill in the gap, therefore, the people

who do not belong to those categories have to bear the costs27. In the past ten years,

the tax to GDP ratio in most of the OECD countries rose by an average 1.3%28.

The full or partial elimination of tax havens would improve welfare in non-‐haven

countries. Indeed, tax heavens’ activities lead to a wasteful expenditure of resources,

26 Hong, Qing and Smart, Michael. 2006. In Praise of Tax Havens. University of Toronto. http://repec.economics.utoronto.ca/files/tecipa-‐265-‐1.pdf 27 Chavagneux, Christian, Richard Murphy, and Ronen Palan. Op. cit. 28 Tax Burdens Falling in OECD Economies as Crisis Takes its Toll. OECD website: http://www.oecd.org/document/47/0,3343,en_2649_34533_44115887_1_1_1_37427,00.html

23

both by firms (in their participation in havens), and by governments (in their attempts to

enforce their tax codes). Additionally, tax havens worsen tax competition problems by

causing countries to reduce their tax rates further below levels that are efficient from

the viewpoint of all countries combined. Either full or partial elimination of havens is

found to be welfare improving and countries would be better off if they agreed to

increase their tax rates and lower enforcement. Doing so would raise the demand for

the services provided by tax havens, which would raise the effective price of these

services and thereby discourage their use.29

2. Tax havens and global financial stability

The question of the involvement of tax havens in financial crises was not raised until the

late 1990s, in the aftermath of the Asia financial crisis and the collapse of the hedge

fund LTCM – i.e. when the Financial Stability Forum was created. Before that, tax havens

were seen as a minor problem of tax avoidance and evasion. Even though economists

share the thought that offshore finance strengthens the global financial system, the

most common thought is about how little tax havens contribute to the health and the

strength of the global financial system. The best judge on this issue is the Financial

Stability Forum and it assesses that tax havens raise two fundamental issues:

supervision and systemic risk. Indeed, offshore centers add a more opacity to an already

pretty opaque financial system.30

As major actors in the globalization of finance, tax havens have heavily contributed to

widening the gap between the rich and the poor and as most developing countries lack

sophisticated and well rounded tax systems, tax havens might play an important role in

shaping the economies of the South.

29 Slemrod, Joel, John D. Wilson. 2009. Tax Competition with Parasitic Tax Havens. Journal of Public Economics. 30 Chavagneux, Christian, Richard Murphy, and Ronen Palan. Op. cit.

24

B. Tax havens and the developing world

Developing countries lack of sophisticated tax systems and in addition to that, tax

havens offer multinational corporations a huge competitive advantage compared to

what they offer to local small and medium-‐sized companies; i.e. MNCs find tax havens

way more attractive to shelter their money than local financial institutions.

1. Capital flight

Raymond Baker, an expert on international capital flight, describes illicit capital flight as

“money illegally earned, illegally transferred, or illegally utilized if it breaks the laws in

its origin, movement, or use”31. It results from voluntary misreporting, and in

combination with opacity and bank secrecy provided by tax havens, it has become very

hard for regulatory institutions to identify the flows of capital flight. When people or

MNCs send their money offshore, the money that is supposed to go to the states such

as income taxes, don’t, therefore the tax burden is transferred on poor people. In the

case of an economic downturn, tax havens draw people’s assets and contribute to

destabilize the monetary equilibrium and then lead to currency devaluations.

50% of the international financial flows – illicit or not – pass through tax havens, causing

a real financial outflow for the developing countries’ economies. This phenomenon is

not new; according to the United Nations Conference of Trade And Development

(UNCTAD)32, the capital drain in African countries between the sixties and the nineties

would represent $400 billion, i.e. almost twice as much as their debt, which at that time

amounted for $215 billion. The same study evaluates that the capital drain amounts for

$13 billion per year on average, between 1991 and 2004, i.e. around 7% of the

continent’s annual GDP33.

31 Baker, Raymond. 2005. Capitalism’s Achilles Heel: Dirty Money and How to renew the free-‐market system. John Wiley and Sons, Inc. 32 World Investment Report: Transnational Corporations, Extractive Industries and Development. UNCTAD, 2007. www.unctad.org/en/docs/wir2007_en.pdf 33 Gross Domestic Product.

25

2. Illicit capital flows

Because of the flows of illicit money transfers, tax havens have had a very significant

impact on development countries. As we can see on this map, and according to a study

conducted by the Global Financial Integrity in 200834, illicit money transfers coming from

developing countries to developed countries amount to between $850 and $1,000

billion annually, and many of those transfers are made possible by tax havens. As shown

on the map, we can also see that the amount of illicit financial outflows going from

countries in the South to countries in the North represent eight to ten times the current

development aid flow. Oxfam International estimates that an additional $100 billion of

annual aid for development are necessary in order to reach the Millennium

development goals in order to reduce poverty by half35. On top of that, a very

considerable portion of the Third-‐World debt was placed in Swiss and other key offshore

financial centers’ banks, whereas international institutions such as the International

Monetary Fund (IMF) insisted on the fact that Third-‐World countries had to take on the

burden of their debt payments36.

34 Dev, Kar, and Devon Cartwright-‐Smith. 2008. Illicit Financial Flows From Developing Countries: 2002-‐2006. Global Financial Integrity: www.financialtaskforce.org/wp-‐content/uploads/2009/04/illicit-‐financial-‐flows-‐executive-‐report.pdf 35 Oxfam International Report. 2008. Credibility Crunch. Food, poverty and climate change: an agenda for rich-‐country leaders. http://www.oxfam.org/policy/credibility-‐crunch 36 Chavagneux, Christian, Richard Murphy, and Ronen Palan. 2010. Tax Havens: How Globalization Really Works. Cornell University Press.

26

Baker’s most recent estimates of cross-‐border illicit money flows oscillate between $500

and $800 billion per year37.

