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Tax Havens

Tax Havens: How Globalization Really Works 

Ronen Palan
Richard Murphy
Christian Chavagneux
Copyright Date: 2010
Published by: Cornell University Press
Pages: 280
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  • Book Info
    Tax Havens
    Book Description:

    From the Cayman Islands and the Isle of Man to the Principality of Liechtenstein and the state of Delaware, tax havens offer lower tax rates, less stringent regulations and enforcement, and promises of strict secrecy to individuals and corporations alike. In recent years government regulators, hoping to remedy economic crisis by diverting capital from hidden channels back into taxable view, have undertaken sustained and serious efforts to force tax havens into compliance.

    In Tax Havens, Ronen Palan, Richard Murphy, and Christian Chavagneux provide an up-to-date evaluation of the role and function of tax havens in the global financial system-their history, inner workings, impact, extent, and enforcement. They make clear that while, individually, tax havens may appear insignificant, together they have a major impact on the global economy. Holding up to $13 trillion of personal wealth-the equivalent of the annual U.S. Gross National Product-and serving as the legal home of two million corporate entities and half of all international lending banks, tax havens also skew the distribution of globalization's costs and benefits to the detriment of developing economies.

    The first comprehensive account of these entities, this book challenges much of the conventional wisdom about tax havens. The authors reveal that, rather than operating at the margins of the world economy, tax havens are integral to it. More than simple conduits for tax avoidance and evasion, tax havens actually belong to the broad world of finance, to the business of managing the monetary resources of individuals, organizations, and countries. They have become among the most powerful instruments of globalization, one of the principal causes of global financial instability, and one of the large political issues of our times.

    eISBN: 978-0-8014-6856-8
    Subjects: Law, Political Science, Business

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. List of Tables and Figures
    (pp. vii-viii)
  4. Acknowledgments
    (pp. ix-x)
  5. Introduction
    (pp. 1-14)

    In September 2007, only a month after the beginning of one of the most devastating financial crises ever experienced, the British bank Northern Rock was on the brink of collapse. Northern Rock had expanded rapidly prior to its failure, funding its growth as an aggressive player in the international market for Collaterized Debt Obligations (CDOs) and emerging as the fifth largest mortgage provider in the UK. However, those CDOs were issued not by Northern Rock itself but by what became known as its shadow company, Granite Master Issuer plc and Associates. What was intriguing about the arrangement was that Granite...

  6. Part I. Tax Havens and Their Uses

    • Chapter 1 What Is a Tax Haven?
      (pp. 17-45)

      The term ʺtax havenʺ has been widely used since the 1950s.¹ Yet there is no consensus as to what it means. The influential U.S. Treasuryʹs Gordon Report concluded: ʺthere is no single, clear, objective test which permits the identification of a country as a tax havenʺ (1981, 21). Twenty-five years later, Jason Sharman reached similar conclusions. The term ʺtax haven,ʺ Sharman writes, still ʺlacks a clear definition and its application is often controversial and contestedʺ (2006, 21). Nevertheless, and despite controversies and debates, the list of countries considered to be tax havens has changed remarkably little since the 1980s, and...

    • Chapter 2 Tax Havens: Vital Statistics
      (pp. 46-76)

      The head of the OECD offshore unit, Jeffrey Owens, declared in 2007 that ʺbetween five and seven trillion US dollars are located in tax havens.ʺ Others tout that ʺhalf of the global stock of money goes through offshoreʺ (Cassard 1994). BIS data suggest that Cayman-registered banks have accumulated in excess of $1.5 trillion in deposits, that Luxembourg-registered mutual funds have amassed more than $2.3 trillion of assets, and Swiss ʺprivateʺ bankers manage about US$4 trillion of assets (Sullivan 2007a). These are some of the staggering figures associated with tax havens. How reliable are these figures? And what do they tell...

    • Chapter 3 The Instruments of Tax Havens
      (pp. 77-104)

      Despite the secrecy that surrounds tax havens, we have considerable knowledge of their role and function in globalization. What are the instruments through which this ʺbright guilty world,ʺ to quote Orson Welles, lives its daily life?

      Two groups use tax havens: individuals and companies. Both use similar techniques of tax avoidance, such as offshore companies and offshore trusts, but they do so with differing intent. We begin this chapter by describing the principle of avoidance, then go on to describe the various instruments used for avoidance and the professionals who help set up such schemes. Throughout the discussion we bear...

  7. Part II. The Evolution of Tax Havens

    • Chapter 4 Origins of the Tax Havens
      (pp. 107-123)

      The history of tax havens is riddled with myths and legends. The hideouts of pirates and robbers have added new layers of mystery and glamour to their names through association with shady deals, mafias, and the secret services. There are many conflicting accounts of the origins of tax havens, few of them backed by hard evidence. Some of the best-known myths of origin can be dismissed outright.

