Tax Havens

Tax Havens One of the major ways to evade taxes is through the use of tax havens. When most people think of a tax haven, a tropical island where corporations and the rich hide their money from the government is typically what comes to mind, but that isn’t always the case. There are many separate definitions and lists of what constitutes a tax haven, but perhaps the most widely accepted is the criteria put forth by the Organization for Economic Co-Operation and Development. The OECD focused on “factors that could cause harm by undermining the integrity and fairness of tax systems” (OECD, 2001), resulting in four criteria in particular: No or nominal taxes, lack of effective exchange of information, lack of transparency, and no substantial activities (OECD, 2001). The first factor of no or nominal taxes basically acts as a classification device determining which areas require an analysis of the other criteria (OECD. 2001). The second criterion, lack of effective exchange of information, is important because “Effective exchange of information enables governments to ensure that their own tax laws are being complied with, particularly where cross-border transactions are involved. Globalisation of the economy has had the side effect of opening up new ways in which companies and individuals can avoid taxes that are legally due. As the level of taxpayers’ activities outside national borders expands, governments cannot always rely on domestic sources of information to enforce their tax laws.” (OECD, 2001). So if a jurisdiction in question has the tendency to withhold their financial institutions’ information from other countries, investigation into exactly why would be recommended. The third criteria based on transparency is concerned with “ensuring that 1) laws are applied on an open and consistent basis among similarly situated taxpayers, and 2) information needed by tax authorities to determine a taxpayer's situation is in place. Lack of transparency can make it