The money lost by developing countries because of financial outflows is really important

and those billions of dollars lost could provide the Third-‐World’s economies with a vital

boost and could be spent on fighting poverty. Reliable tax systems have to be

established in developing countries in order to prevent money from being siphoned

offshore.

C. The world’s money in tax havens

1. Money sheltered in tax havens

The World Bank estimates the global money flows at $1 to $1.6 trillion annually, and as

mentioned above, 50% of the world’s financial flows pass through tax havens. According

the International Monetary Fund (IMF), those jurisdictions shelter 4,000 banks, two

thirds of the world’s hedge funds, and two millions of shell corporations.

As stated in a report on tax haven banks and US tax compliance from the US Senate38,

the total amount of assets sheltered offshore by wealthy non-‐resident individuals

represents more than $11 trillion, resulting in $255 billion in annual lost tax revenues

37 Ibid. 38US Senate Permanent Subcommittee on Investigations. 07.17.2008. Report on Tax Haven Banks and US Tax Compliance. http://hsgac.senate.gov/public/_files/071708PSIReport.pdf

27

worldwide. The same study shows that among those $11 trillion, $1.5 trillion are

sheltered in the four following tax havens: Isle of Man: $150 billion, Guernsey: $293

billion, Jersey: $491 billion, and Switzerland: $807 billion, and that in early 2008, the

Cayman Islands only were holding $2 trillion in the 10,000 UCITS39 such as hedge funds.

Estimation of the assets held offshore

Source Amount Type of assets Cited documents Tax Justice Network (2005)

$11,500 billion Assets held offshore by individuals

The Price of Offshore, 2005.

Oliver Wyman Group (2008)

$8,000 billion Assets held offshore by High-‐Net Worth Individuals (HNWI)

The Future of Private Banking, March 2008.

Boston Consulting Group (2008)

$7,300 billion Assets held offshore in general

Global Wealth Report, 2008.

Source: OCDE, 2008.

2. Money lost because of tax havens

The worldwide tax fraud is estimated at $350 to $500 billion according to a study

conducted by the World Bank and the UNCTAD. The European Committee believes that

it corresponds to 2 to 2.5% of the total European GDP.

Recently, the US Treasury announced that it lost $100 billion in tax revenue due to the

existence of tax havens40. In Germany, the money lost because of tax havens is

evaluated at $30 to $40 billion. In Belgium, neighbor of one of the most famous tax

haven – Luxembourg – the amount of money put away in Luxembourg by Belgians is

close to $250 billion. In Italy, the sum of illicit exported capital reaches $800 billion, of

which $430 billion are in Switzerland. Finally in France, the total amount lost in tax

revenue is evaluated at $20 to $30 billion41.

39 Undertaking for Collective Investment in Transferable Securities (equivalent of OPCVM in French) 40 US Senate Permanent Subcommittee on Investigations. 07.17.2008. Report on Tax Haven Banks and US Tax Compliance. http://hsgac.senate.gov/public/_files/071708PSIReport.pdf 41 France. Rapport d’Information l’Assemblée Nationale sur les Paradis Fiscaux. 09.10.2009. http://www.assemblee-‐nationale.fr/13/rap-‐info/i1902.asp

28

IV. How are tax havens regulated?

The current war against tax havens started at the end of the 1990s when international

organizations and governments coordinately started to address harmful tax

competition. In 1998 the OECD developed its campaign against harmful tax competition

following a request from the G742, the Financial Stability Forum (FSF) tackled financial

stability, and the Financial Action on Tax Force (FATF) money laundering.

A. The Organization for Economic Cooperation and Development (OECD)

During the G20 summit that took place in London at the beginning of April 2009, the

G20 leaders launched the most important crackdown on tax havens and asked the OECD

to issue a list of countries that are failing to comply with its guidelines concerning tax

compliance. Following this request, the OECD updated its former list published in 2000

and published a new one on April 2nd 2009. The OECD actually divided the tax havens

into three lists: the white list, the grey list, and the black list, according to its four key

criteria used to determine whether a jurisdiction is a tax haven (mentioned above).

1. The lists published right after the G20 summit in London in April 2009

a. The white list

The white list compiles the jurisdictions that have substantially implemented the

internationally agreed tax standard on April 2nd 2009.

42 At the time: Canada, France, Germany, Italy, Japan, United Kingdom, United States

29

White list on April 2nd 2009

Argentina Australia Barbados Canada China43 Cyprus Czech Republic Denmark Finland France

Germany Greece Guernsey Hungary Iceland Ireland Isle of Man Italy Japan Jersey

Korea Malta Mauritius Mexico Netherlands New Zealand Norway Poland Portugal Russian Federation

Seychelles Slovak Republic South Africa Spain Sweden Turkey United Arab Emirates United Kingdom United States US Virgin Islands

Source: OECD, 2009.

b. The grey list

The grey list compiles the jurisdictions that have committed to the internationally

agreed tax standards, but have not yet substantially implemented on April 2nd 2009.

Grey list on April 2nd 2009

Jurisdiction Year of Commitment

Number of Agreements



Tax Havens44 Andorra Anguilla Antigua & Barbuda Aruba Bahamas Bahrain Belize Bermuda BVI Cayman Islands Cook Islands Dominica

2009 2002 2002

2002 2002 2001 2002 2000 2002 2000

2002 2002

0 0 7 4 1 6 0 3 3 8 0 1

Marshall Islands Monaco Montserrat Nauru Neth. Antilles Niue Panama St Kitts and Nevis St Lucia St Vincent & Grenadines Samoa

2007

2009 2002 2003 2000 2002 2002 2002

2002 2002

2002

1 1 0 0 7 0 0 0 0 0 0

43 Excluding the Special Administrative Regions, which have committed to implement the internationally agreed tax standard. 44 These jurisdictions were identified in 2000 as meeting tax haven criteria as described in the 1998 OECD report.

