Tax havens
A tax haven is a territory, sovereign or independent, with a fiscal or legal regime offering exemptions from generally accepted practices: banking secrecy, low or non-existent taxation, shell companies, simplified administrative requirements, etc. Some tax havens offer a comprehensive range of services; others specialize in a particular area: banking secrecy (Switzerland), flags of convenience (Liberia), wealth management (Jersey), low corporate tax rates (Netherlands, Ireland), etc. All are opaque and reluctant to cooperate with foreign tax authorities.
Financial secrecy index, 2018
Comment: Because they are too linked to political issues, inter-state actors (OECD, EU, etc.) do not produce independent data on the most problematic tax havens. Tax Justice Network (TJN) is an NGO campaigning for more transparency in finance. Every two years it analyzes financial secrecy from two aspects: 1/ the weight of various countries in offshore finance (the top ones being the United States and the United Kingdom followed by Luxembourg, which between them account for more than half of global offshore finance); and 2/ the level of secrecy (the worst countries being Vanuatu, Antigua and Barbuda, the Bahamas, Paraguay, Brunei and the United Arab Emirates). When the two are combined (weight and opacity), TJN considers Switzerland to be the top tax haven, ahead of the United States, the Cayman Islands, and Hong Kong.
These regimes enable multinational corporations (MNCs), corrupt politicians, entrepreneurs, star athletes and entertainment celebrities, mafia groups and so on to avoid taxes in their own countries via financial arrangements that are either legal (exploiting tax loopholes – tax optimization) or illegal (tax evasion). Supported by major banks and law firms, MNCs locate their profits in countries with the lowest tax rates in order to avoid paying tax in markets where they are actually operating. According to the economist Gabriel Zucman, more than 40% of MNCs’ global profits and 8% of personal financial wealth are located in tax havens. The resulting loss of tax revenue for states (€350 billion per year, including €120 billion in the European Union and €20 billion in France) can lead to over-taxation of those with middle-incomes and the loss of public services.
Despite the danger tax havens represent for global economic and financial stability, and for the survival of the social contract (solidarity principle), they have long been effectively protected by major states which have maintained close ties with them (beyond their own tax breaks) some even being under their control (Delaware in the United States, Hong Kong in China, etc.). However, following revelations arising from journalists’ investigations into leaked confidential documents (Offshore Leaks, 2013; Panama Papers, 2016; etc.), the United States (under Obama) and the European Commission were able to force some tax havens to end financial secrecy, to participate in automatic data exchange and even to end some tax optimization practices. In May 2018, the UK announced its intention to require greater financial transparency from its island dependencies (Jersey, Isle of Man, Virgin Islands, etc.).
- multinational corporations > Multinational corporation
- Company that has undertaken foreign direct investment (FDI) giving it access to facilities that it owns fully or in part (subsidiaries). The first MNCs date from the late 19th century; corporations of this kind have become widespread in the early 21st century. The majority of FDI takes place between industrialized nations. Such companies are now transnational rather than multinational, the largest among them tending to evolve into global corporate networks.
- tax evasion > Tax evasion
- Illegal practice in which an individual or business hides revenues and assets in a third country, generally a tax haven, in order to evade fiscal obligations in their country of residence or business activity. Tax optimization, by contrast, involves using loopholes in national legislation to legally avoid taxes.
- public services > Public Service
- An activity in the general interest carried out by a public or private body and overseen by the government. Public services serve a wide range of purposes, from the traditional sovereign functions (police, defense, justice, public finance, diplomacy) to the non-market state sector (education, health, social protection, culture and sport, etc.) and the industrial and commercial sectors (transport, energy, water, telecommunications, etc.). Public services are grounded in fundamental principles: equality of access and treatment for users, continuity, accessibility, neutrality and transparency of services, and their adaptability to evolutions of the general interest. The notions of services in the general interest and universal services, used in European and some international institutions, have – not without controversy – redefined the perimeters of state action in reaction to the liberalization of some of these sectors.
- social contract > Social contract
- The social contract was an idea invented in the West during the sixteenth and seventeenth centuries. It describes the agreement by which humans decide to abandon their supposedly original state of nature to form a political community. The contract marks a break with the theological concept of power and its legitimacy which had held sway since the Early Middle Ages. Henceforth it was the people, and no longer divine power, who were the source of civil power, and the power of rulers depended on the consent of those being ruled (Grotius, Pufendorf, Locke, Rousseau, Hobbes). In the eighteenth century, the theory of the social contract galvanized liberal and democratic ambitions to limit power in the name of the general will. In the twentieth century, it inspired philosophers’ thinking about justice (John Rawls) and deliberative democracy.