      The first myth holds that Swiss bankers invented secret bank accounts to protect Jewish assets from the Nazis. In reality, secret bank accounts were invented to protect Swiss bankers from prosecution by other...

    • Chapter 5 The British Empire Strikes Back
      (pp. 124-150)

      Switzerland was the archetypal tax haven, but the British Empire more than matched it, proving a fertile ground for the development of tax havens. Today, the United Kingdom retains responsibility for fourteen Overseas Territories, eleven of which are permanently populated. Of those, seven are tax havens: Bermuda, Caymans Islands, British Virgin Islands, Gibraltar, Turks and Caicos, Anguilla, and Montserrat. The United Kingdom also maintains sovereignty over the Crown Dependencies of Jersey, Guernsey, and the Isle of Man, all among the worldʹs leading tax havens. Moreover, a former British colony, Hong Kong, shared British law and has developed into a major...

  8. Part III. Tax Havens in World Politics

    • Chapter 6 Tax Havens and the Developed World
      (pp. 153-171)

      Tax havens may have their origins in the United States, but the last one hundred years have witnessed their evolution into a developmental state strategy. Tax havens are now an essential component of financial and economic globalization, but their impact has been uneven. We distinguish the impact they have had on the developed world, which we discuss in this chapter, from their impact on developing countries, which is the subject of the next chapter.

      Tax havens offer low or zero rates of taxation, primarily to nonresident businesses and individuals. One obvious impact of this strategy over the years has been...

    • Chapter 7 Issues in Development
      (pp. 172-188)

      Tax havens have played a significant role in shaping the economies of developed countries. They may play an even greater role in shaping the lives of those who live in developing countries.

      Most developing countries do not possess sophisticated tax systems. Typically, they are characterized by large and undertaxed informal economies, and in some of the extreme cases economies that are not taxed at all. Research has shown that an effective tax system is a critical factor in development. Not only does a functioning tax system raise the necessary revenues for development; it also builds the institutional capacity necessary for...

  9. Part IV. The Battle for Hearts and Minds

    • Chapter 8 Signs of Discontent
      (pp. 191-202)

      The emergence of tax havens has not gone unnoticed. Policies aimed at combating tax abuse coincided with the emergence of tax havens after World War I. The battle against tax abuses, capital flight, and money laundering was conducted simultaneously on three fronts: national law courts, national legislators, and bilateral and multilateral treaties. Yet until late 1990s, ʺgovernmental interest in offshore was largely restricted to the concerns of revenue departments of larger nationsʺ (Hampton and Christensen 2002, 1658). It was a period of politics without conviction, intermittent action, and little obvious success. Yet in retrospect, the key battles that shape todayʹs...

    • Chapter 9 Institutional Attacks on Tax Havens
      (pp. 203-225)

      By the late 1990s, the left-of-center governments of the United States, France, and Germany led international organizations toward a much more aggressive attack on offshore financial centers. As we have seen, the United States took the lead throughout the twentieth century in developing unilateral measures against tax havens, particularly those located in the Caribbean. The Clinton administration sought to extend the same methods and tactics multilaterally.

      The years 1998–2000 saw the beginning of a new phase in international efforts to combat the deleterious effects of tax havens. A coordinated three-pronged attack was pursued by separate international organizations. The OECD...

    • Chapter 10 Tax Havens in the Twenty-First Century
      (pp. 226-235)

      If there is a recurring theme in the story of the tax havens, it is their continuous development in the face of opportunity and opposition. Indeed, one of the most remarkable features of the last decade has been their ongoing growth. Rawlingsʹs survey of companies doing business in tax havens showed that the net effect of the various campaigns was to increase the cost of tax havens but little else (Rawlings 2005; see also Sharman and Mistry 2008). Yet opposition to tax havens is mounting. The major states are, through collective organizations, opposing almost every aspect of their activity.


  10. Conclusion
    (pp. 236-248)

    The central argument of this book is that tax havens not only are conduits for tax avoidance and evasion but belong more broadly to the world of finance—to the business of managing the monetary resources of an organization, country, or person. Individually, tax havens may appear small and insignificant; combined, they play a central role in the world economy, serving as one of the key pillars of what has been described as ʺneoliberal globalization.ʺ

    We define tax havens as jurisdictions that deliberately create legislation to ease transactions undertaken by people who are not resident in their domains, with a...

  11. Glossary
    (pp. 249-252)
  12. References
    (pp. 253-266)
  13. Index
    (pp. 267-270)