30

Gibraltar Grenada Liberia Liechtenstein

2002 2002 2007 2009

1 1 0 1

San Marino Turks & Caicos Islands Vanuatu

2000 2002

2003

0 0 0

Other Financial Centers Austria Belgium Brunei Chile

2009 2009 2009 2009

0 1 5 0

Guatemala Luxembourg Singapore Switzerland

2009 2009 2009 2009

0 0 0 0

Source: OECD, 2009.

c. The black list

The black list compiles the jurisdictions that had not committed to the internationally

agreed tax standard on April 2nd 2009.

Black list on April 2nd 2009

Jurisdiction Number of Agreements

Jurisdiction Number of Agreements

Costa Rica Malaysia (Labuan)

0 0

Philippines Uruguay

0 0

Source: OECD, 2009.

2. The current lists

On February 18th 2010, the OECD published a progress report on the jurisdictions

surveyed by the OECD Global Forum in implementing the internationally agreed tax

standard.

a. The white list

The white list compiles the jurisdictions that have substantially implemented the

internationally agreed tax standard on February 18th 2010.

31

White list on February 18th 2010

Antigua & Barbuda Argentina Aruba Australia Austria Bahrain Barbados Belgium Bermuda BVI Canada Cayman Islands Chile China45 Cyprus Czech Republic

Denmark Estonia Finland France Germany Gibraltar Greece Guernsey Hungary Iceland India Ireland Isle of Man Israel Italy Japan

Jersey Korea Liechtenstein Luxembourg Malaysia Malta Mauritius Mexico Monaco Netherlands Netherlands Antilles New Zealand Norway Poland Portugal Russian Federation

Samoa San Marino Seychelles Singapore Slovak Republic Slovenia South Africa Spain Sweden Turkey Turks & Caicos Islands United Arab Emirates United Kingdom United States US Virgin Islands

Source: OECD, 2010.

b. The grey list

The grey list compiles the jurisdictions that have committed to the internationally

agreed tax standards, but have not yet substantially implemented on February 18th

2010.

Grey list on February 18th 2010





Tax Havens46 Andorra Anguilla Bahamas47 Belize Cook Islands Dominica Grenada

2009 2002 2002 2002 2002 2002 2002

10 11 10 2 11 1 1

Montserrat Nauru Niue Panama St Kitts and Nevis St Lucia

2002 2003 2002 2002 2002

2002

2 0 0 0 9 5

45 Excluding the Special Administrative Regions, which have committed to implement the internationally agreed tax standard. 46 These jurisdictions were identified in 2000 as meeting tax haven criteria as described in the 1998 OECD report.

32

Liberia Marshall Islands

2007 2007

0 1

St Vincent & Grenadines Vanuatu

2002

2003

8 1

Other Financial Centers Brunei Costa Rica Guatemala

2009 2009 2009

8 1 0

Philippines Uruguay

2009 2009

0 4

Source: OECD, 2010.

c. The black list no longer exists

On February 18th 2010, all jurisdictions surveyed by the Global Forum have committed

to the internationally agreed tax standard so the black list disappeared.

3. The Tax treaties

Tax treaties exist between many countries on a bilateral basis in order to prevent double

taxation. Double taxation can mean that taxes would be levied twice on the same

income, profit, capital gain, inheritance, or some other item, by both the country of

residence of a person or a corporation and the country where the person or the

corporation is settled. Those tax treaties can be known as Tax Information Exchange

Agreements (TIEAs)48.

The TIEA was developed in response to the OECD Report “Harmful Tax Competition: An

Emerging Global Issue” which identified “the lack of effective exchange of information”

as one of the main criteria in determining harmful tax practices.

The purpose of this Agreement is to address harmful tax practices by promoting

international co-‐operation in tax matters through exchange of information. It was

developed by the OECD Global Forum Working Group on Effective Exchange of

Information (also known as “the Working Group”). The Agreement is presented as both

47 The Bahamas signed tax information exchange agreements (TIEAs) on March 10th 2010 with seven Nordic countries, which now brings its bilateral accords signed to 18. Thus, it has passed the required 12 agreements to be removed from the OECD "grey list". (Reuters, 03.10.2010). 48 OECD website. Tax Information Exchange Agreements. http://www.oecd.org/document/7/0,3343,en_2649_33745_38312839_1_1_1_1,00.html

33

a multilateral instrument and a model for bilateral treaties or agreements49.

B. The Financial Stability Forum (FSF)

It was established in 1999 to contribute to the building of a “new financial architecture”

after the crisis of the Asian financial crisis. The FSF is not initially directly related to tax

havens. The FSF is composed of large and rich countries that define universal standards

and rate how nonmember jurisdictions measure up.

In 2000, the FSF adopted the “name and shame” method and listed forty-‐two countries

as non-‐cooperative, which were divided into three groups according to their estimated

level of risk50:

(1) Co-‐operative jurisdictions with a high quality of supervision

(2) Jurisdictions having procedures for supervision and co-‐operation where actual

performance falls below international standards

(3) Jurisdictions with a low quality of supervision and non-‐co-‐operation

(1) (2) (3) Hong Kong SAR Luxembourg Singapore Switzerland Ireland Guernsey Isle of Man Jersey

Andorra Bahrain Barbados Bermuda Gibraltar Labuan (Malaysia) Macau SAR Malta Monaco

Anguilla Seychelles Antigua and Barbuda St. Kitts and Nevis Aruba St. Lucia Bahamas St. Vincent and the Belize Grenadines BVI Turks and Caicos Cayman Islands Vanuatu Cook Islands Costa Rica Cyprus Lebanon Liechtenstein Marshall Islands Mauritius Nauru Netherlands Antilles Niue Panama Samoa

Source: Financial Stability Forum, 2000.

49 Agreement on exchange of information on tax matters. OECD. www.oecd.org/dataoecd/15/43/2082215.pdf 50 Financial Stability Forum, 2000.

34

C. The Financial Action Task Force on Money Laundering (FATF)

The FATF is an intergovernmental organization established in 1989 by the G7. Its

purpose is to develop policies and make recommendations on legislative and regulatory

measures in order to combat money laundering and terrorist financing at international

and national levels.

The role of the Task Force is to monitor the members’ ability to apply necessary

measures, to examine money laundering and terrorist financing techniques and

counter-‐measures, and finally to encourage the adoption and implementation of

appropriate measures both nationally and globally To do so, the FATF joins forces with

other international organizations specialized in combating money laundering and

terrorist financing. The FATF is composed of thirty-‐five members and reviews its mission

every five years. The Task force has standards that are comprised of forty

recommendations on money laundering and nine special recommendations on terrorist

financing51.

In 2000 the FATF published the first list of Non-‐Cooperative Countries and Territories,

recording the jurisdictions accused of failing to meet minimum standards. By showing

that it has initiated and is implementing legislations on money laundering, a jurisdiction

can be removed from the list52.

1. The forty recommendations on money laundering53

Those recommendations emphasize the role of national laws in combating money

laundering. They have been adopted by many international organizations. The forty

recommendations were initially developed in 1990 but were revised several times since

and a lot of countries have used them in order to fight against money laundering.

51 The FAFT website: http://www.fatf-‐gafi.org 52 Chavagneux, Christian, Richard Murphy, and Ronen Palan. 2010. Tax Havens: How Globalization Really Works. Cornell University Press. 53 The FAFT website. The Forty Recommendations. http://www.fatf-‐gafi.org/document/28/0,3343,en_32250379_32236920_33658140_1_1_1_1,00.html

35

After the issuance of those forty recommendations, most tax havens announced that

they were ready to cooperate with the FATF. Indeed, Switzerland, Jersey, and the

Cayman Islands passed the recommendations into laws very quickly. Let’s take the

example of Switzerland who started penalizing insider trading in 1988, money

laundering in 1990, stock-‐market manipulation in 1997, and bribery of foreign officials in

200054.

2. The nine special recommendations on terrorist financing55

Following the terrorist attacks of September 2001, the United States realized that they

should be worrying more about terrorist financing through tax havens; that is why the

FATF then published those nine special recommendations on terrorist financing.

The nine special recommendations to combat the financing of terrorism are the

following:

I. Ratification and implementation of UN instruments

II. Criminalizing the financing of terrorism and associated money laundering

III. Freezing and confiscating terrorist assets

IV. Reporting suspicious transactions related to terrorism

V. International co-‐operation

VI. Alternative remittance

VII. Wire transfers

VIII. Non-‐profit organizations

IX. Cash couriers

54 Ibid. 55 The FATF website. 9 Special Recommendations (SR) on Terrorist Financing (TF). http://www.fatf-‐gafi.org/document/9/0,3343,en_32250379_32236920_34032073_1_1_1_1,00.html

36

D. The governments

Still in order to keep up the tax competition and to bring (or bring back) wealth on their

territories, countries adopt measures such as fiscal amnesty, like in Italy or in the US. In

France, on the other hand, a regularization unit based on voluntarism was implemented

during eight months.

1. France

a. Tracfin

Tracfin, created in 1990, is composed of seventy agents working in cooperation with the

French customs and contributes to the protection of the national economy by fighting

against illicit financial flows, money laundering, and terrorist financing56. Its mission is to

gather, process, and diffuse information. Tracfin has become one of the most powerful

departments of the French administration and its database is one of the most secured in

the country. In 2009, Tracfin handed 384 cases to the Court57.

b. The regularization unit at the Ministry of budget

The French Ministry of budget implemented this office in order to encourage French tax

evaders to regularize their situation. This unit was opened during eight months (from

April 1st, 2009 to December 31st, 2009), attracted 3,500 taxpayers, helped repatriate

around €6 billion ($8.5 billion) and generated €700 million ($1 billion) revenues58.

The modalities of regularization are the following59:

• Immediate payment of the taxes due (tax income, wealth tax, inheritance tax) in the

limit of legal prescription

56 Tracfin website: www.tracfin.gouv.fr 57 Delahousse, Matthieu. 02.16.2010. Comment l’Etat traque l’argent sale. Le Figaro. 58 AFP. 01.12.2010. Evades Fiscaux: Woerth, la cellule de Bercy a rapporte 700 millions d’euros. Le Point. http://www.lepoint.fr/actualites-‐economie/2010-‐01-‐12/comptes-‐suspects-‐evades-‐fiscaux-‐woerth-‐la-‐cellule-‐de-‐bercy-‐a-‐rapporte-‐700-‐millions/916/0/412767 59 French government tax website: http://www.impots.gouv.fr/portal/dgi/public?paf_dm=popup&paf_gm=content&pageId=particuliers&espId=1&typePage=cpr02&paf_gear_id=500018&docOid=documentstandard_5735&temNvlPopUp=true

37

• Late payment interests and penalties

Following this regularization unit, an electronic file, “Evafisc”, will be created soon in

order to keep a record of French taxpayers holding offshore bank accounts, registered

or not. This system will be used by the French tax department to launch investigations

accordingly.

c. France’s blacklist of tax havens

On February 14th 2010, referring to the finance law for 2009 (“loi de finances

rectificative pour 2009”), French Secretary of Budget, Eric Woerth, and Secretary of

Economic Affaires, Christine Lagarde have published a black list of eighteen countries

considered as fiscally uncooperative60. This list will remain valid until January 1st 2011. If

by then jurisdictions listed have improved their transparency and are ready to

cooperate and exchange information with France, the list will then be edited.

Following the OECD criteria, the French government considers uncooperative non

European Union member jurisdictions since common law forbids assimilating a country

member of the EU as a tax haven. This is the reason why Luxembourg or Ireland are not

on the list. The territories listed have to be on the OECD grey list, i.e. they still have not

signed tax information exchange agreements with at least twelve countries, and if they

have signed tax information exchange agreements it cannot be with France. This is the

reason why countries such as Malaysia or Andorra are on the OECD grey list but not on

the French one61.

Concretely, the French corporations that are established in the territories listed will be

heavily taxed. For example, as long as they will be paid in a subsidiary located on an

uncooperative territory, the passive income (dividends, interests etc.) will be taxed at

60 Lachevre, Cyril. 02.14.2010. Bercy a bouclé sa liste des paradis fiscaux. Le Figaro. http://www.lefigaro.fr/impots/2010/02/15/05003-‐20100215ARTFIG00021-‐bercy-‐a-‐boucle-‐sa-‐liste-‐des-‐paradis-‐fiscaux-‐.php 61 Robequain, Lucie. 02.15.2010. La France publie sa liste noire des paradis fiscaux. Les Echos. http://www.lesechos.fr/patrimoine/impots/300410508-‐la-‐france-‐publie-‐sa-‐liste-‐noire-‐des-‐paradis-‐fiscaux.htm

38

50%. The law also modified some aspects of the relationship between the parent

company and the subsidiary. Before, the dividends paid by a subsidiary to its parent

company could be tax exempt at 95%. That rule is no longer applicable if the

subsidiaries are established in a jurisdiction that is on the black list62.

The French blacklist

Anguilla Belize Brunei Cooks Islands Costa Rica Dominican Republic

Grenada Guatemala Liberia Marshall Islands Montserrat Nauru

Niue Panama Philippines St Kitts and Nevis St Lucia St Vincent and the Grenadines

Source: Le Figaro, 2010.

2. Italy

In mid-‐July 2009, at the initiative of Giulio Tremonti, the Italian Secretary of Economic

Affairs, Italy launched a fiscal amnesty in order to recover between €3 and €5 billion

(between $4 and $7 billion) of tax revenues63. Indeed, according to estimations, the

black economy accounts for about 19% in Italy and a lot of taxpayers declare inferior

incomes compared to what they really earn. The amount of unpaid taxes in Italy reaches

€250 billion per year, what represents more than the size of the Portuguese

economy!64.

Under the initial conditions of the amnesty, which was supposed to last until December

15th, 2009, Italian tax evaders could declare offshore funds and pay a 5% fee. This

amnesty was a huge success and Italy was able to recover €95 billion ($130 billion) from

62 France. Budget: loi de finances rectificative 2009. Rapport de l’Assemblée Nationale. http://www.assemblee-‐nationale.fr/13/dossiers/troisieme_collectif_2009.asp 63 Heuze, Richard. 07.16.2009. L’Italie lance une amnistie fiscale assortie de 5% de penalités. Le Figaro. http://www.lefigaro.fr/impots/2009/07/16/05003-‐20090716ARTFIG00255-‐l-‐italie-‐lance-‐une-‐amnistie-‐fiscale-‐assortie-‐de-‐5-‐de-‐penalites-‐.php 64 Italy recovers record EU9.1 billion from tax-‐evasion crackdown. 03.02.2010. Bloomberg. http://www.bloomberg.com/apps/news?pid=20601092&sid=aEzKfGHortOw

39

the crackdown on tax dodgers, therefore the Italian government decided to extend it

until April 30th, 2010 and raise the fee65.

3. The United States

a. The IRS voluntary disclosure

On March 24th, 2009, the Internal Revenue Service (IRS) announced it would launch a

voluntary disclosure program to allow US tax evaders with offshore accounts to come

clean. In most cases, the IRS mentioned it would demand 20% of the account’s highest

single balance in the past six years, and 5% if the account was inherited and contained

funds that were initially taxed properly. Also, taxpayers participating in the program

would have to pay any new taxes resulting from filing amended income tax returns for

the six previous years, in addition to accuracy or delinquency penalties66. The program

ended on October 15th, 2009 and gathered about seven thousands taxpayers67.

b. Bills from the US Senate

For several years the US Senators have been proposing bills whose goal were to combat

the use tax shelters for tax evasion, money laundering or terrorist financing.

In March 2009, Michigan Senator Carl Levin introduced the Stop Tax Haven Abuse Act, S

506. The bill creates a blacklist of thirty-‐four offshore entities and establishes several

actions such as68:

-‐ The taxation of foreign publicly traded corporations that are managed or controlled in

the United States as US corporations

65 AFP. Italie: hausse des résultats de la lutte contre l’évasion fiscale en 2009. 03.02.2010. Les Echos. http://www.lesechos.fr/info/france/afp_00234565-‐italie-‐hausse-‐des-‐resultats-‐de-‐la-‐lutte-‐contre-‐l-‐evasion-‐fiscale-‐en-‐2009.htm 66 Barret, William P. 03.26.2009. IRS Offers Deal to Offshore Evaders. Forbes.com. http://www.forbes.com/2009/03/26/irs-‐amnesty-‐ubs-‐personal-‐finance-‐taxes-‐offshore-‐accounts.html 67 Wingfield, Brian. 11.17.2009. IRS Sees Success in Anti-‐Evasion Campaign. Forbes.com. http://www.forbes.com/2009/11/17/irs-‐amnesty-‐offshore-‐business-‐washington-‐tax.html 68 Tanenbaum, Edward. (2009). Stop Tax Haven Abuse Act Has Broad Implications. International Tax Review Vol. 20 Issue 5, pp63-‐64.

40

-‐ The imposition of a withholding tax on dividend-‐equivalent payments and substitute

dividend payments to non-‐US persons that hold certain types of equity derivatives

The US blacklist in the Stop Tax Haven Abuse Act

Anguilla Antigua and Barbuda Aruba The Bahamas Barbados Belize Bermuda British Virgin Islands Cayman Islands Cook Islands Costa Rica Cyprus

Dominica Gibraltar Grenada Guernsey/Sark/Alderney Hong Kong Isle of Man Jersey Latvia Liechtenstein Luxembourg Malta

Nauru Netherlands Antilles Panama Samoa St. Kitts and Nevis St. Lucia St. Vincent and the Grenadines Singapore Switzerland Turks and Caicos Vanuatu

Source: Stop Tax Haven Abuse Act, 03.02.0969.

More recently, House Ways and Means Committee chairman Charles Rangel and Senate

Finance Committee chairman Max Baucus have introduced legislation to provide the IRS

with larger ability to “detect, deter and discourage offshore tax abuses” on the issue of

US tax evaders. Thanks to this Act and according to the Joint Committee on Taxation’s

analysis, the IRS can expect to raise $8.5 billion over ten years70.

President’s Obama recent tax proposal on US-‐based multinational corporations (MNCs)

includes the limitation of the ability of US MNCs with foreign subsidiaries to defer US tax

liabilities until they repatriate dividend profits on the US territory.

69 Senator Levin, Carl. Stop Tax Haven Abuse Act. 2009. http://levin.senate.gov/supporting/2009/PSI.StopTaxHavenAbuseAct.030209.pdf 70 Snowdon, Catherine. Dec. 2009/Jan. 2010. US Proposes New Offshore Tax Compliance Legislation. International Tax Review, Vol. 20 Issue 10.

41

V. What will be the future of tax havens?

A. Current context

Offshore financial industry has become unmanageable due to its high complexity. Its

activities are opaque, thus, the regulations have to be drastic in order to combat this

lack of transparency. As mentioned in the course of this paper, as tax evasion is a crime,

jurisdictions that do not commit to changing their bank secrecy laws to comply with the

internationally agreed standard of information exchange for tax purposes could be

subject to sanctions, that is why governments have the right to pursue those who

commit tax evasion. In addition to that, the insistence on transparency and information

disclosure will help them pursue tax evaders and will eventually keep others from

evading taxes. The instauration of rules on transparency and the obligation for tax

havens to sign tax exchange information agreements with other nations will also reduce

“legitimate” tax avoidance. But what lacks to completely regulate tax havens and their

opacity is a common political will to implement global tax compliance regulations. The

emergence of international bodies such as the OECD is not enough. To tackle the change

in the global tax environment, pursuing a common goal towards global tax compliance is

unquestionable. An international set of regulations is necessary to protect national

financial systems from illicit practices, to put an end to global tax competition, and to

allow the automatic exchange of information between financial authorities that will

restrain tax evasion. But such thing is not easy as globalization implies the existence of a

very liberal economy and the existence of a free-‐market.

B. Could the world live without tax havens?

More than half of the world’s capital flows, i.e. $8,000 billion, pass through tax havens.

That raises the following question: could the world live without tax havens? I would say

probably not, and at least not without some precautions. Tax havens drain a large part

of the economy; therefore, their sudden disappearance would cause heavy damage on

the whole economic activity and its actors. In addition to draining funds from the black

42

economy (among those $8,000 billion it is estimated that around 10% represent the

black economy), tax havens are today completely integrated in the global financial

system and their collapse would completely disrupt the financial circuits that became

dependent on them and would impact the real economy.

C. Taking down offshore finance

Following the recent economic downturn, governments have suffered from the loss of

tax revenues and as the economic situation is damaged everywhere, states all need

public resources. Furthermore, countries engage themselves in the fight against tax

havens in order to maintain financial stability. If enough countries decide they want

more transparency laws implemented in tax havens and want to take bank secrecy

down, offshore centers will have no choice but to apply those rules. Since the beginning

of the century, a considerable number of international organizations have begun to

examine offshore centers aiming to crackdown tax evasion, the spread of financial

crises, money laundering, and terrorist financing. Those international institutions

generally make regulatory requests that tend to weaken the long-‐established

advantages of offshore. First and foremost the demands are related to transparency and

exchange of information. Those requirements obviously go straight against one of the

key attractions of offshore centers: secrecy. That being said, the collection and the

exchange of information will tend to reduce the attractiveness of tax havens. Indeed,

potential clients to offshore financial centers will feel threatened and will either reduce

their investment in those centers or simply take their money back onshore. Moreover,

the lists published by both international and national bodies have contributed to

damage the popularity and the reputation of the tax havens so listed. All these

situations will have a bad impact on offshore centers’ economies. According to this

view, we can think that tax havens will have to face the investments’ return onshore,

which would mean a collapse in their business. The shift towards transparency global

regulatory institutions such as OECD are trying to implement is undeniably far from

being auspicious for services provided by tax havens.

43

D. What is left for tax havens after they collapse?

As many offshore territories are currently struggling with the effects of the new

regulations, we can think that only a few of them will be able to survive to this

crackdown: the strongest, i.e. those who belong to very powerful countries, such as the

US states of Delaware or New Jersey, the City of London, or Ireland, and that have other

alternatives than only offshore financial services to sustain. Many tax havens will try to

survive to international regulations because otherwise what is their best option despite

offshore finance? Many of them are very small countries or even islands, and offshore

finance is their principal – if not only – activity. This sector provides them with economic

viability and development. Indeed, before they could reach the world’s highest GDP per

capita, a lot of tax havens such as the Cayman Islands or Bermuda were among the

smallest and poorest economies in the world, and they still are very exposed because of

their dependence on the offshore activity. That is why it is important to envision exit

scenarios for those territories in case of the collapse of the offshore financial activity.

Moreover, tax havens might offer a very flexible tax regime to non-‐resident individuals

or corporations, but the rules are completely different for their residents. Indeed, due to

the high cost of life and the difficulty to find a job in another sector than financial

services, an important part of the population of territories considered as tax havens live

a pretty miserable life.

E. Conclusion on the future of tax havens

With the disappearance of tax havens, systemic risk would be considerately lowered –

so would the risks of economic downturns – and the fights against terrorist financing

and money laundering would be facilitated. On the other hand, the disappearance of

Caribbean or Central American tax havens might imply the emergence of new tax

havens in zones where the political instability is dominant, such as the Middle East for

example.

44

Conclusion

Unlike what French President Nicolas Sarkozy was announcing last September, tax

havens and bank secrecy are far from being over. One thing is certain: tax havens are

not only conduits for tax avoidance and tax evasion, but definitely belong to the global

financial system and play a significant role in the “neoliberal globalization”71. Global

institutions and individual governments are joining forces to take them down and it is

starting to work. Indeed, in the battle to tackle bank secrecy, efforts are starting to pay

as Switzerland’s sacrosanct bank secrecy was recently endangered. Under international

pressure, coming especially from France and the United States, Switzerland is currently

preparing a regulatory system for undeclared foreign assets and is going to adjust its

bank secrecy72. Maybe the disappearance of bank secrecy will help taking tax havens

down once and for all because without bank secrecy, tax havens users would stop

putting their money offshore, and those using tax haves for the purpose of tax and

regulatory avoidance would be easily identifiable.

Global tax competition is not good for the world community. Indeed, if a company goes

bankrupt, another one, more efficient, will replace it. On the other hand if a state fails, it

is the international community that is called to rescue it. And in no ways tax havens

should not be deciding what the right tax rates are for foreign countries, and therefore,

should neither be encouraging global tax competition, nor tax evasion. The decision

about right tax rates should be made globally and democratically, and the world is

currently lacking a common political will to implement global tax compliance

regulations. The emergence of international bodies such as the OECD is a good start but

it is not enough. To tackle the change in the global tax environment, pursuing a common

goal towards global tax compliance is unquestionable because capital flight from

onshore to offshore entities is bad for populations since they deprive states from

income tax revenues that they could use for public purposes.

71 Chavagneux, Christian, Richard Murphy, and Ronen Palan. 2010. Tax Havens: How Globalization Really Works. Cornell University Press. 72 Massonnaud, Robin. 02.26.2010. Suisse: La Fin d’un Paradis Fiscal? L’Express.fr. http://www.votreargent.fr/fiscalite/suisse-‐la-‐fin-‐d-‐un-‐paradis-‐fiscal_123907.html

45

With the elimination of tax havens, systemic risk would obviously drop, as would the

risks of economic turmoil, and it would ease the combat against money laundering and

terrorist financing. But the desire to eradicate currently existing tax havens might imply

the emergence of new tax havens in politically unstable zones such as the Middle East

or Asia.

46

Exhibit 1: Number of Offshore Entities in Tax Havens. Source: INCSR 2008.

47

48

Exhibit 2: Tax Information Exchange Agreements: list of bilateral agreements signed by

Andorra Argentina, Austria, Belgium, France, Liechtenstein, Monaco, Netherlands, Portugal, San Marino, Spain

Anguilla Denmark, Faroe Islands, Finland, Greenland, Iceland, Ireland, Netherlands, New Zealand, Norway, Sweden, United Kingdom

Antigua and Barbuda Australia, Belgium, Denmark, Ireland, Liechtenstein, Netherlands, Netherlands Antilles, United Kingdom, United States

Argentina Andorra, Bahamas, Costa Rica, Monaco, San Marino Aruba Australia, Bermuda, British Virgin Islands, Denmark, Faroe Islands,

Finland, Greenland, Iceland, Netherlands Antilles, Norway, Spain, St. Kitts and Nevis, St. Vincent and the Grenadines, Sweden, United States

Australia Antigua and Barbuda, Aruba, Bermuda, British Virgin Islands, Cook Islands, Gibraltar, Guernsey, Isle of Man, Jersey, Netherlands Antilles, Samoa

Austria Andorra, Gibraltar, Monaco, St. Vincent and the Grenadines Bahamas Argentina, Belgium, China, France, Monaco, Netherlands, New Zealand,

San Marino, United Kingdom, United States Belgium Andorra, Antigua and Barbuda, Bahamas, Belize, Gibraltar, Liechtenstein,

St. Lucia, St. Vincent and the Grenadines, St. Kitts and Nevis Belize Belgium Bermuda Aruba, Australia, Denmark, Faroe Islands, Finland, Germany, France,

Greenland, Iceland, Ireland, Japan, Mexico, Netherlands, Netherlands Antilles, New Zealand, Norway, Sweden, United Kingdom

British Virgin Islands Aruba, Australia, China, Denmark, Faroe Islands, Finland, France, Greenland, Iceland, Ireland, Japan, Mexico, Netherlands, Netherlands Antilles, New Zealand, Norway, Sweden, United Kingdom, United States

Canada Netherlands Antilles Cayman Islands Denmark, Faroe Islands, Finland, France, Greenland, Iceland, Ireland,

Netherlands, Netherlands Antilles, New Zealand, Norway, Sweden, United States

China Bahamas, British Virgin Islands Cook Islands Australia, Denmark, Faroe Islands, Finland, Greenland, Netherlands,

Iceland, Ireland, New Zealand, Norway, Sweden Costa Rica Argentina Denmark Anguilla, Antigua and Barbuda, Aruba, Bermuda, British Virgin Islands,

Cayman Islands, Cook Islands, Gibraltar, Guernsey, Isle of Man, Jersey, Netherlands Antilles, San Marino, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Samoa, Turks and Caicos

Faroe Islands Anguilla, Aruba, Bermuda, British Virgin Islands, Cayman Islands, Cook Islands, Gibraltar, Isle of Man, Netherlands Antilles, San Marino, Samoa, Turks and Caicos

Finland Anguilla, Aruba, Bermuda, British Virgin Islands, Cayman Islands, Cook Islands, Gibraltar, Guernsey, Isle of Man, Jersey, Netherlands Antilles, Samoa, Turks and Caicos

France Andorra, Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Guernsey, Isle of Man, Liechtenstein, San Marino, Turks and Caicos, Uruguay, Vanuatu

49

individual jurisdiction (February 2nd 2010) Germany Bermuda, Gibraltar, Guernsey, Isle of Man, Jersey, Liechtenstein Gibraltar Australia, Austria, Belgium, Denmark, Faroe Islands, Finland, France,

Germany, Greenland, Iceland, New Zealand, Norway, Portugal, Sweden, United Kingdom, United States

Greenland Anguilla, Aruba, Bermuda, British Virgin Islands, Cayman Islands, Cook Islands, Gibraltar, Guernsey, Isle of Man, Jersey, Netherlands Antilles, Samoa, San Marino, Turks and Caicos

Guernsey Australia, Denmark, Finland, France, Germany, Greenland, Iceland, Ireland, New Zealand, Norway, Sweden, The Faroe Islands, Netherlands, United Kingdom, United States

Iceland Anguilla, Aruba, Bermuda, British Virgin Islands, Cayman Islands, Cook Islands, Gibraltar, Guernsey, Isle of Man, Jersey, Netherlands Antilles, Samoa, San Marino, Turks and Caicos

Ireland Anguilla, Antigua and Barbuda, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Cook Islands, Guernsey, Isle of Man, Jersey, Liechtenstein, Samoa, St. Vincent and the Grenadines, Turks and Caicos

Isle of Man Australia, Denmark, Faroe Islands, Finland, France, Germany, Greenland, Iceland, Ireland, New Zealand, Norway, Sweden, Netherlands, United Kingdom, United States

Japan Bermuda Jersey Australia, Denmark, Finland, France, Germany, Greenland, Iceland,

Ireland, New Zealand, Norway, Sweden, The Faroe Islands, Netherlands, United Kingdom, United States

Liechtenstein Andorra, Antigua and Barbuda, Belgium, France, Germany, Ireland, Monaco, Netherlands, St. Kitts and Nevis, St. Vincent and the Grenadines, United Kingdom, United States

Mexico Bermuda, Netherlands Antilles Monaco Andorra, Argentina, Austria, Bahamas, Belgium, Liechtenstein,

Netherlands, Samoa, San Marino, United States Montserrat Netherlands Netherlands Andorra, Anguilla, Antigua and Barbuda, Bahamas, Bermuda, British

Virgin Islands, Cayman Islands, Cook Islands, Guernsey, Isle of Man, Jersey, Liechtenstein, Monaco, Montserrat, Samoa, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Turks and Caicos

Netherlands Antilles Antigua and Barbuda, Aruba, Australia, British Virgin Island, Bermuda, Canada, Cayman Islands, Denmark, Faroe Islands, Finland, Greenland, Iceland, Mexico, New Zealand, Spain, St. Lucia, St. Kitts and Nevis, San Marino, Sweden, United States

New Zealand Anguilla, Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Cook Islands, Gibraltar, Guernsey, Isle of Man, Jersey, Netherlands, Antilles, St. Kitts and Nevis, Turks and Caicos

50

Source: OECD, 2010.

Norway Anguilla, Aruba, Bermuda, British Virgin Islands, Cayman Islands, Cook Islands, Gibraltar, Guernsey, Isle of Man, Jersey, Netherlands Antilles, Samoa, Turks and Caicos

Portugal Andorra, Gibraltar Samoa Australia, Denmark, Faroe Islands, Finland, Greenland, Iceland, Ireland,

Monaco, Netherlands, Norway, San Marino, Sweden San Marino Andorra, Argentina, Bahamas, Denmark, Faroe Islands, Finland, France,

Greenland, Iceland, Monaco, Netherlands, Norway, Samoa, Sweden Spain Andorra, Aruba, Netherlands Antilles St. Kitts and Nevis Aruba, Belgium, Denmark, Netherlands, Liechtenstein, Netherlands

Antilles, New Zealand, United Kingdom St. Lucia Belgium, Denmark, Netherlands, Netherlands Antilles, United Kingdom St. Vincent and the Grenadines

Aruba, Austria, Belgium, Denmark, Ireland, Liechtenstein, Netherlands, United Kingdom

Sweden Anguilla, Aruba, Bermuda, British Virgin Islands, Cayman Islands, Cook Islands, Gibraltar, Guernsey, Isle of Man, Jersey, Netherlands Antilles, Samoa, San Marino, Turks and Caicos

The Faroe Islands Guernsey, Jersey Turks and Caicos Denmark, Faroe Islands, Finland, France, Greenland, Iceland, Ireland,

Netherlands, New Zealand, Norway, Sweden, United Kingdom United Kingdom Antigua and Barbuda, Anguilla, Bahamas, Bermuda, British Virgin Islands,

Gibraltar, Guernsey, Isle of Man, Jersey, Liechtenstein, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Turks and Caicos

United States Antigua and Barbuda, Aruba, Bahamas, British Virgin Islands, Cayman Islands, Gibraltar, Guernsey, Isle of Man, Jersey, Liechtenstein, Monaco, Netherlands Antilles

Uruguay France Vanuatu France

51

Glossary

BVI: British Virgin Islands.

Hedge fund: great variety of investors employing a diverse set of generally aggressive

and risky investment strategies. They are generally either unregistered or registered in

offshore financial centers to minimize both regulatory supervision and tax.

Internal Revenue Service (IRS): the US government agency responsible for tax collection

and tax law enforcement.

International Business Corporation (IBC): limited liability companies that are set up

either as subsidiaries of onshore companies or as independent companies in tax havens

and OFCs. They are used for a variety of purposes; the principal among them is to shift

the profitable portion of a business to a low tax countries.

Offshore Financial Center (OFC): financial center located in any country and offering

financial services to non-‐resident clients with an aim to avoid regulation.

Round-‐tripping: locally owned money being invested in its country of origin via an

offshore location to benefit from a preferential tax regime.

Shell corporations: companies that serve as vehicles for business transactions without

itself having any significant assets or operations. Also known as “mailbox companies”.

Tax Information Exchange Agreement (TIEA): Tax treaties that exist between many

countries on a bilateral basis in order to prevent double taxation.

Transfer pricing: prices companies charge for intra-‐group cross-‐border sales of goods

and services.

52

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Memoire Final